Monday, August 23, 2010

Gambling: The Wrong Way to Close Fiscal Gaps

image by jasonswell
I have nothing against gambling; I love, love, love a good horse race and I've stayed up my share of nights at a craps table. I've played dice 'till sunrise, I buy Mega Millions tickets if the pot gets big and I've been known to wager a dinner tab with co-workers. However, gambling is not the way to cure fiscal woes. If states want to legalize gambling because the residents of the state in question want the liberty to choose whether they want to gamble or not, I am strongly for it, but not as a way to close fiscal gaps.
Gambling is a consumption activity. The only value that is being generated after everything nets out is whatever enjoyment gamblers got out of spending their money. There is no other net value being produced. Going back to Econ 101 (hi Greg!) we can't just all do each others' laundry. I have nothing against consumption, it is the reward we get for hard work, but you can't base an economy solely around it. As states turn to gambling to close budget gaps, it is increasingly important to remember how this all works:

  • If the state approves a limited number of venues / licenses / whatever, they can sell the rights to operate a gambling establishment for x number of years to a company for a lump-sum.
  • The state can elect to charge a yearly fee to the gambling establishment operator.
  • The state may collect income or excise tax on the profits generated by the gambling establishment
It's pretty clear from this that the states can indeed get revenue from gambling sources, now let's dig a little deeper:
  • Every dollar the gambling establishment operator pays for the license / concession / whatever must be earned back. If the operator has no reasonable expectation of making that money back, they will not pay. A license or concession may be considered a fixed cost and carried as an intangible asset by the venue operator.
  • The establishment must also cover other fixed and variable costs like construction of the venue (PP&E), and running it (Expense).
Regardless of what you read in newspapers or blogs, business people are not stupid. Sometimes they make mistakes, but they don't just invest willy-nilly in projects that will lose money. They expect to recover all their costs and make a profit through operations. The main revenue generator here is gaming, people need to lose enough money playing slots, craps, poker, etc. to pay for the employees, any comps received, other operating expenses and the license / concession / whatever.

Every dollar the state takes in is n dollars lost gambling. n being a number between which has a lower limit of one, but is probably much, much, higher. That means people are losing n number of dollars to close a much-smaller fiscal gap. Politicians will tell you the revenue comes from people coming in from other states to gamble as well as people not leaving the state to gamble, so that revenue stays in the state. Therefore increase in gambling by the population that is proportional to the increase in venues in the area is necessary to maintain per-casino revenues flat, operators know this. There is not an unlimited amount of money to be gambled. As gambling venues increase, their average revenue eventually decreases, therefore operators are willing to pay less for licenses / concessions and states will be making less from taxation.

Politicians will tell you that the casinos will create jobs. They will, and those jobs will create tax-receipts and economic activity, but those must also be financed by money lost at the tables. After the state gets paid, the bills get paid, investors get paid, and banks get paid, the money being put back into the economy has to be less than the money lost.

So, unless only the super-rich and under-taxed gamble, or the gamblers come from outside of the state, there is a net economic loss to the state after all is said and done. How, then, does the state make money?
  • Capturing lost revenue - The state keeps gamblers in-state, or legitimate operations replace illegal or unofficial ones (think sports betting). This is a valid and economically rational argument, but the rewards are limited.
  • Capturing out-of-state gamblers - This may be true to a certain extent, but as gambling expands, states will have an incentive to capture their own lost revenue, leading this point to be largely invalid.Foreign citizens may come to the USA to gamble, but the US still has to compete with other countries for their money.
  • Increase in gambling activity - This is the problematic one, in my eyes. People need to lose many dollars for the state to collect a single one. With savings rates at ~6.4%, there is not much room to to create new consumption, so it would have to come at the expense of other types of consumption. What businesses are going to lose revenues to gambling? Ideally, it would be things like lottery, bars, restaurants and movies as people simply swap one type of entertainment for another, but it might not. The losses might come from sectors that create greater value or from savings like kids' college funds or retirement savings.

    Additionally, there is externalities to consider. Will gambling create negative externalities? Will there be an increase in gambling addiction? Did the businesses that lose revenue share to gambling have positive externalities? Will it encourage over-consumption and misallocation of capital away from more productive activities to consumption? These are important concerns.
That's why I worry about gambling as a way to close budget gaps. States are trying to take short-cuts and free money, but at what expense? Why can't we just cut spending instead? If you still want to introduce gambling, then use the revenues to reduce taxes even more. The states spent too much and didn't have enough savings. There is no cure for that, no magic bullet that's going to make it all better--unless Uncle Sam starts giving out money, although, even then it would just be a temporary measure.
 Introducing gambling to balance budgets is simply a scheme to sucker citizens out of their money and transfer it to the state, and an incredibly inefficient one at that. For every dollar the state raises, tens--if not hundreds--are being lost by citizens. If states have budget gaps, encouraging gambling is not the answer.

If the states are serious about needing money, they should just do what the rest of us do when we find ourselves squeezed: cut spending, borrow against future earnings if there's someone willing to lend, or sell whatever assets we have.

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