Casinos and Economic Development: A Look at the Issues

Casinos have become a major industry in the United States over the past two decades. Prior to the 1980s, casino gambling was legal only in Nevada and Atlantic City, N.J. Since then, nearly 30 states have legalized casino gambling.

Many states have approved commercial casino gambling primarily because they see it as a tool for economic growth. The greatest perceived benefits are increased employment, greater tax revenue to state and local governments, and growth in local retail sales. Increasing fiscal pressure on state budgets, the fear of lost revenue to casinos in neighboring states and a more favorable public attitude regarding casino gambling all have led to its acceptance, according to the National Gambling Impact Study Commission's Final Report. In addition, the passage of the Indian Gaming Regulatory Act in 1988 allows Indian tribes to operate casinos on their reservations. Many states now have a combination of tribal and corporate casinos.

The amount of money wagered in American corporate casinos is not trivial. More than $370 billion was wagered during 2000 alone. This is roughly $1,300 per person in the United States. Of this annual total wagered, nearly 93 percent is returned to players in the form of winnings, leaving casinos with $26 billion in annual adjusted revenue.

Casino revenue varies greatly across states, however. Nevada has the largest market, with casinos capturing nearly $9.5 billion annually in adjusted gross revenue. Atlantic City casinos generate more than $4 billion annually, whereas the riverboat casinos in Missouri and Illinois collected more than $1 billion and $1.8 billion in adjusted gross revenue during 2001, respectively.

Although economic development is used by the casino industry and local governments to sell the idea of casino gambling to the citizenry, the degree to which the introduction and growth of commercial casinos in an area leads to increased economic development remains unclear. What are some of the issues surrounding the perceived benefits?

Casinos increase employment.

Issue 1: Casino proponents commonly point to a lower local unemployment rate after a casino is introduced as evidence that casinos improve local employment. Because the local unemployment rate dropped after the casino was introduced, it must be that the casino helped lower the local unemployment rate. Maybe. The change in the unemployment rate in the local area should be compared with the change in the statewide unemployment rate during the same period. If the changes are about the same, then it is possible that all of the employment growth in the casino area is the result of the natural movement of the business cycle (economic changes in other sectors of the economy) and not the introduction of the casino. If the drop in unemployment is larger in the local area than statewide after the casino is introduced, then one could argue that the casino has indeed reduced local unemployment.

The point here is that local changes in unemployment should be compared with statewide unemployment changes. Other factors, such as population changes and local business conditions, should also be considered when comparing local unemployment rates before and after a casino opens. Just looking at differences in local unemployment rates over time without an understanding of population dynamics and the statewide business cycle can paint a false picture as to the employment benefits of casinos.

Issue 2: The basic idea regarding increased employment is that a casino's operation requires labor, and this labor will come from the local area. This, in turn, will reduce unemployment in the area. The question to ask is not just whether casinos decrease unemployment, but for whom they decrease unemployment. Most casino jobs require some kind of skill, be it accounting, dealing cards, security or other expertise. If a casino is planning to move to a rural area having a relatively less skilled work force, the casino probably will draw skilled labor from outside of the area. If this labor remains outside of the local area and workers commute to the casinos, then unemployment in the local area will remain unchanged. If some of this skilled labor decides to move near the casino, then the unemployment rate (which is the number unemployed divided by the labor force) in the local area will fall because the labor force has increased. It is this decreased unemployment rate that is often used as evidence that casinos have indeed improved local employment. However, it is important to realize that unemployment for the original, relatively less skilled population has remained essentially unchanged—only the higher skilled, new arrivals have found employment with the casino. It is the employment of these new arrivals that has decreased the unemployment rate.

The main lesson regarding casinos and their impact on the local unemployment rate for the original population is that local officials and the citizenry need to know whether the work force for the new casino will come from their area. The promise of increased employment for the original population that is often used as an argument for the construction of casinos may not be realized. In a relatively urban area, there is probably enough variety in the work force to ensure that skilled labor will be provided locally. In rural areas, however, most of the labor will be from outside of the local area, thus leaving the unemployment rate for the original population unchanged.

