States Place Bad Bets With Gambling

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In Guys and Dolls, craps players desperate for diversion welcome the arrival of Nathan Detroit because "even when the heat is on it's never too hot" for Nathan to arrange some action.

Today, Nathan Detroit is more likely to be a state legislator, a governor or a board of education commissioner than a Broadway gambler. Forty-eight of our states have now legalized at least some form of gambling, and in the wake of growing state budget woes, legislators are scrambling to expand government-controlled legalized betting to raise new revenues. Every recession, in fact, brings a little more state-authorized betting, so that what started out as a few state lotteries has grown to government-chartered casinos, sports wagering, slots machines at racetracks, and keno parlors--to name just a few areas of public-sector sanctioned betting. This year, at least a dozen states have passed or are considering new gambling initiatives, after half a dozen new ones last year.

You don't have to be a moralist to recoil at this trend because expanding legalized gambling to close budget gaps is lousy fiscal policy. It siphons money out of the private economy just as tax increases do and hardly ever accomplishes what government advocates promise it will. Typical is the phony relationship between education financing and lotteries, which are often promoted to taxpayers as a painless way to boost public school spending or support other programs. "Sold to the electorate on the grounds that they will reduce taxes or provide better services, lotteries do neither," concluded Thomas H. Jones, co-author of America's Gamble, after a series of studies in the early 1990s. "They become one of government's false promises." Indeed, Jones and others have found that states with lotteries dedicated to education spend no more money proportionally on public schools than other states. Nor are taxes on average lower in such states.

There's evidence that state lotteries work on a private economy in the same way that tax increases do-by taking money that would be spent on goods and services and giving it to government. Of course, you'll never hear this from advocates of state-sponsored gambling, who typically argue that it merely captures money that people are already betting illegally anyway. Under this rationale, expanding government gambling sends money into public coffers painlessly.

But a 2002 National Bureau of Economic Research study authored by economist Melissa Schettini Kearney looked at consumer expenditures in 21 states that instituted a lottery between 1982 and 1998 and concluded that household spending declined by an average of $137 per quarter in each state in the first year of the lottery. That decline corresponded closely to average expenditures per adult on the lottery, suggesting to Kearney that "spending on lottery tickets is financed completely by a reduction in non-gambling expenditures." How is this possible? Because gamblers don't reduce their illegal betting when the state introduces a new game; they gamble more, surveys show. That's why new state gambling initiatives reallocate money already in the economy, passing more of it through public coffers.

In fact, state-sponsored gambling may have a more harmful impact on a private economy than your typical tax increase, because government's take is so high. The Tax Foundation, for instance, estimates that the implicit average tax rate of state lotteries is a whopping 43 percent because states pay out only half of the betting proceeds and spend about 7 percent of revenues to administer the lottery. Of course, few bettors understand that's the payout/tax rate, which is one reason why the Tax Foundation argues that lotteries are bad fiscal policy--because they are taxes that lack transparency.

Lottery advocates say that the high tax rate is irrelevant since gambling is a discretionary activity, something that you can simply forgo. But government justifies high tax rates on other products-cigarettes, alcohol, gasoline-on the grounds that society wants people to use less of them. By contrast, states spend millions of dollars trying to persuade us to gamble more. As the historian and social critic Barbara Dafoe Whitehead, who calls lotteries ‘anti-thrift' institutions, has observed, governments "don't simply make [lotteries] available: They actively seek to ‘grow' their hard to hold onto current players, entice new players into the game and increase the frequency of play."

And the effort succeeds disproportionately among the poor, something we've known for years. Back in the mid-1980s, for instance, one study estimated that adults making under $10,000 spent three times more per week on state lotteries than those earning $50,000 or more annually. Moreover, the study found that the burden was concentrated in 20 percent of households that gambled the most. Among those earning under $10,000 annually, the most frequent gamblers spent $35.66 a week, or $1,855 a year. Today, the pattern persists. Households earning under $12,500 a year spend five percent of gross income on the lottery, compared to one-third of one percent in households earning ten times as much.

Today states market lotteries with slogans like "a ticket and a dream," or "Just Imagine!" That makes it a great irony that some states pitch the lottery as a revenue raiser for education, because once upon a time our public schools taught that the American dream was to achieve success through the Protestant ethic--hard work, thrift and a patient accumulation of wealth, not the big, improbable, lucky score.

While recessions have typically brought incremental increases in government involvement in gambling, we're looking at major shifts now, especially in states that run big budget deficits where politicians can rarely make the tough fiscal choices. New Jersey legislators (fiscally irresponsible case #1) are now contemplating suing the federal government to allow Jersey into sports betting, which would presumably prompt a rush into this fertile new field. (Only four states can permit sports betting without federal approval because they had laws on the books back when Congress banned the practice for everyone else).

There's an old saying in betting that if you're in a poker game and you look around the table and can't tell who the sucker is, it's probably you. That's something that taxpayers have yet to realize when it comes to government gambling schemes.






Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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