The economic impact of casino gambling



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THE ECONOMIC IMPACT OF

CASINO GAMBLING
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CHAPTER OUTLINE
The Perceived Impact of Casino Gambling
Local Substitution
The "Modest" Upside of Casino Gambling
The Economic Reasons for Opposing Casino Gambling
Summary

LEARNING OBJECTIVES
LO1: Describe the potential economic impact of casino gambling in the context of the local substitution problem.
LO2: Apply the concept of externalities to casino gambling.
LO3: Summarize the local economic impact of casino gambling while noting that it depends greatly on where the casino is located.


KEY TERMS

Externalities- Effects of a transaction which hurt or help people who are not part of that transaction.
Vig- The expected percentage of any gamble that a casino will keep.


DISCUSSION QUESTIONS



  1. How many Americans visit casinos annually, and how much money do they leave behind?




  1. How many people are employed in the casino industry? What is the tax contribution made by the casino industry?




  1. What determines if a casino will bring money into a rural community?




  1. Does casino gambling increase economic development?




  1. Was there any difference in the growth of personal income in the counties in Indiana that had a casino and those that did not?




  1. Why are casinos favored by politicians?




  1. What negative behaviors are exhibited by gambling addicts?




  1. What is an externality? What are the externalities associated with gambling?




  1. What is a vig? What is its purpose?




  1. How do psychologists explain the addiction to gambling?




  1. From an economic point of view, how is a casino like a Walmart Supercenter?


THE WEB-BASED QUESTION

Part I.


In April 2000, the United States General Accounting Office (GAO) sent a report to Congress, the “Impact of Gambling: Economic Effects More Measurable than Social Effects,” which examines the costs and benefits associated with legalized casino gambling in the United States. This report reviews the 1999 findings of the National Gambling Impact Study Commission (NGISC), which was created by Congress in 1996 to study the social and economic effects of gambling. The GAO report also investigates the points raised in the NGISC study through a case study of Atlantic City, New Jersey. The entire report is available at the GAO website, www.gao.gov/archive/2000/gg00078.pdf. Visit this website and view the findings of the NGISC’s study and the Atlantic City case study. GAO Director of Government Business Operations Issues, Bernard L Ungar, summarizes the findings of the GAO report in a letter to Congressman Frank R. Wolf.
Both problem gamblers, who do not meet all the American Psychiatric Association’s criteria for pathological gambling, and pathological gamblers have difficulty controlling their gambling habits. Given the laws of probability, addicted gamblers cannot “win” in the long run. The odds are always set to favor the casino, and there are severe financial consequences from repeated gambling. Addicts will often become involved in illegal activities. They jeopardize jobs, educational opportunities, and personal relationships. Family members, employers, and society, in general, bear the costs of these externalities.
Because data on family problems, crime, and suicide do not indicate the reason for these problems and because pathological gamblers often have other behavioral disorders, neither the NGISC nor the Atlantic City case study were able to offer any conclusive “cause and effect” evidence showing increased social problems as a direct result of gambling. However, both studies uncovered testimonial confirmation that gambling, and especially pathological gambling, increased domestic violence, child abuse, divorce, crime, and suicides.
Examine Appendix II of the GAO’s report and summarize their findings on the social effects of gambling on family problems.

Part II.


The GAO’s report to Congress, the “Impact of Gambling: Economic Effects More Measurable than Social Effects” (www.gao.gov/archive/2000/gg00078.pdf), refers to Atlantic City as “a typical ‘destination-style’ gambling operation.” In this type of enterprise, the local community with the casino can secure the economic benefits without suffering the full burden of the increased social costs.
The GAO report states that casinos created about 50,000 jobs in Atlantic City. Additionally in 1998, the casinos paid 80 percent ($86 million) of Atlantic City’s property taxes, $41.7 million in school taxes, $25 million in county property taxes, and $319 million to the State of New Jersey. Between 1985 and June of 1999, Atlantic City casinos contributed $900 million in community reinvestment funds that were used for local redevelopment. Clearly, the Atlantic City community has received significant economic benefit from the gambling casinos, while much of the social costs have returned home with the problem and pathological gamblers.
When a gambling addict visits a casino that is out of state, the home state of the addict experiences the worst possible outcome from gambling. The local community and state in which the addict resides bears much of the external costs associated with this addictive behavior, but the casino’s state receives the benefit from the gambling tax revenue. If tax funds paid to the casino’s state are sufficiently large, there is strong incentive for the home state to establish a casino within its own state boundaries. In this way, the home state and local community would collect tax revenue, which in turn would help pay for the external costs of gambling that it already bears.
The University of Massachusetts Dartmouth Center for Policy Analysis examined patron origins at Connecticut’s two casinos, Foxwoods Resort Casino and Mohegan Sun Casino. In their report, “New England Casino Gaming: Update 2006,” they estimated the indirect income to the Connecticut state treasury that was collected as a result of gaming activities from the residents of New York and four other New England states, Massachusetts, Rhode Island, Maine, and New Hampshire.
What is the revenue that was collected from the residents of each state? How much was collected in total from these out-of-state residents? List the estimated revenue in the table below.
Currently, two of the four New England states are actively looking into possible legislation that would permit casino gambling. Given the strong economic incentive for the home state to establish casino gambling within its jurisdiction, which two states do you think are considering new gambling legislation?

