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Economic
Impact of Legalizing Gambling
by Glenn O. Thompson, Executive
Director, Stand Up For Kansas
January 4, 2002
The economic impact of expanding legalized gambling on communities, businesses and states is one of the least understood areas of gambling public policy. To obtain approvals from elected officials, proponents often distort and/or omit facts related to revenue sources and social costs. At the same time, opponents often fail to present sound counter arguments because of inadequate knowledge on the subject. A gambling enterprise, such as a casino, racetrack or lottery, impacts the surrounding region economically in two ways, cash flow and social costs, as discussed in the following sections. 2.0 CASH FLOW: ECONOMIC DEVELOPMENT OR ECONOMIC REGRESSION? Casinos: Casino promoters often misuse terms like “creates economic development”, “creates tourism”, “and “creates jobs” in slick color brochures to obtain legislative approval of proposed casinos. But, these terms are often deceptive. For example, in 1990, the Illinois state legislature approved riverboat casinos to promote economic development and tourism. Six years later the Chicago Better Government Association conducted a study to determine if these objectives were met.[1] The first of the two final reports states: “The results of the field study show that riverboats have failed to create new tourism. By almost any definition of a tourist this is true. The evidence is overwhelming and conclusive: ■ 84% of gamblers are from Illinois while only 16% are from out-of-state ■ 85 percent of people who gamble in Illinois live within 50 miles of the casino ■ Over one-half the out-of-state players live within 50 miles ■ Only 4.6 percent travel more than 100 miles ■ 97.7 percent of all Illinois gamblers stay less than one day ■ 9.2 percent of out-of-state visitors stay over night ■ Less than 12 percent of out-of-state visitors stayed in either a hotel or motel The purchases that casino patrons made outside of the casino were minimal, and irrelevant to any discussion of economic impact. Out of 785 players interviewed, only one out-of-state visitor, that traveled over 100 miles, reported making a purchase in town. Only 3% of all out-of-state players spent money outside the casino.” [2] “The largest percentage share of gamblers are locals. ‘There is no doubt that Illinois draws their largest share of patrons from their own communities and other nearby communities.'’ Over five-sixths (83%) of the amount of money gambled is not new money brought into the local area. It is money that is already in the community.”[2] “85% (of the gamblers) live within 50 miles, 50% within 25 miles, 25% within 10 miles, 14% within 5 miles of the casino.”[3] The second of the two final reports states: ■ “The overall statewide monetary impact of casino gambling in Illinois is a negative $6.7 million. In addition there are regulatory and infrastructure costs, and social costs which Thompson and Gazel (the researchers) estimate to be in the range of several hundred million dollars for Illinois, which increases the negative impact”[4] ■ “The monetary impact on local areas in a 35-mile radius surrounding the casinos is very large, and very negative. The local areas lose $239.7 million a year from their economics. ■ A typical riverboat with $100 million in annual revenues will result in a loss of $18,381,321 for the local economy. ■ For every dollar lost gambling on an Illinois riverboat 18.4 cents is lost from the local economy.” [4] ■ “It is clear from the (first) report ... that casino gambling, while a huge commercial success, has been a ‘dismal failure’ in promoting tourism and economic development.”[4] “Consequently, because job creation and economic development are dependent on bringing new tourist dollars into community rather than merely transferring sales from local businesses to the casino, there has been no significant economic development.” [4] So, what went wrong? Why did the riverboat casinos not meet the legislature’s objectives of promoting economic development and tourism? First, state legislators did not do their homework in understanding the difference between destination casinos and convenience casinos. Secondly, their decision was based on biased data from casino promoters rather than results of studies by qualified, independent research organizations. A destination casino is a casino in which most revenues come from gamblers living outside the local region. The casino brings more money into the region than it exports, net cash flow into the region is positive, and wealth of the region is increased. For example, most large Las Vegas casinos are destination casinos, since a large percentage of the gamblers are from outside Nevada. A “convenience casino” is a casino in which most revenues come from gamblers living within the local region. A convenience casino drains more money out of the region than it brings in, net cash flow into the region is negative, and wealth of the region decreases. Most riverboat and racetrack casinos are convenience casinos, since a large percentage of the gamblers live within the surrounding region. For example, in 1995 a vice president of Prairie Meadows Racetrack Casino, Des Moines, Iowa, testified at a Kansas legislative committee hearing that 80 to 90 percent of the gamblers at the casino live within a 50-mile radius.