by Laurie Cummings, Economist, and Robert Kleine, Senior Economist
|Once forbidden fruit, gaming has grown in popularity nationwide as a form of entertainment and as fuel for state budgets. This Advisor discusses different types of gaming and the potential economic and social effects of expanding this activity in Michigan.|
Horse racing and state lotteries have been around for some time, but in the 1990s legislatures have authorized such for-profit gaming enterprises as Indian and non-Indian casinos,1 riverboat casinos, and video-lottery terminals (VLTs) at bars and restaurants.2 Exhibit 1 shows the growth in wagering between 1982 and 1995, overall and by category.
- Americans gambled $134 billion in 1982 and $431.6 billion in 1995, an increase of 222 percent.
- Parimutuel gaming, which includes horse racing, greyhound racing, and jai alai, is the only category that has lost in popularity. Wagers declined 26.4 percent between 1982 and 1995, and market share dropped from 14.9 percent to 3.4 percent.
- Although state lotteries are a relatively small part of the industry, they grew by 851 percent over the period. Lottery betting increased from 3 percent of the total to 9 percent.
- Casinos, both land-based facilities and riverboats, account for the vast majority of gambling nationwide. From 1982 to 1995, their market share rose about 4 percent, but wagers increased 238.5 percent—from $102.9 billion to $348.4 billion.
- Miscellaneous gaming (such as Bingo) made up 6.9 percent of betting in 1995, up from 5.2 percent in 1982. The $29.6 billion spent in 1995 was an increase of 320 percent.
- About half the states now allow some form of casino gambling. Until 1986 only two states permitted non-Indian casinos, but by 1996 the number had risen to ten states, and several more were considering legalization. The growth in Indian casinos followed a similar pattern: No state allowed them in 1986, and 20 had approved them by 1996.
A major reason for the spread of legalized gaming is the desire of state legislatures to increase revenues. While these have been rising in recent years, demand continues to grow for spending on education, corrections, and other programs. Gaming accounted for 2.8 percent of state revenues nationwide in 1994, a small but significant amount during tight fiscal times.3 Exhibit 2 shows government revenues from gambling nationwide. Lotteries contributed the lion’s share in 1995—$13 billion. Non-Indian casinos, which accounted for 12.1 percent of state gaming revenues that year, added $1.9 billion, most of it from land-based facilities. Indian casinos, horse and greyhound racing, jai alai, and other forms contributed $1.1 billion, or 6.7 percent.
The gambling bug has not bypassed Michigan. The state lottery is almost 25 years old, but recently there has seen a growth in other forms: A number of Indian casinos began operating in the 1990s; three casinos are preparing to open in Detroit in 1998; and a bill before the legislature seeks to legalize VLTs at bars and race tracks. Exhibit 3 shows the amount of betting in Michigan by category. Indian casinos account for the largest share by far, followed by the lottery, horse racing, and charitable gaming, such as Bingo. The sections below describe the types of gambling currently allowed and some possible changes in the state’s gaming industry.
Michigan has had a lottery since 1972, and ticket sales have increased almost every year since (see Exhibit 4). In 1996, more than $1.4 billion was wagered: 43 percent on daily games, 33 percent on instant tickets, and 19 percent on Lotto. This last category has declined more than half from the peak of $537 million in FY 1987–88. To boost these sales, in 1996 Michigan joined The Big Game, a multistate lottery that has sold more than $87 million in tickets since its inception in September 1996.
The lottery is the largest source of Michigan’s gambling revenue. Of the $1.5 billion received in FY 1995–96, about half went to pay off winners; 12 percent was used for administration, game expenses, and commissions to retailers; and the remaining 37 percent (approximately $540 million) went to the School Aid Fund.
Class III Indian casinos have been legal in Michigan since 1993, when Governor Engler signed compacts with the state’s seven federally recognized tribes. Class III includes slot machines, video poker, and all other “casino-style” games. Even before the agreements were concluded, some tribes were operating card rooms with blackjack, poker, and similar games of chance, as was allowed by federal law.
The compacts specify that as long as Indian tribes have the exclusive right to operate casinos in Michigan, their revenues from Class III games will be taxed. The state takes 8 percent of the net win (after payouts to winners) for the Strategic Fund, to be used for economic development, and local governments take another 2 percent. While Indian casinos are not under state regulation, the compacts allow for state inspection of casino records and require the tribes to reimburse the state for the cost of this oversight.
Since 1993 there has been an explosion of gambling at Indian reservations in Michigan. As shown in Exhibit 5, the amount of betting more than doubled between 1994 and 1996. In 1996 at least 17 casinos were in operation, and $3.9 billion was wagered; this resulted in state revenues of $31.9 million and local revenues of $8 million.4 The future of this funding source became questionable, however, with voter approval in 1996 of casino gambling in Detroit. Some tribes claim that since they have lost the exclusive right to operate casinos in the state, their tax obligation under the compacts no longer applies. The state contends that since no other casinos are yet open, the tribes still have exclusive casino rights.