ANSWERS TO STUDY QUESTIONS

SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS


  1. Each year, 50 million Americans visit casinos, and they leave behind almost $30 billion annually.




  1. The casino industry employs 370,000 people, and it contributes more than $4 billion in taxes.




  1. A casino will bring money into a rural community, if it attracts new customers from outside the community. These customers must spend “new” money that would have been spent outside the community, if it were not for the casino. A casino will not have a positive impact in community, if it simply takes customers away from other local businesses. This will simply result in a reshuffling of how local entertainment dollars are spent.




  1. According to Senior Economist Thomas A. Garrett of the St. Louis Federal Reserve, the extent to which casino gambling increases economic development is unclear. However, he believes that the evidence seems to support a “modest impact.” The economic impact depends on whether the casino is located in a rural or in an urban community. It also depends on whether or not there is a large unserved population in close proximity.




  1. In the counties in Indiana that had a casino, personal income grew annually at 5.3% between 1991 and 2001. Personal income grew at a slightly lower rate of 5.2% in the counties in Indiana that did not have a casino.




  1. Casinos are favored by politicians because casino revenue is taxed at a higher rate than other businesses. Even if there is no increase in overall economic activity in the community, and casinos only shift customers’ dollars spent on entertainment away from other local business to the casinos, there will be an increase in tax revenue due to the higher tax rate.




  1. Because the odds are set to favor the “house,” a gambler can never win over the long run. Eventually, a gambler will need to raise large sums of money to finance a gambling habit. The negative behaviors exhibited by a gambling addict include:




  • Selling off assets to raise cash.




  • Mortgaging the family home.




  • Running up credit card debt.




  • Ruining the family’s finances.




  • Declaring bankruptcy.




  1. An externality is the effect of a transaction that either helps or hurts a person other than the buyer or the seller. The externalities associated with gambling are the higher costs to innocent third parties that result from gambling. These include:




  • The high emotional cost to the spouse and children of a gambler, and the financial downfall of the family.




  • Higher interest rates charged to everyone due to the high rates of bankruptcy associated with gambling addicts.

  • The foregone food, clothing, and other things that could have been bought by the family of a gambler, if the money had not been lost gambling.




  • Higher taxes paid by the taxpayers to pay for the public assistance that is required to support the spouses and children of gamblers after they divorce and leave their families.




  1. Since the odds of winning are set to favor the “house,” the casino is expected to keep a percentage of the money gambled. This percentage is a vig. Its purpose is to cover the expenses of the casino and to leave the casino with a profit.




  1. Psychologists explain that the addiction to gambling is caused by the “high,” which a players experience, when they win large sums of money the first time that they play. Gambling addicts seek to experience this “high” again and again.




  1. In an economic sense, a casino is like a Walmart Supercenter because both businesses drain other businesses’ sales in order to thrive. In addition, there are economic winners and losers associated with both a casino and a Walmart Supercenter.

SUGGESTED ANSWER TO THE WEB-BASED QUESTION


Part I.

The findings on the social effects of gambling on family problems from the GAO’s report to Congress, the “Impact of Gambling: Economic Effects More Measurable than Social Effects” are summarized below.




  • Between 10 and 17 percent of the children of pathological gamblers have been abused by those parents.




  • Many pathological gamblers leave their children unattended at home, locked in cars in parking lots, or in casino lobbies for hours while they gamble.




  • Between one quarter and one half of the spouses of pathological gamblers have been abused by their spouse.




  • 53.5 percent of pathological gamblers are divorced, which is considerably higher than the 18.2 percent for non-gamblers or even the 29.8 percent for low-risk gamblers.




  • Between 18 and 33 percent of the homeless indicated that gambling was a contributing factor or the cause of their homelessness.




    • It was estimated that the annual average cost to society for problem and pathological gamblers from job loss, unemployment benefits, poor physical and mental health, welfare benefits, and treatments for gambling disorders was approximately $1,200 per pathological gambler and $715 per problem gambler.




    • Lifetime costs are estimated to be $10,550 for the pathological gambler and $5.30 for the problem gambler.




    • Annual costs to the United States from problem and pathological gamblers are estimated to be approximately $5 billion.

Sources: The GAO’s report to Congress, the “Impact of Gambling: Economic Effects More Measurable than Social Effects” (http://www.gao.gov/archive/2000/gg00078.pdf).

Part II.

In their report, “New England Casino Gaming: Update 2006,” The University of Massachusetts Dartmouth Center for Policy Analysis estimated the indirect income to the Connecticut state treasury that was collected from the residents of New York and four other New England states, Massachusetts, Rhode Island, Maine, and New Hampshire. The tax funds were collected as a result of gaming activities at the State’s two casinos, Foxwoods Resort Casino and Mohegan Sun Casino. The estimated revenue data are listed in the table below.


In 2005, Massachusetts and Rhode Island are losing $122.9 million and $44.5 million, respectively, in state taxes to the State of Connecticut. Both are currently looking into possible legislation that would permit casino gambling.



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