January 17, 2022 Legal

Revenue in review

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Gaming America takes a look at the sometimes controversial, often beneficial relationship that state governments have with legalized gambling.

With rich streams of puritanism coursing through the nation's veins, gambling sometimes gets a bad rap in the United States. Historically, it has too easily been lumped together with alcohol and tobacco, constituting the third prong in a triumvirate of sin. While this perception is changing as gambling becomes increasingly legal, there is still a sense in which legalization must be justified (as if freedom itself was not justification enough).

And how is this pastime – so well loved by so many millions – justified? By the bottom line, of course. In the spirit of fortifying the arguments for expanded legalized gambling, we propose a closer look at where the revenue, once collected, in fact goes. While tax revenue from gambling usually goes to programs and initiatives that would otherwise have nothing, every state has a different approach regarding how to divvy up the revenue.

There’s certainly a lot to go around. According to the American Gaming Association (AGA), commercial gaming in 2019 (the last ‘normal year’) generated $41bn nationwide, and the growth of the industry shows no signs of letting up. In total, this led to $10.2bn in tax revenue. The potential for more is even greater. The 10 years from 2009 to 2019 saw tax revenue from legal gambling double. The AGA predicts that there is still $150bn in illegal bets going on every year. That’s a lot of green to tax.

Governments are addicted to revenue. They always have been since the days of the Fertile Crescent. Lately, though, times have been hard in the US. The 2008-9 recession, chronic tax cuts and, most recently and significantly, the Covid-19 pandemic all put a major dent into revenues across the country. It was this revenue crunch, stemming from these crises, which provides the setting for the wave of legalized gaming across the nation. Governments simply need the money.

There are a few things to remember when considering this issue. First, every state taxes at a different rate, some favoring ‘high-tax regimes’ while others favor ‘low-tax regimes.’ The recent opening up of legal gambling in New York state is a classic example of a high-tax regime. In fact, New York has the highest tax rate in the country for gambling: 51% of revenue. That’s not atypical for New York, which has a notoriously high tax regime anyway, but it does strain the ability for casinos and operators who want to be in the market. A tax rate so high simply makes it a struggle to cut a profit.

New York – the location of America’s biggest and most visited city – can afford to take the risk. The second-highest tax rate in the country, Pennsylvania, is lower at 40%. Every other state with legal betting operates at a lower rate than this. The average tax rate on gambling in any given state is about 10-20%.

Secondly, it is not uncommon for there to be multiple entities calling for taxes. Say you are a casino operator in Chicago, you will be paying a 2% rate to the city, another 2% to Cook County, and then another 15% to the state of Illinois! It is difficult to understand the benefits legalized gambling and betting brings to a locale because there are all of these different tiers.

Thirdly, different categories of gambling face different taxes. The lottery, for instance, will face a different tax rate then a commercial casino, which in turn will be taxed differently than a sportsbook. Tribes, as well, will be taxed at a different rate than non-tribal operators.

Despite these various factors, revenue from gambling is often set aside for incontestably beneficial expenditures, such as education or senior care. If this revenue is not given toward one of these ostensibly good causes, it is simply lumped into the general fund.

Art and cultural funds are a favorite destination for gambling revenue. In Colorado, all revenue from gaming tax, as well as from license and application fees, is placed in what is known as the Limited Gaming Fund. From this, $2m is transferred to the creative industries cash fund – overseen by Colorado Creative Industries (CCI) – to be doled out as grants or to support other aspects of creative output. In 2018, every cent given to the CCI came from gaming revenue.

Iowa follows a similar pattern: revenue from legalized gambling is given to the Department of Cultural Affairs. Half of the money goes to operational support grants, while the other half goes to the community cultural grants program. In 2018, a quarter of all the money received by the Iowa Arts Council came through these means.

Altogether – in addition to these two states – Kansas, Maryland, West Virginia and Wisconsin all fund their arts programs in a similar fashion. In 2018, an average of 38% of these states’ art funding cames from gaming.

Lotteries follow a slightly different pattern. State lotteries tend to have been around for longer. Modern lotteries began proliferating around the country in 1964, and today 45 states and the District of Columbia offer some version of it. Sometimes the take from lotteries can be a significant portion of the budget. Eleven states raise more money from lotteries than from their state corporate income tax.

Money from lotteries most often goes to supporting education. Texas, for instance, has seen $22bn of lottery money (over a quarter of total funds) going toward public education since 1997.

But, again, there are variations, as states choose how to spend the money. The Pennsylvania Lottery has been ongoing since 1972. In that time, $29bn in lottery revenue has been steered toward programs that help seniors and older residents. Colorado is one of the most scenically beautiful states in the country, and lottery money goes toward preserving this, and is spent on parks and trails.

One area that states often fund when introducing commercial gaming is programs which treat gambling addiction, which is a relatively small problem in the grand scheme but a central issue for the industry: the National Council on Problem Gambling has determined that 1% of American adults are considered to be gambling addicts, while 2-3% are problem gamblers. This can be minimal. Of the $1.1bn that Pennsylvania raises from gambling taxation, only about $5m a year goes to address this issue.

Obviously, the promise of increased revenue is not enough for some. Utah, with its strong Mormon contingent, is unlikely to allow gambling in the near future because of religious objections. Usually, what is required to allow gambling is a deal with already existing players in the market. For example, California was on the cusp of implementing sports betting legislation – this, bill sponsors estimated, would have generated as much as $700m in tax revenue – but opposition from tribal casinos meant that the bill died on the vine.

Still, the benefits are undeniable. The stabilization of Detroit’s budget? That was thanks to the rise of sports betting and iGaming in the state of Michigan. And in Maryland, there was a deficit in the state’s education trust fund. Now that people are playing 12% more than they were before the pandemic, that deficit is gone. As the star of legal gambling continues to rise, so too will the benefits the activity’s tax revenue brings to the people.

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