Casinos: A Tax on the Reasonably Well Off?

It’s pretty well established that lotteries are a regressive tax, though if Powerball gets big enough (it’s not even close), it might eventually cross over into being progressive. Casinos, meanwhile, reach a different demographic.

Star wars slot machine

 

Rahm Emanuel’s laid out his state legislative agenda, and coming in just behind pensions is a casino, “one in which … all of the resources will go into building new schools and modernizing our schools.” I was thinking about this as the media started freaking out about the big powerball prize today (currently the number-one story at the Sun-Times, number two at the Tribune).

It’s a bit depressing, because we know from extensive research that lotteries are regressive—although, as the U. of C’s Emily Oster found, they get less regressive as the pot grows and pulls in wealthier players (PDF):

The decreasing regressivity of the lottery product as jackpot increases suggests that lotteries are not always regressive. Although it is a substantially out-of-sample prediction, it is interesting to consider at what point the lottery tax becomes progressive, which can be done by extrapolating the results in Figure 2. The tax is progressive when the income elasticity is equal to one, in this case at a jackpot of $806 million. This should be taken with extreme caution, since it is out-of-sample and it is difficult to know how people would behave at jackpots of this magnitude. It is also di±cult to know whether this jackpot level is something that could ever be achieved. It is worth noting, however, that the Powerball has reached jackpots of over $300 million, and yet the Powerball states made up only 22.5% of total lotto sales in the country in 1997 (National Gambling Impact Study Comission 1999). This suggests that a jackpots as high as the progressive level would not be out of the question with, for example, a national lottery. 

We’re at $550 million, so only $250 million to go before it ceases to be a regressive tax on the poor.

By contrast, casinos look downright reasonable, as a St. Louis Fed overview of the topic describes (PDF):

One controversial issue surrounding casinos is the perception that the bulk of casino revenue comes from low-income gamblers, thus placing an unfair financial burden on the poor. There are really two separate issues: (1) Do lower-income gamblers bear more of the financial burden from casino gambling (i.e., as a percent of their income) and (2) From which income groups do casinos generate the bulk of their revenue?  Focusing on the second issue, the median household income for casino gamblers is almost $50,000, compared with $41,000 for the U.S. population. This statistic reveals that the income level of casino gamblers is relatively higher than the U.S. population.

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That the median income of the casino gambler is higher than the U.S. median income suggests that, on average, casinos generate more of their revenue from relatively wealthier gamblers than they do from lower-income gamblers.

Who gambles what is still something of an open question:

The evidence on the financial burden of gambling is mixed. One early study using a national survey found high-income gamblers spend a greater percentage of their income on gambling than do lower-income gamblers—thus, high-income gamblers bear a greater financial burden than lower-income gamblers. A study of Las Vegas gamblers, however, found that lower-income gamblers living in Las Vegas spend a higher percentage of their income on gambling than wealthier gamblers living in Las Vegas. For visitors to Las Vegas, the burden on lower-income gamblers was somewhat less.

So that’s… not good, but it’s better than the frequently depressing demographics of lottery gambling (PDF).

There’s also the matter of how casinos are taxed. One of the issues regarding casinos is the worry that new tax income isn’t generated by casinos; it merely gets shifted from something more sadness-inducing, like Cubs games (a Chicago casino would theoretically capture people who are going to other casinos, but it’s a complicated question). But Illinois also taxes its casinos at very progressive rates, starting at 15 percent and rising to 50 percent of marginal casino revenue (kicking about a third of that back to the state, comparable if slightly better than lottery returns).

Which is not to say there aren’t good reasons to oppose casinos, either generally or specifically. The Civic Fed opposed the last casino bill for lots of reasons, among them that it would have decreased tax revenues by $41 million in the first year. There’s evidence to suggest that they do cause a modest increase in crime. But as the powerball ramps up yet again, it’s worth wondering why casinos are so much more controversial.

 

Photograph: Lomo-Cam (CC by 2.0)

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