Gambling in American History

The questions of who pays the gambling tax and its impacts upon society are important policy questions. The answer is that the gambler pays the taxes, as the gambler is the source of the tax money – no matter how many hands it is processed through before it reaches a state treasury. When gambling opponents proclaim that we should “tax the casinos” more or that the “casinos must pay their fair share”, false notions are being generated. All taxes come from people, and that is especially the case with gambling taxes. The proper question to ask is, “which people?” For sure they are volunteer gamblers. But are they local residents, or are they tourist visitors who would not otherwise be spending money in the community? More important, are they affluent people who can afford the recreational activity of gambling, or are they poor people who must divert funds from family needs in order to gamble?
Studies of lotteries have suggested that the burden of taxation from sales of tickets falls most heavily upon poorer people. Their purchases of tickets constitute a higher proportion of their income and resources than do purchases of tickets made by more affluent persons. Moreover, many have suggested with empirical studies that governments purposely put lottery ticket sales outlets in poorer residential areas in higher proportion than they do in other neighborhoods. They also direct their advertisement messages toward poorer people. These people are considered their best potential customers in terms of volumes of sales. The National Gambling Impact Study Commission was very critical of lottery advertising. Lottery taxes are considered to be regressive (National Gambling Impact Study Commission 1999, 3–17).
Pari-mutuel racing locations are such that betting on races is not as convenient as buying lottery tickets. Hence, fewer numbers of poor people are attracted to this kind of gambling. Also, the process of selecting probable winners of races is much more difficult than buying a lottery ticket. Nonetheless, many of the regular race-track bettors are poorer people—perhaps because they are regular bettors.
Casino taxes may be regressive or progressive. Casino betting may be convenient, or it may require such major investments of time, energy, and travel money that poorer persons avoid the gambling. For instance, in Las Vegas, taxes on casino gambling can be considered both regressive and progressive. Slot machines are permitted in bars, convenience stores, and grocery stores within walking distance of almost all the residents of Las Vegas. Tourists do not play at these machines. Nor do affluent persons. Many of the bars and 7–11-type stores are established for the primary purpose of offering machine gambling. The grocery stores of Las Vegas stay open twenty-four hours a day in order to service gamblers. A high proportion of the grocery store and 7–11 players are probably problem gamblers. Taxation of the gambling exploits the conditions of these players and must be considered regressive (Thompson 1998, 459–461).
On the other hand, the Las Vegas Strip casinos attract tourists. Over half of the casino visitors arrive in Las Vegas by air. They stay at the hotels for an average of four days, but they gamble only four hours each day. Their gambling dollars are from their recreational budgets. They can afford to gamble; hence, taxes on their activity tend to be progressive taxes (Las Vegas Convention and Visitors Authority 1999).

Lotteries

A typical lottery ticket may sell for $1. Of this amount, half may be designated for prizes to be returned to players. Fifteen percent of the ticket price is often directed toward expenses (advertising, ticket distribution and sales commissions, printing tickets, managing funds). About 35% is reserved for government treasuries, either for a specific use or for general uses. If we consider that a ticket purchase results in a value of $0.50 going to the player, we can assume that the player has purchased a product worth $0.50. At the point of purchase, however, the price was $1, or $0.50 more. If the lottery purchase was considered to be the purchase of any other product, we could say that it carried a 100% sales tax. If we see the extra $0.50 as a profit margin, we could say that the seller was paying a tax of 70% on the gross profit – that is, $0.35 on $0.50. Or we might simply say that the government tax is 35% of the gross sales, and all other costs are costs of doing business. However we conceive the rate of taxation, we can see that lottery operations carry the highest taxation rates of any gambling products. Also it can be claimed that the use of a lottery to raise money for government activities is very expensive. It costs $0.15 in expenses to raise $0.35 for government use.

Pari-mutuel Racing

In pari-mutuel wagering, players typically make all their bets, and these are placed into a common pool (e.g., $1,000). A set amount of the pool is then given back to the winning players (about $800). As a sales tax, we can say that the tax on the player is 25% ($20 on $80). Expenses and shares given to the track and animal owners constitute most of the $200, however. The government would typically keep only $60 or $70. It might then be said that the government tax is 30 percent or 35% of the profits from the wagering, or 6% or 7% of the gross sale price of the betting tickets. As the government incurs only a very small part of the cost of race-betting operations (having a state racing commission), the cost of raising the $60 or $70 is very small, perhaps less than 10% of the amount raised.

Casinos

Casinos typically pay many kinds of fees as well as taxes on their gambling winnings. Fees are charged for licensing activities and also for having individual numbers of machines or gambling tables. Taxes on the winnings are assessed on the gross gambling win – that is, the amount of money the casino retains after all prizes are given to the players. The rates of the casino win taxes vary considerably among the commercial casino jurisdictions of the United States.  Nevada has the lowest rate – 6.25% of the win – followed by a rate of 8 percent in New Jersey, Mississippi, and South Dakota. In Michigan, the state tax on wins is 18%, and Louisiana has an 18.5% win tax. Several states have taxes of 20% (Iowa, Indiana, and Missouri). The highest rate is found in Illinois, where a graduated tax climbs to as high as 35% of the casino win. These taxes are generally more efficient than those for lotteries and pari-mutuel racing. The government collection costs are consumed by state regulatory commissions and are normally less than 5 percent of the revenues collected.

A primary rationale for the legalization of almost any form of gambling has been the anticipation of government revenues derived from special taxation on the gambling activities. Proponents of gambling often argue that “since people gamble anyway”, the activity should be legalized so that it can be taxed. Persons opposed to gambling might dispute the premise that there is “gambling anyway”, and they claim that even where there is legalization, the amount of tax revenue gained is in most cases only a small part of a government’s budget. It is also argued that the legalization efforts will result in increased gambling, as government actors will begin to rely upon gambling revenues, whatever their amount, and they will therefore encourage the activity. This is especially the case where the gambling is conducted as a government enterprise (e.g., state and provincial lotteries). Increased gambling can have a depressing effect upon other tax revenues when the gambling products are substitute purchases replacing the sale of other goods, which would also be taxed.  Mindful of these arguments, when Great Britain legalized commercial casinos in 1968, the nation purposely provided that there would be no special casino taxes. The government simply did not want government officials to have an incentive for allowing the activity to increase.
Additional issues concerning the taxation of gambling revolve around the “fairness” of the taxes. Critics ask: Do the taxes fall most heavily upon poor people, or upon people who can afford to pay more taxes? Of course, proponents of gambling emphasize that taxation in this case is “voluntary”.