Casino tax revenue is a benefit.

Issue 1: Most states tax adjusted casino revenue and use the taxes to fund state and local programs. In Missouri, the tax rate is 18 percent, and there is an additional 2 percent tax to aid local city governments. Indiana has a 20 percent tax rate. Illinois and Mississippi have a graduated tax schedule.

Casino proponents and state and local governments promote casino tax revenue as a benefit. This revenue is a benefit for the recipients of taxed casino revenue. However, it is important to realize that this revenue is not "new money" to society. Taxes result in a transfer of income from one group to another group—in this case, casino owners to state and local governments (and eventually to program recipients). So, for example, while the state of Missouri collected nearly $190 million in casino taxes during 2001, this $190 million is a cost to casino operators. Zero new money was created as a result of the casino tax.

Issue 2: State governments use casino tax revenue for various programs, but public education seems to be the favored destination for casino tax revenue in many states. In fact, states often promote how much money from casino revenue is earmarked to public education. This suggests to the public that spending on education has increased since the taxing of casino revenue began. Not necessarily.

The problem is that all earmarked revenue is interchangeable. Consider the following example: Your son is in college and spends $40 a week on pizza. You send him a check for $20 and insist that he spends the money on pizza. This suggests that his total spending on pizza will now be $60 a week. But there is nothing from preventing your son from taking $20 out of his original $40 and using it for something else, and then simply adding your $20 back to get the final $40.

The same works for state, local and federal governments regardless of the tax and destination of revenue. If $100 million a year from casino taxes is earmarked to education, one would expect total education spending to increase by $100 million. However, state legislators can simply reduce the total amount of funds budgeted for education by $100 million and use these funds elsewhere, and then use the $100 million from casino revenue to bring total education expenditures back to their pre-casino levels. No increase in education spending has occurred.

The swapping of casino revenue has yet to be tested empirically, but the issue has been explored using state lotteries. Numerous studies have found that in those states that earmark lottery funds for education, spending on education has not increased beyond historical trend levels after the introduction of the lottery. Essentially, contrary to the claim made by lottery officials, state lotteries do not appear to help public education. There is no reason to doubt the same result could occur with casino revenue.

Casinos help boost local retail sales.

The issue of whether casinos help or hurt local retail sales, and thus retail sales tax collections, has received the most attention in the academic literature. Essentially, the degree to which casinos attract visitors from outside the local area relative to local customers determines the casino's impact on local retail sales. If the bulk of a casino's clientele is local, then one would expect retail sales (and thus retail sales tax revenue) in the local area to be negatively impacted. This is the substitution effect, i.e., consumers substitute casino gambling for other consumption activities such as dining out or going to the movies. However, if casinos act as part of a "tourist vacation," where non-local visitors spend several days gambling, touring museums and dining out, then local retail sales would probably increase.

Another factor to consider is that many casinos have restaurants, shops and hotel rooms for casino customers. All items purchased in these outlets are taxable under state and local sales tax laws. A possible loss in retail sales in the local community may be partly offset by an increase in retail sales activity in the casinos.

Rural areas that have one or two casinos are more likely to experience a decrease in local retail sales than urban areas that attract a greater number of tourists. Areas such as St. Louis and Kansas City would probably experience less, if any, of a decrease in retail sales compared to rural casino areas such as Booneville or Caruthersville, Mo. Of course, only empirical testing can provide a definite answer regarding retail sales losses and gains due to casinos. An interesting point is that many rural communities do promote their casinos along with other area attractions to draw out-of-area visitors.

Regardless of the specific issues, casino gambling in the United States is likely here to stay. The only question is to what degree its popularity will increase in the future. The topics presented here should be understood by both citizens and government officials when they debate the issues surrounding casinos and economic development.