[5] Net cash flow into the region is the only measure of economic development. If net cash flow is positive, overall wealth of the region increases. Conversely, if net cash flow into the region is negative, cash drains out of the region and overall wealth of the region decreases. Net cash flow can be determined only for a clearly-defined geographical area. Net cash flow is often positive for the small local area surrounding a convenience casino, but becomes negative as the surrounding area increases. For example, the National Gambling Impact Study Commission (NGISC) stated “Single communities boasting a positive impact can readily be found, but the radius of their concerns usually does not extend to surrounding areas where negative consequences for others may surface as a direct consequence of this good fortune, such as loss of business, increases in crime, reduced tax revenues, and problem gamblers taking their problems home.”[6] The geographical area used for determining net cash flow should have a radius of no less than 50 miles from the casino to assure that revenue from gamblers living in local surrounding areas is included in the economic impact analysis. Jobs, payroll and revenue are not measures of economic development, although casino promoters often advertise that a proposed casino will “create ‘x’ jobs” or “create ‘x’ dollars in revenue.” A school district having a thousand employees creates no new wealth for the area, since income to pay the employees comes from local taxpayers. On the other hand, a call service center employing a thousand employees for a large national company has an enormous positive economic impact on the area, since all of the revenue for operating the center comes from outside the area. A convenience casino attracts very little revenue from outside a 50 mile radius region, as shown by the Illinois riverboats study. Revenue and jobs are simply transferred from businesses in the surrounding region to the casino, without increasing wealth of the region. For example, consider a typical racetrack casino with an estimated revenue of $100 million -- $80 million from within the 50 mile region surrounding the casino and $20 million from outside the region. At least $50 million leaves the region for the state’s share, racetrack owner’s profit, federal tax and other statutory expenses. So, the casino imports $20 million in revenue into the region and exports at least $50 million, resulting in a net cash flow out of the region of at least $30 million. Lotteries: A state-owned-and-operated lottery provides no economic development for the state, since almost all revenue is from citizens living within the state. The small amount of revenue from out-of-state players is usually insignificant compared to in-state revenue. Further, research studies indicate lotteries prey on blacks, high-school dropouts, and lower-income citizens. For example, results presented to the National Gambling Impact Study Commission in 1999 showed: ■ black players wagered 4.8 times as much as white players ($998 per year compared to $210 per year) ■ players with no high school degree wagered 3.9 times as much as players with college degrees ($700 per year compared to $178 per year), and ■ players with household incomes under $10,000 wagered 2.7 times more than players with household incomes over $50,000 ($597 per year compared to $225 per year).[7] 3.0 SOCIAL COSTS Pathological and problem gamblers cost U.S. society (families, businesses and taxpayers) billions of dollars annually for absenteeism, addiction recovery, bankruptcy, crime, divorce, embezzlement, fraud, insurance rate increases, judicial and incarceration, law enforcement, suicide and theft. ■ Counties that have gambling casinos have a bankruptcy filing rate 13.6% larger than counties without casinos. Counties with five or more casinos have a bankruptcy filing rate 29% larger than counties without casinos.[8] ■ The crime rate in gambling communities is nearly double the national average, according to a 1996 U.S. News & World Report analysis.[9] ■ At least two-thirds of compulsive gamblers turn to crime to finance their addiction, according to Valerie Lorenz, director of the Compulsive gambling Center in Baltimore.[10] ■ In a study conducted in 1990, compulsive gamblers had an average debt of $40,000.[11] ■ A compulsive gambler testified in a Kansas 2001 legislative committee hearing that she lost $290,000 in 1999 in slot machines, some of which was money embezzled from her employer.[12] A study on the influence of pathological gambling on insurance problems indicated “47 % of male pathological gamblers were involved in at least one form of insurance-related crime.” The authors estimated that each fraudulent claim from a pathological gambler costs the insurance industry an average of $65,468.