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Study Warns Gambling Taxes are Unreliable Income Sources

Posted on by John Lathram

GamblingA study published by Pew Charitable Trusts has warned that putting too much reliance on “sin taxes” (gambling, tobacco, alcohol, etc.) is likely to result in long-term structural budget challenges – a factor that states considering the regulation of online poker, online casinos, and sports betting should be wary of.

During the course of the next twelve months, dozens of states around the country will be considering the regulation of online poker, online casinos, and/or sports betting. Most see regulation as a way of generating tax revenues to fill vacuums in state budgets; but – according to a study published by Pew Charitable Trusts – relying too heavily on “sin taxes” could cause budget problems in the future.

The study does not exclusively concern gambling taxes. It also looks at taxation on the historic “go-to” vices of tobacco and alcohol, and the emerging revenue streams from the regulation of e-cigarettes and recreational marijuana. Its conclusion is that the consumption of these products can be volatile, and therefore revenues generated from taxing them should not be considered sustainable.

Tobacco Down, Alcohol Wobbles, E-Cigs/Weed an Unknown Quantity

To support its conclusion the study reports that, despite the median tax on tobacco increasing more than fourfold since 2000, tobacco tax revenues in over half U.S. states have declined in the same period. Clearly, a more health-conscious population has contributed to the decline in tobacco revenues, but the study notes higher cigarette prices (caused by tax increases) play a role in reducing demand.

With regard to alcohol, the population has not been so health conscious. Alcohol consumption per capita has increased by 10 percent in the past twenty years, so tax revenues (where tax rates have remained unchanged) have also increased 10 percent. However, alcohol consumption can have peaks and troughs depending on societal trends. Despite the recent 10 percent increase in consumption, people are still drinking 20 percent less alcohol than they were forty years ago.

It is too early to tell yet what trends will develop in the consumption of e-cigarettes and recreational marijuana; but, due to the way in which some states tax recreational marijuana at multiple points along the supply chain, the consequences of a fall in demand are greater. Surprisingly, the discussion about e-cigarettes and recreational marijuana is the only point in the study in which competition from the black market is considered – despite it applying to tobacco sales, alcohol consumption, and gambling.

States Relying on Gambling Taxes are Exposed to Volatility

Whereas trends in tobacco sales and alcohol consumption are measured in decades in the study, trends in gambling revenues are measured in much shorter time spans. Due to inflation-adjusted lottery revenues remaining constant over the past decade, the study focuses on gambling revenues generated from casinos and racinos – noting that all of the growth in gambling tax revenues has come from five states that opened their first casinos after 2006 (Florida, Kansas, Maryland, Ohio, and Pennsylvania). Meanwhile, a group of 18 older casino states recorded an average decline in revenue of 16 percent.

The decline in gambling tax revenues among older casino states is attributed to a factor generally dismissed by pro-regulation advocates – cannibalization. However, as the study notes, states with new casinos poach gambling activity from neighboring “older casino” states. Indeed, during the same period that Maryland and Pennsylvania were expanding their gambling activities (2008 – 2015), casino tax revenues in neighboring New Jersey fell 54 percent in real terms. This phenomenon will likely be repeated as more states regulate online poker, online casinos, and sports betting.

What´s important to note here is that – in many states – tax revenues from gambling contribute more to state coffers than tax revenues from tobacco, alcohol, e-cigarettes and marijuana combined. A decline in tax revenues from gambling (either due to societal trends, cannibalization, or black market competition) could have a significant impact on state budgets – particularly in states that have placed a long-term reliance on gambling revenues. The table below indicates the states most exposed to a decline in gambling activity based on the percentage of their budgets reliant on gambling taxes.

Nevada10.2%Pennsylvania4.7%
Rhode Island7.9%Missouri4.1%
West Virginia6.7%Georgia3.8%
Louisiana6.7%Indiana3.7%
South Dakota4.8%Maryland3.7%

Conclusion: Don´t Put Too Much Reliance on Tax Revenues from Gambling

Taxes on tobacco, alcohol and gambling are easy targets for policymakers looking for budget fixes, but they are unlikely to prove reliable funding sources over the long term. Tax bases are eroded when the consumption of a product or service declines, and the historic answer to this scenario has been to further increase tax rates.

As the competition for gambling dollars increases between states, each state´s gambling tax base is likely to decline. If tax rates are increased to compensate for the decline, the higher returns being offered by black market operators will become more attractive to gamblers – resulting in further declines in the tax base.

The conclusion is that states should keep their tax rates for online poker, online casinos, and sports betting competitive, and not rely on gambling tax revenues to support state budgets. The alternative is long-term structural budget challenges. The Pew Charitable Trusts study asks the question Are Sin Taxes Healthy for State Budgets? My answer would be All things in moderation.

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