In November 1996, passage of Proposal E allowed the creation of up to three casinos in Detroit. (Non-Indian casinos remain illegal in the rest of the state.) The ballot proposal also stipulated a tax of 18 percent on the net win. Fifty-five percent of the revenues will go to Detroit for additional police protection and other costs, and 45 percent will go to the state School Aid Fund. The casinos may open in 1998.
The impetus to legalize non-Indian casinos in the city came from Detroit businesses, local government officials, and others. A primary argument was that Windsor, Ontario, just across the Detroit River, had opened casinos in 1994 and was drawing large numbers of customers from the metro area and beyond. Many advocates felt that Detroit should have a chance to compete for those gambling dollars, which amounted to $720 million for Windsor casinos in FY 1995–96.
Although Detroit voters showed their support in a referendum, Governor Engler opposed off-reservation casinos anywhere in the state. This made it highly unlikely that gaming would become legal unless approved by a majority of Michiganians. Hence, gaming supporters worked to get the issue on a statewide ballot (Proposal E), asking voters to give their stamp of approval to casinos in Detroit. While the proposal passed by a slim margin, “No Dice”, an opposition group, plans a petition drive for repeal.
The Michigan legislature is debating casino regulation and the requirement of a three-fourths majority vote to override Proposal E, a margin that would be difficult to obtain. Much of the discussion centers on how to reimburse the state for regulatory costs and on the criteria for issuing licenses. Casino opponents, primarily Republicans, have proposed very stringent criteria, including strict background checks on applicants. They also favor a tax in excess of 18 percent to cover all regulatory costs. Advocates want to maintain the tax rate required by Proposal E and claim that the licensing conditions are an attempt to quash the casinos.
Adding fuel to the fire, the Michigan Department of Treasury recently released an analysis that projected casinos would cost Michigan $21.9 million in revenue, due primarily to an estimated drop of 10 percent in lottery sales. (PSC disagrees with this prediction; experience in other states does not support it, research indicates there are different markets for lotteries and casinos, and Indian casinos did not cause a decline in Michigan lottery sales.) The report has intensified
At the time of writing, there was no agreement between either the political parties or the House and Senate on the major aspects of casino regulation.
The oldest form of legalized gambling in the state, parimutuel betting on horses was established in 1933. There were 31 racing days that year; attendance was 101,227, wagering was $3.5 million, and state revenues were about $124,000. Horse racing grew rapidly, particularly after World War II, and in 1971 attendance peaked at just under 4 million during 563 racing days.
In current dollars, wagering continued to increase until 1990, reaching a high of about $441 million. Due to the addition of simulcasting, a new record of $468 million was set in 1996. When these figures are adjusted for inflation, however, the peak was attained in 1971 and declined roughly 75 percent by 1995. Revenue to the state reached a high of $28.9 million in 1975 and then dropped to a low of $15.6 million in 1995 (prior to simulcasting), due to a decline in wagers and a reduction in the state tax rate. (See Exhibit 6.)
Horse racing in Michigan has fallen on hard times. While the number of race days grew 40 percent from 1975 to 1995, attendance dropped 55 percent. In only five years (1990 to 1995), attendance fell about 35 percent, and wagering decreased 30 percent in current dollars, 40 percent if adjusted for inflation. This decline is due largely to greater competition for entertainment and gaming dollars over the last decade from the state lottery as well as casinos on reservations and in Windsor. The three casinos recently approved for Detroit are likely to cut even more into the horse racing market.
The industry received a boost from the passage of Public Act 279 of 1995, which authorized year-round, full-card simulcasting at Michigan race tracks. As a result, wagering in 1996 was up 50.7 percent, despite almost the same percentage drop in live race betting. The improvement may be only temporary, however, as casinos continue to gain ground. To compete, the industry is seeking legislation to allow VLTs at the tracks, which are permitted in four other states.
Legalized gambling is becoming an important sector of the national economy. In 1982, gross gaming revenue was $10.4 billion, or 0.39 percent of U.S. personal income. In 1995, the respective figures were $44.4 billion and 0.73 percent. As shown in Exhibit 7, casinos and lotteries account for about 80 percent of the increase. Over the same period, gaming on Indian reservations rose from zero to more than $4 billion. Industry growth has been almost as dramatic in Michigan as nationwide.
Gaming can create new economic activity in a state if it attracts capital or tourist dollars from outside. This clearly has been the case in Nevada, although Michigan has not yet reached that point. Similarly, a new gaming facility can provide significant economic benefits to a community, but only if patrons are attracted from elsewhere. Otherwise, income is merely transferred to gambling from another activity in the community, particularly other forms of entertainment, and there is no net economic gain.