[13] Gambling debts of more than $100,000 caused a woman to attempt a robbery of an Olathe, Kansas bank in January 2000. Some bank employees were held hostage for more than eight hours.[14] A 1998 study found that suicide rates in Las Vegas, Atlantic City, and Reno are up to four times higher than in cities of comparable size where gambling is not legal.[15] According to Professor John Kindt, “a business with 1,000 workers can anticipate increased personnel costs of $500,000 or more per year – simply by having various forms of legalized gambling activities accessible to its workers.”[16] The total social cost of a compulsive gambler cannot be quantified precisely, but studies have been conducted to estimate costs. ■ A Maryland Dept. of Health study determined that each newly-created pathological gambler costs society from $13,200 to $52,000 per year.[17] ■ A United States Gambling Study, directed by Professor Robert Goodman, author of The Luck Business, estimated a “conservative” cost of $13,200 per year per problem gambler, in 1993 dollars.[18] ■ Professors Grinols and Mustard computed the average social cost from eight studies to be $13,586 per pathological gambler per year.[19] Using this average for a metropolitan region of 500,000 people, social cost increases $68 million per year for each percent increase in the number of pathological gamblers. In 1994, the state of Florida sponsored an excellent study on the social and economic impacts of legalizing casinos in that state. The authors concluded: ■ Crime and social costs (in the state) attributable to casinos would total at least $2.16 billion annually; ■ When comparing annual projected state tax revenues to costs, the state would experience a substantial deficit each year; ■ Annual projected state tax revenues related to casinos are sufficient to address only 8 to 13 percent of annual minimum projected costs related to casinos.”[20] 4.0 CONCLUSION Gambling enterprises have a tremendous economic impact on surrounding regions and states. Consequently, we agree with the following recommendation of the National Gambling Impact Study Commission: “3.18 The Commission recommends that jurisdictions considering the introduction of new forms of gambling or the significant expansion of existing gambling operations should sponsor comprehensive gambling impact statements. Such analyses should be conducted by qualified independent research organizations and should encompass, in so far as possible, the economic, social, and regional effects of the proposed action.”[21] The 1994 study sponsored by the state of Florida is an excellent example of such an analysis .[20] ENDNOTES [1] “Demographic survey of riverboat casino patrons in Illinois,” April 26, 1996, Chicago Better Government Association, p. 1 [www.bettergov.org/gambling.htm]. [2] Ibid., p. 2. [3] Ibid., p. 3. [4] “Demographic survey of riverboat casino patrons in Illinois,” June 11, 1996, Chicago Better Government Association, p. 3 [www.bettergov.org/gambling.htm]. [5] Tom Timmons, Vice President of Parimutuel Operations, Prairie Meadows Racetrack, Des Moines, Iowa, testimony to Kansas legislature Special Committee on Gaming, 1995. [6] “National Gambling Impact Study Commission Final Report,” June 1999, p. 1-6. [7] Charles T. Clotfelter, Philip J. Cook, Julie A. Edell, and Marian Moore, “State Lotteries at the Turn of the Century,” Report to the National Gambling Impact Study Commission, April 23, 1999, tables 9 and 10. [8] “Bankruptcy & Gambling,” SMR Research Corp. report, Chap. VI, Aug. 2001, p. 206. [9] Joseph P. Shapiro, “America’s Gambling Fever,” U.S. News & World Report, Jan. 15, 1996 p. 58. [10] Valerie Lorenz, “Dear God, just let me win!”, Christian Social Action, July/Aug 1994, p. 26. [11] Robert Goodman, The Luck Business, New York, NY: The Free Press, 1995, p. 48. [12] Testimony to Kansas Senate Federal and State Affairs Committee, Feb. 8, 2001. [13] The Wager, Massachusetts Council on Compulsive Gambling, Harvard Medical School, Division on Addictions, Vol. 1, Issue 15, April 9, 1996. [14] “Gambling debts led to attempted bank robbery,” St. Louis Post-Dispatch, Jan. 6, 2000. [15] “Study links suicide increase to gambling,” New York Times, Dec. 16, 1997. [16] John Kindt, “The Business-Economic Impacts of Licensed Casino Gambling in West Virginia: Short-term Gain but Long-Term Pain,” The West Virginia Public Affairs Reporter, Spring 1996. [17] Maryland Department of Health, Better Government Assoc. 1994. [18] Robert Goodman, Ibid., p. 51. [19] Earl L. Grinols and David B. Mustard, “Business Profitability versus Social Profitability: Evaluating Industries with Externalities, The Case of Casinos,” Managerial and Decision Economics, Vol. 22, p. 154. [20] “Casinos in Florida: An analysis of the Economic and Social Impacts,” Prepared by The Executive Office of the Governor, Office of Planning and Budgeting, 1994, Executive Summary. [21] National Gambling Impact Study Commission Final Report, June 1999, p. 3-19 NCALG 100 Maryland Avenue NE, Room 311, Washington, DC, 20002 National Information Center at 800-664-2680 FAX (307) 587-8082 ncalg@vcn.co |
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