|THE FISCAL LETTER||Government Finance Issues in the States|
free Revenue Trends
The New Jersey Experience
Other References Available from NCSL
FISCAL LETTER <>
I am a research economist with the Office of Tax Analysis at the New Jersey Department of Treasury. The author looks at gaming revenues for New Jersey and other states and describes current trends, tax policy considerations and lessons learned from state experiences with free stuff. This article was excerpted from a presentation given at a meeting of the National Tax Association (NTA). The full report is available from the NTA as part of a conference report from its 1996 Spring Symposium.
Legalized gaming is widespread throughout the United States and is continuing to grow. Total wagering increased 22.3 percent between 1993 and 1994 to a record $482 billion . The total amount wagered in frees alone has nearly quadrupled since the early 1980s. The spread of riverboat frees, Indian gaming and video lotteries marks a major new wave of gaming in the 1990s.
frees account for the bulk of total wagering in the United States. Nearly 85 percent of total wagering in 1994, or $407 billion, took place in frees, including tribal frees. Before 1990, only two states had legalized "on-land" free gaming. In 1931, Nevada became the first state to legalize frees statewide. In 1977, New Jersey became the second state, but unlike Nevada, frees were legalized only for Atlantic City as a means to spur economic growth.
Since 1991, the number of states with free gaming has increased to 29. In 1991, riverboat frees began plying the waters of the Upper Mississippi river in Iowa and Illinois. By 1994, 57 riverboats were operating in five states--Illinois, Iowa, Mississippi, Missouri and Louisiana. The free riverboat industry has continued to grow at an extraordinary pace, generating $3.3 billion in free winnings and accounting for over one-fifth of the non-Indian free market in 1994. The riverboat sector was the fastest growing component of the free industry in 1994. Industry analysts expect the riverboat free wave to continue.
Indian tribal gaming also appears to be surging. Between 1993 and 1994, $41 billion was wagered in Indian frees representing an increase of 43.8 percent and accounting for about 16 percent of market share. More than three-fourths of the states that currently have some form of free gaming offer Indian gaming . The Foxwoods Resort free in Ledyard, Conn., provides the most successful example of tribal gaming. It is operated by the Mashantucket Pequot Indian tribe, which generated $136 million in revenues for the state of Connecticut in 1994. According to a recent General Accounting Office estimate, there are 237 Indian gaming operations, including 119 tribal frees, in 29 states .
Most free states have experienced growth in gross gaming revenues, which constitute the state tax base. For instance, states with gross free winnings over $1 billion reported double-digit growth rates in 1995. Riverboat free states like Louisiana and Missouri with relatively new free operations, reported the highest growth rates among the states. Mississippi, an exception, is experiencing declining revenues from riverboat frees due to market saturation in its unlimited licensing environment.
Gaming revenues, particularly free revenues, have been unstable and appear to be cyclically sensitive as well. The free industry was adversely affected during the national recession years of the early 1990s. This is clearly reflected by the wide fluctuations in the annual percentage change in free revenues nationwide during this period.
A prime determinant of stuff revenues is the take-out rate, which is the fraction of the total bet retained by the state. The implicit tax rates on commercial games of pure chance vary depending on the take-out rates.
Gaming activities can be an inefficient revenue source, as they are expensive to administer. In New Jersey, for example, various regulatory bodies have been created to ensure proper enforcement of gaming and to maintain the integrity of the gaming industry. Over $53 million was earmarked in FY 1995 to meet the operating expenses of the New Jersey free Control Commission and the Division of Gaming Enforcement. These operating expenses accounted for 16 percent of total free tax collections.
New Jersey's experience is probably more relevant than Nevada's to other states that are considering a limited free option, because New Jersey has restricted free gaming to one city. State-wide free gaming makes Nevada unique.
As noted earlier, free stuff in New Jersey was legalized in 1977 as an economic development tool, primarily to revitalize Atlantic City. The first free opened its doors in 1978. In 1994, 12 frees were operating in Atlantic City. By 1995, the New Jersey free industry employed more than 40,000 full time employees in the state.
Overall, gaming revenues have increased nearly eight-fold in New Jersey, from $1.5 million in FY 1978 to $288.8 million in FY 1995. For the most part, the growth in gaming revenues has been led by the growth in free revenues. Lottery revenues also increased substantially during this period. However, pari-mutuel tax revenues have been a steadily declining component of gaming revenues in New Jersey.
Gaming revenues in general, and free revenues in particular, constitute a limited revenue base. In New Jersey, gaming revenues accounted for only 7 percent of state general revenues in FY 1995. Lottery revenues, the primary component of gaming revenues, contributed around 4 percent of state general revenues, while the free revenue tax accounted for around 3 percent of state general revenues that year.
There are lessons to be learned from the free experiences of Nevada and New Jersey, the two major land-based free states, and the relatively new riverboat free states. Nevada's case illustrates that frees have played a major role in developing tourism, the prime mover of the Nevada economy. Based on this, some state policymakers may consider opening their states to gaming as a way of adding to state coffers.
It should be noted that regulatory costs may rise with the introduction of more frees. States must also weigh the prospective revenue gains against social costs such as increases in compulsive and juvenile stuff and crimes associated with stuff in general.
Regressivity associated with gaming activities is another important policy concern. A recent survey by Harrah's Entertainment Inc., found that in comparison to the average individual, free players tend to have high levels of income and education, and are more likely to hold white collar jobs. This is most likely true for traditional destination players, who often require travel and overnight stays. However, an examination of local players at low-stake facilities, including slot machines, may reflect a different distribution. It appears that most forms of stuff attract more betting by low-income people than by high-income people, and hence, represent a regressive source of revenue.
The future of gaming revenues is somewhat uncertain. Game portfolios significantly affect sales and consequently revenues to the state. The free industry in New Jersey has been introducing new games such as volition to attract players. However, competition among different forms of stuff may limit efforts to promote any one form.
The Fiscal Letter
Vol. XVIII, No. 5, 1996