A number of benefits are associated with new casinos. The positive direct effects on the economy are: (1) temporary construction jobs; (2) direct casino jobs; (3) a pay scale at casinos well above the average for the recreation and entertainment industry; and (4) additional revenues for local and state government. The positive indirect effects are: (1) purchases from local suppliers; (2) expenditures by casino and construction workers; (3) expenditures by tourists drawn to the area; and (4) diffusion of technology/skills from the casino industry.
New casinos bring disadvantages as well. The negative economic effects are: (1) increased crime (see below), which is costly to local residents and can make the area unattractive for new businesses; (2) loss of market share by established bars and restaurants; (3) loss of market share by other gaming activities; (4) less disposable income for purchasing goods and services; and (5) no new employment if casino jobs go to persons from outside the area.
The most comprehensive research on how casino development may affect Michigan was conducted by Deloitte and Touche for the Governor’s Blue Ribbon Commission on Michigan Gaming, which issued its report in April 1995. The study estimates total increased spending of about $1.2 billion, 70 percent of it captured from Michigan residents who currently spend elsewhere (Las Vegas, Windsor, Atlantic City, and projected riverboat gaming in Indiana).
New jobs are estimated at 16,497, based on the creation of 4,782 full-time equivalent positions in the casinos. In other words, each casino job will generate 3.54 others in the economy. The distribution of this indirect employment is shown in Exhibit 8. More than 60 percent will be in the eating and drinking, amusement and recreation, and retail trade sectors. Shown in Exhibit 9 is the indirect employment breakdown by occupation. The largest category is food preparation and services, but the numbers for managerial and other professional jobs are significant.
The economic benefits of gaming must be weighed against the social costs. Opponents point to two major problems associated with the expansion of gambling. The first is an increase in the number of people who become addicted, including teenagers, many of whom gamble in casinos despite the minimum age limit of 21. Addiction can have serious financial and family consequences, such as divorce and suicide. The second problem is an increase in the crime rate.
“America is on a gambling binge,” according to Congressman Frank Wolf (R-VA), who was behind legislation that established the national Gambling Impact Study Commission. (It will conduct a comprehensive two-year investigation of the social and economic effects of gambling in the U.S.) The gambling fever is likely to continue, at least for the next few years, as state and local governments look for ways to avoid new levies and reduce current taxes. In 1995, governments collected $1.4 billion from casinos and $11.6 billion from the more ubiquitous lotteries.
Government’s addiction to gambling has been transmitted to the public. An estimated 10 million Americans have a gambling habit that is out of control. The recent surge in the number of problem and pathological gamblers is strongly correlated with the explosion in legalized opportunities. A 1989 Iowa survey indicated that 1.7 percent of the state’s residents were problem or pathological gamblers. Shortly thereafter, casinos on riverboats and Indian lands were permitted, and a 1996 survey of Iowans revealed that the proportion had jumped to 5.4 percent. An additional 78,000 adults had become hooked.
Some experts warn that the number of addicts has yet to peak. Durand Jacobs, a professor of clinical psychiatry at Loma Linda Medical School in California and a specialist in youth gambling, predicts that gaming will become the nation’s fastest-growing addictive behavior. In addition to the wider availability of traditional venues, the emergence of VLTs, gambling on the Internet, and interactive telephone and television gambling will contribute to the problem.
Americans will legally wager $500 billion this year—more than they will spend on groceries and an increase of 3,000 percent since 1976. Utah and Hawaii are the only states that prohibit all forms of gambling. Casinos are now legal in half the states and account for nearly half of state gaming revenues, which have grown at an annual rate of 12 percent over the last decade.
A number of studies have found a correlation between the expansion of legal gambling and the crime rate. Research by Central Michigan University on the Soaring Eagle Casino and Hotel in Mt. Pleasant, Michigan, estimates that Isabella County can expect increases of 15 percent in violent crime, 20 percent in property crime, and 70 percent in nonindex crime (less serious offenses, such as vandalism and fraud) by 1998 as compared to 1994.5 Supporters of expansion argue that no definitive evidence links gambling to significant increases in crime.
Despite efforts to repeal Proposal E, it is very likely that legal gambling is in Michigan to stay. Not only are Indian casinos expanding, but non-Indian casinos are preparing to make their debut.
State policy makers will need to address several questions in the coming months and years. They will need to agree on how to tax and regulate the new casinos. They must decide whether to allow video devices at horse tracks and bars. And, if Michigan follows the lead of some other states, they may also have to decide whether riverboat gambling should be allowed. While resolving these issues may seem a formidable task, it is likely only the beginning—more issues could emerge as casinos begin operation.