State revenues from gambling: Short-term relief, long-term disappointment

Abstract

Introduction

Gambling has become very popular as a way for states to raise revenue. Many states have been authorizing and expanding
additional forms of gambling and finding ways to raise revenues from those activities. States are particularly likely to expand gambling in the aftermath of recessions and subsequent economic downturns in the hopes of raising more revenues.

In the short-run, states indeed do raise additional revenues due to expansion of gambling activities and facilities. However, history shows that in the long-run the growth in state revenues from gambling activities slows or even reverses and declines. In short, the revenue returns deteriorate—and often quickly. This pattern of deterioration may be due to competition with other states for a limited market (saturation), competition between different forms of gambling (substitution), or other factors. Despite the deterioration, the dynamic often continues, as states find new forms of gambling to authorize, open new facilities, and impose higher taxes on gambling. The results are short-run yields and longer-run deterioration.

In addition to the weak long-run growth of gambling revenues, the expansion of highly taxed gambling activities also raises equity issues, since the revenues come largely from low and moderate income households, whose incomes have declined (or not grown) in real terms along with their spending. A related equity issue may be the effects of expansion of state-sanctioned commercial casinos1 on Native American casinos, which have been around since 1988. These are low-income communities that found a source of income in casinos, but the expansions of state-sanctioned commercial casinos may reduce their yields.

Finally, the research literature suggests that expansion of gambling activities has social and economic costs, although the findings are mixed on these points, and it’s unclear whether the economic development impacts are strong enough to counter the costs and other weaknesses of these policies.

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