Julien Lecomte| 20090685 | ECOG2 | Public Finance

Legalization of gambling

Julien Lecomte | Public Finance 1

Public Finance: legalization of gambling

hen we think about casinos, we think about entertainment. And when you push the doors in one of

them, everything is done to make you think that you will exit richer than you were when you

entered even though that is less than probable. In fact, money is what casinos are really all about.

When the government looks at a casino, it clearly also sees a big dollar sign. Casinos can bring huge revenue and

boost the economy of an area. But they are also known for their bad sides: criminality, game addiction, Money

Laundering and much more.

That’s why the decision of building a casino has to be taken very seriously by the authorities. We could wonder

“why should the government aloud the construction of a casino?”, “How many money will be provided by the

casino to the state?”, “Is the casino a trustable option?”, “What are the implicit costs of such an implantation?”,

“How the government will be able to solve the different problems created?”

In this work, I will try to answer those questions and try to demonstrate that the public finance and the casino

economy are two topics that are very connected with each other.

I will begin by the Cost-Benefit Analysis of building a casino. Of course, the calculations depend on a lot of factors

such as the greatness, the level of standing, the area in which the casino is built, etc. That is why I will try to stay

very global on my analysis and I will focus on the costs that are experienced by almost all of the casinos. This list

has, however, not the pretention to be exhaustive. Let’s get started by the costs and then we’ll move to the

benefits.

Current Costs:

The construction can be supported by the private investor but some

public planning have to be made anyway. It concerns especially the

accessibility of the place. From a simple bus stop to modifications in

the airport terminal (see FIG.1 for a concrete example). The arrival of a

game complex in the landscape requires rethinking the urbanization. It

is beneficial for the casino to be very accessible because it brings

customers.

The state will have to face administrative costs such as the cost of

asking the people if they’re for or against opening a casino in the area.

Or the costs of the new regulations that have to be approved according

to legalize gambling in a state (see FIG.2).

W

FIG 1: McCarran International Airport,

which is the Las Vegas’ airport located

in the east of the town, hosts more than

forty million passengers a year. Plant

expansion are planned to be able to

respond to the demand of tourism of

today and tomorrow but seeing that the

space around the existing airport is

limited, a new airport will be built in the

years to come.

►www.onlinenevada.org/McCarran_Internationa

l_Airport

FIG 2: Maine voters narrowly approved

the casino in Oxford (Maine, USA), the

first in Maine with table games.

Nevertheless, the cost of the Casino in

Oxford before its opening, were more

than $1.5 million paid by the state

taxpayers.

►www.pressherald.com/news/board-oversight-

of-oxford-casino-to-cost-a-bundle_2010-11-

18.html

Julien Lecomte | Public Finance 2

The construction can be noisy. This externality could lead to some costs supported by the state.

Future Costs:

Gambling is not just a game for everyone. For some people, it is an addiction. In the same way the governments

try to fight drugs addiction, they have to spend money in programs to help the people that suffer from that

problem (see FIG.3).

Casinos attract a lot of different people. That is why it might create

some security issues which lead to a state intervention. From a drunken

man who has abused of the whisky while he was gaming to the huge

money laundering problem, there is a large space for the state to

intervene. This last topic of the money laundering is developed in FIG.4.

In addition to its current cost, the infrastructures have a maintenance

cost that has to be considered.

Benefits:

Employment. To work, casinos hire a panel of people from very

different sectors. From the dealers to the security members, the large

amount of working people decreases the unemployment rate and thus

increases the social surplus.

Entertainment created by a casino is one of the things that are really

difficult to estimate in money. We could use the revealed preferences

based on what the population spend on the national or state lotteries to

have a preview. We could also use the statistics of the existed casinos.

We could also use the contingent valuation but for some people, fun is

priceless.

The casino industry boosts tourism of an area. After the casino, the

tourist might want to visit the town, eat at the restaurant and sleep at

the hotel. Even if they are secondary costs that shouldn’t be considered

in the Cost-Benefits analysis, it seems pretty clear that a social surplus will be created from the casino activity.

Taxes are probably the biggest aspect considered when the government is thinking about building a casino.

Usually, there are various taxes with various goals which depend on local laws (see FIG.5): you have the casino

taxes and the state or federal taxes. A casino has licensing fees to pay, too, such as casino fees, slot machine fees,

casino employees’ fees and parking fees.

