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“I just want the money…”

 By D. Eric Schansberg

It is easy to see why taxes on gambling are so attractive to politicians. First, they are a relatively subtle form of raising revenue. The state sells exclusive regional rights to casinos who are interested in purchasing monopoly power in exchange for an extra tax burden. Then, to some extent, casinos pass the burden to their customers through lower payoffs. Second, gambling taxes please those in interest groups who would like to impose "sin taxes" on certain activities. Third, it's a relatively voluntary way to raise revenues—in comparison to most other taxes. The primary danger is long-term. State and local government officials are prone to grow dependent on this revenue source. And they are unlikely to account for increasing competition cutting into their future revenues as more and more gambling outlets become available.

Recent events in Indiana highlight another danger of depending on gambling revenues for local government: what the State gives, it can also take away. When gambling is approved, local communities make an extra-legal arrangement with their state government. Since it is not a contract, enforceable by the courts, local governments are vulnerable to the whims of their state’s elected officials. Now, under the premise of a tight state budget, state lawmakers in Indiana are looking lustfully at the gambling revenues of certain local communities.

It is also easy to see why many Indiana state legislators would find it relatively attractive to take gambling revenues from selected local communities. Few politicians enjoy increasing taxes, but given the choice of increasing taxes or decreasing spending, tax hikes are often more palatable. And among potential tax increases, taking money from a few less-populous counties—especially when “they don't deserve it” and when the activity being taxed is not viewed as fully legitimate—is not likely to cause significant electoral damage. The four hardest-hit counties (Harrison, Dearborn, Ohio, and Switzerland) are mostly rural, representing only 1.6% of Indiana’s population. Their residents would lose $582 per person under the Senate plan. The three other casino counties represent 12.4% of the population and their residents would only lose $24 per person. And of course, the vast majority of Indiana’s population is “non-casino” and would bear no cost at all! If the state lawmakers impose the bulk of the cost on the less-populous counties, there may be a small political firestorm. But it’s not the sort of issue that is likely to carry much weight by the time of the next statewide election. And among individual legislators, those in the affected counties will probably have opposed it anyway, earning the respect (and votes) of their constituents.

Why treat casinos differently with respect to taxation? A casino’s impact on a local economy is somewhat more complicated than that of many other businesses. On the one hand, as with any other business, casinos generate economic growth and jobs. And casinos often attract money from outside the local community, acting as a type of tourism. On the other hand, casinos are said to create the need for more infrastructure, including resources for law enforcement. But most new businesses (and economic growth in general) rely on additional infrastructure. How much more infrastructure does gambling require beyond the norm? (In any case, how bad can it be? If a community is, on net, damaged by a casino, then the community’s leaders were foolish to invite the casino in the first place.) In that sense, much or all of the special tax revenue that local communities receive is “extra”. In a word, why do either state or local governments have a right to any extra tax revenues from gambling?

Rep. Troy Woodruff (R-Vincennes) has played a prominent role in the debate thus far. He wants to redistribute the casino revenues and has said that his community has no money to make infrastructure improvements. The truth is that the people of Vincennes have plenty of money, but Rep. Woodruff prefers using other people’s money to pay for those improvements. When asked by a fellow legislator if he wanted a casino in his county, Woodruff replied: “I just want the money”. His candid quote takes us to the heart of the matter. In this debate, there has been a lot of talk about “fairness”, but fairness is always in the eyes of the beholder. Opponents of this proposal complain about the inequity of the state government "stealing" money from the local governments. But why is it equitable for state and local governments to take so much money from casinos and their customers in the first place? So, the local government takes from the casino, and now the state government wants to take from the locals. Perhaps the most fitting end to this episode would be a headline in next year's newspapers, announcing legislation passed by President Bush and the U.S. Congress to deal with their own budget woes by taking Indiana's gambling revenues.

D. Eric Schansberg is Professor of Economics at Indiana University Southeast and an adjunct scholar for the Indiana Policy Review.

"History affords us many instances of the ruin of states, by the prosecution of measures ill suited to the temper and genius of their people.  The ordaining of laws in favor of one part of the nation, to the prejudice and oppression of another, is certainly the most erroneous and mistaken policy. ... These measures never fail to create great and violent jealousies and animosities between the people favored and the people oppressed; whence a total separation of affections, interests, political obligations, and all manner of connections, by which the whole state is weakened." --Benjamin Franklin

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