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Risky Revenues

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Risky Revenues

Desperate for more income, states are turning to questionable new forms of gambling. Autumn 2017
Economy, finance, and budgets

Facing the weakest economic recovery in decades, states are rushing to tap what many lawmakers consider a reliable way to generate new revenue—legalized gambling. In the wake of the explosive growth of betting on fantasy sports, 11 states have recently passed legislation to legalize, regulate, and ultimately tax the games. A half-dozen are contemplating an even larger expansion—letting residents play casino games online. These new provisions continue the growth in gambling that followed the 2008 recession, when at least a dozen states passed laws expanding gaming options, such as the allowance of casinos in Maryland and Massachusetts.

Legislators typically see legal gambling as an economically painless way to close budget gaps. Earlier this year, for instance, Connecticut legislators proposed a new licensing fee on fantasy sports games as part of a plan to break a deadlock over the state budget deficit. But little research exists on the social consequences of these new forms of gambling. Overindulgence in these games among some residents may lead to an increase in personal bankruptcies, which would take a bite out of the revenue that the gaming taxes supply. “New gambling activities may generate short-run increases in public revenues,” the Rockefeller Institute for Government wrote in a recent study, “but these increases are getting smaller and their duration shorter.”

One problem with relying on gambling revenues is that so many states have gotten into the game. Each state government that permits legal gaming competes for the same narrow market of players, such that states are now cannibalizing one another’s gaming industries. New Jersey had a lock on the East Coast casino business for years, until neighboring states like Pennsylvania got into the game. Since 2007, Jersey’s casino tax collections have plummeted by more than half. And, seeing Pennsylvania’s success, other eastern states have added casinos of their own, causing Pennsylvania’s gaming revenue to plateau within a few years. Overall, states that added casinos have taken in $1.3 billion in new tax revenue since 2008, while states with established gaming operations have lost $1.4 billion. That’s the very definition of a stagnant marketplace.

Undeterred, politicians are still seeking new markets. New Jersey, for example, legalized online betting on casino-style games in 2013, joining Nevada and Delaware. Massachusetts recently formed a panel to consider online gaming, while California has passed legislation to develop regulations for online poker betting. Pennsylvania’s last state budget included $100 million from online gaming taxes, though the state has yet to authorize the betting, while four states have already legalized online lotteries. So far, the results have been underwhelming. New Jersey projected that online gaming firms could generate up to $1 billion in business in their first year, but instead they yielded an unimpressive $123 million in revenues.

States are even more hopeful that fantasy sports could open a new taxable market because these games appeal to millennials, who are less enthusiastic about lotteries and traditional casinos. The market for fantasy games remains small—generating about $300 million in action last year—compared with other types of betting, but virtually the entire business has emerged in the last few years. And states are encouraging new types of betting. New Jersey has launched a betting league called FastPick, an expansion of the type of games offered by popular leagues like DraftKings, in which bettors select professional athletes who they think will outperform other players in preselected matchups (during the first week of the National Football League season, for instance, FastPick featured a matchup between quarterbacks Tom Brady and Aaron Rodgers). Such games are similar to the sports betting offered by Las Vegas casinos, with a crucial difference: by matching players, rather than teams, against each other, these games qualify as fantasy sports, a category not regulated by federal law in the same way as other sports betting. More state-run fantasy sports games like FastPick will surely be on the way.

Much of this may come to be seen as a budgetary deal with the devil. While gaming taxes are a politically popular way to raise revenues, research suggests that legalized gambling reduces other kinds of economic activity. A 2002 paper by economist Melissa Schettini Kearney, who studied consumer spending in states immediately after they instituted lotteries, found that household expenditures declined with the rise in betting. Similarly, the California Grocers Association reported that sales in its member stores declined by 7 percent after the state rolled out its lottery. One chain, Holiday Quality Foods, stopped selling tickets because its business was down even more.

Most lawmakers and voters would recoil at examples like these, in which gamblers reduce their spending on food and other necessities to cover their gaming habits. And yet, as legalized gaming spreads, states will have to rely on these “problem gamblers” because they form the core of much legal betting. A 2004 study in Ontario, Canada, estimated that problem gamblers accounted for as much as 35 percent of the wagering at casinos in the province. That jibed with a 1999 study by the Louisiana Gaming Control Board, which estimated that problem gamblers generated about 30 percent of casino volume.

Initial research suggests that the latest games may hook a new generation of gamblers. One study found that those who bet on fantasy sports are more likely to graduate to other forms of sports gambling, while another discovered that teens participating in fantasy sports are more likely to develop gambling problems. These insights have led some critics to describe legalized fantasy betting as a “gateway drug” that can hook younger players. A recent review of research on online gaming, especially online casino games, suggests that this new form of gambling will carry its own unique harms. According to many gamblers, the use of digital money (credit cards and electronic transfers) means that online betting often doesn’t feel like spending “real” money. And those who gamble both online and offline are more susceptible to developing gambling addictions than traditional gamblers.

Though research on newer forms of online gaming has yet to provide any conclusive insight about their social impact, state legislators are in no mood to wait for more information. They’re placing their bets.

Photo by Mario Tama/Getty Images

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