FIG 3: Statistics show that more than 8

out of 10 Americans have gambled at

some point in their lives and 2.9

percent of the adult populations are

considered as gambler addict. In

addition to that, over $500 billion is

spent as annual wagers.

►www.clearleadinc.com/site/gambling-

addiction.html

FIG 4: From 2000, Financial Action Task

Force has referred 2000 cases to the

Vancouver (Canada) police related to

money laundering. One out of five

involved casino transaction which made

the Casinos the third most common

place for money laundering.

►www.vancouverobserver.com/city/2010/12/02

/will-bc-casinos-bad-record-money-laundering-

get-worse-bc-place-casino

FIG 5: In South Dakota (USA), a gaming

tax of 8% is imposed on casino’s

adjusted gross proceeds. From that

money, 40% go to tourism promotion,

$100.000 goes to a historic

preservation loan program, and the rest

is distributed according to local laws.

►www.ncsl.org/default.aspx?tabid=12805

Julien Lecomte | Public Finance 3

When you analyze the cost benefits analysis, casinos seems to be a gold

mine. Indeed, the costs look derisory compare to the large benefits that the

government can earn (mostly on the taxes). However, casino revenues have

not to be considered as the solution that will ends all financial problems of an

area. The money earned by the state from the casino is a slight part of the

total amount of all the revenues generated by the state even in the states

known for their gaming facilities such as Atlantic City or Las Vegas (FIG.6)

even though it is considered by the population as “a voluntary and painless

tax”1.

Furthermore, the casino revenues are totally unstable and greatly depend on

the economic fluctuations. Since the beginning of the crisis that we’re

experiencing the Casino statistics are more and more alarming. This proves

that it is not a revenue base that can be trust through thick and thin. Local

laws such as interdiction of smoking have also a great influence on the

attendance of the casinos (FIG.7).

In addition to that, we notice that gaming revenues are Inefficient. This

inefficiency leads to an expensive cost in creation and maintenance of regulation departments. We can also add

that the distribution of the Tax Burden will be unequal since it is calculated on the basis of the take-out-rate

which is the “the fraction of the total bet retained by the state”.

Another problem is that the casinos have a strong competition with each other. That is why if one casino is

already build in an area, the coming of another might be a big mistake which will not result on an improving of

the welfare of the inhabitants.

As a conclusion, we could say that building a casino is a tempting solution for governments because of its little

costs and its big revenues. But we should not close our eyes on the social costs underlying: The gambling

addiction is the more serious of them. That problem can destroy lives and to prevent so from happening, serious

measure have to be taken by the politicians who choose the responsibility of hosting a casino on their city. But to

make a happy ending, I will say that casino fever is likely to continue. The first reason for that is the easy money

earned by the government. Secondly, as we’ve seen maybe with some excess in the US states of Nevada (Las

Vegas and Reno) and New Jersey (Atlantic City), the casino industry creates a mass-tourism activity that is very

healthy for the economic development of an area. That is why betting on the casino option might be a good deal.

Nothing goes more, games are made!

1 Betting On Casino Revenues: Lessons from State Experiences Ranjana G. Madhusudhan - National Tax Journal Vol 49 no. 3

FIG 6: In 1996, gaming revenues

represent only about three to

seven percent of the state

general revenues in New Jersey,

the state of Atlantic City.

► Betting On Casino Revenues: Lessons

from State Experiences Ranjana G.

Madhusudhan - National Tax Journal Vol

49 no. 3

FIG 7: French casinos

experienced a drop of more than

20% of their result during 2008.

That drop could be attributed

with certainty to the interdiction

of smoking and the legalization of

online gaming in France.

► www.clubpoker.net/casinos-francais-

traversent-crise-sans-precedent/n-1253

Julien Lecomte | Public Finance 4

Sources

Betting On Casino Revenues: Lessons From State Experiences Ranjana G. Madhusudhan - National Tax Journal Vol

49 no. 3 (september 1996) pp. 401-412

www.clubpoker.net/casinos-francais-traversent-crise-sans-precedent/n-1253

www.ncsl.org/default.aspx?tabid=12805

www.vancouverobserver.com/city/2010/12/02/will-bc-casinos-bad-record-money-laundering-get-worse-bc-

place-casino

www.clearleadinc.com/site/gambling-addiction.html

www.pressherald.com/news/board-oversight-of-oxford-casino-to-cost-a-bundle_2010-11-18.html

www.onlinenevada.org/McCarran_International_Airport