Response to Kentucky Center for economic policy blog on “Taxing Betting Uniformly”

Thomas Lambert, PhD

Assistant Professor

February 24, 2020

Executive Summary

A recent blog by Pam Thomas of the Kentucky Center for Economic Policy (KCEP) called for a 2% increase in the tax rate on Historical Horse Racing (referred to as Instant Racing) and advance deposit wagering (ADW) at Kentucky racetracks.  Research conducted by the University of Louisville’s Equine Industry Program found there would not be a proportional increase (dollar for dollar) in tax revenue to the Commonwealth.  An increase in the tax would most likely be passed on to the consumer.  For every 1% increase in tax, a corresponding (1%) decrease in tax revenues will result (in this instance a (2%) decrease is expected).  Consumer’s discretionary dollars are elastic regarding gaming.  In the current environment, the elasticity of demand could be as high as 10%.  Multiplying a 2% decrease in tax revenue by the 10% elasticity of demand could result in a 20% decrease in instant racing handle.

Bottom line, 2019 fiscal year projections of $2 billion in handle for instant racing could decrease 20% to $1.6 billion.  Taxes for the Commonwealth in this scenario would not be $71 million due to a tax increase but $56 million.  While the Commonwealth is receiving higher tax revenues, this would result in substantially lower revenues for the racing facilities in the state and its partners, likely reducing the amount of monies available for racetrack purses and operating expenses, including payroll expenses.  It is expected, absent sports wagering in Kentucky, that elasticity could increase as high as 15%, resulting in a 30% decrease in handle, when sports betting is introduced in Indiana and Tennessee.

Recently a blog appearing on the Kentucky Center for Economic Policy (KCEP) website argued for increasing taxes on different forms of horse and instant wagering (“historical horse racing”) in the Commonwealth of Kentucky in order to generate revenue for the state’s General Fund.[1]  The blog somewhat implies that a 2% increase on instant wagering (i.e., raising the tax from 1.5% to 3.5%) and a 2.5% increase on advanced deposit wagering (i.e., raising the tax from 0.5% to 3.0%) would raise proportional increases in tax revenue.  As an example of a proportional increase, let us assume that a tax is imposed on something for the very first time, for example, an excise tax of 10% on something valued at $100,000.  The assumption of the tax yielding 10% more revenues would be that if 10 of these items are sold per year, then the excise tax revenues generated would be $100,000 (or, 10% of $1,000,000).  In economics, this is shown to rarely be the case.  New revenue will probably be generated, but the quantity demanded of the item by consumers will probably fall below 10 per year.  Therefore, the amount of revenue generated could be more like $80,000 or $90,000 or $95,000 depending upon how elastic demand is for the good.  As the effective price of something rises thanks to taxation, consumers will usually try to find substitutes for the good being taxed.

We admit that KCEP does not directly state that a 2% or 2.5% increase in tax rates yields a concomitant increase in tax revenues.  However, the blog post does fail to acknowledge the elasticity of demand for various types of gaming and fails to acknowledge the possibility of decreases in industry handle if a tax increase is enacted.  It also points out that many tax revenues go back to the industry directly or indirectly.  However, this is also not that rare in that it occurs in other industries.  Taxes on airline travel and tickets indirectly support the airline industry by funding local airports and the Federal Aviation Administration just as gasoline taxes make possible roads and road improvements, all of which help the auto industry.  

The literature on gaming, casinos, and horse racing is voluminous with estimates of the elasticity of demand for gambling including estimates of how wagering demand will fall as a greater amount of taxes are withheld.[2] Using estimates of an elasticity of demand of low (1%), medium (5%), and high (10%)[3], Figure 1 below shows that an increase in the tax on instant wagering will raise more tax revenue, but not as much revenue as projected by KCEP if an assumption of proportional tax revenue increases are assumed.  For Fiscal Year 2019, which just ended June 30, 2019, KCEP estimates would project tax revenues of around $71 million on handle of slightly over $2 billion.  Yet, using an elasticity of demand of 5, the tax collected would be more like $64 million on total handle of around $1.8 billion.  Figure 2 also shows how the same elasticities can affect the total handle generated by the industry on instant wagering.[4]  At some point below a certain level of revenues, establishments will have to cut back operating hours or jobs as plunging revenues harm profitability.  The falls in handle are projected based upon what has happened in other jurisdictions where taxes on casinos or racetracks have been increased, which in turn decreased the payouts given to patrons, which in turn further decreased attendance or playing as some patrons looked for other forms of gaming or entertainment.  A tax increase could harm an industry which is still struggling to regain a certain level of profitability that existed before the Great Recession of 2007-2009.  Given the fact that Indiana casinos will soon allow patrons to bet on college and professional sports, the elasticity for instant wagering and ADW at Kentucky tracks could be pushed higher, which would in turn increase the negative consequences of any tax increase.  

Appendix

Navin, John C. and Timothy S. Sullivan.  2007. “Do Riverboat Casinos Act as Competitors?  A Look at the St. Louis Market.”  Economic Development Quarterly 21: 49-59.

Philander, Kahlil.  2012.  “The Effect of Online Gaming on Commercial Casino Revenue.”  UNLV Gaming Research & Review Journal 15(2):  23-28. 

Srinivasan, Arun and Thomas E. Lambert.  2017.  “The Impact of Stagnating Casino Revenues on State and Local Governments Tax Receipts.”  Public Budgeting and Finance  37(1):  26-46. 

Thalheimer, Richard.  2012.  “The Eemand for Slot Machine and Pari-mutuel Horse Race Wagering at

a Racetrack-Casino.”  Applied Economics 44: 1177–1191.

Thalheimer, Richard, and Mukhtar M. Ali.  1995.  “The Demand for Pari-mutuel Horse Race Wagering and Attendance.”  Management Science 41(1):  129-143.

Thalheimer, Richard, and Mukhtar M. Ali.  2003.  “The Demand for Casino Gaming.”  Applied Economics 35:  907-918. 

Thalheimer, Richard, and Mukhtar M. Ali .  2008.  “Table Games, Slot Machines, and Casino Revenue.”  Applied Economics 40:  2395–2404.

Thalheimer, Richard, and Mukhtar M. Ali .  2008.  “Pari-mutuel Horse Race Wagering—Competition from Within and Outside the Industry.  In Handbook of Sports and Lottery Markets, Donald B. Hausch and William T. Ziemba, editors.  Amsterdam, Netherlands:  Elsevier Publishers. 

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Notes

[1] Pam Thomas, “Taxing Betting Uniformly Would Generate Much-Needed General Fund Revenue,” Kentucky Center for Economic Policy, May 17, 2019.  https://kypolicy.org/taxing-betting-uniformly-would-generate-much-needed-general-fund-revenue/ .  Retrieved on August 10, 2019. 

[2] There are probably too many to list.  Please see the Appendix below.

[3] These are all within the ranges cited in the literature depending upon whether is discussing short run or long run elasticities of demand.  As time goes by, the elasticity for most goods increases as consumer preferences change and substitutes appear on the market. 

[4] We would expect similar results for any tax increases on ADW and can provide calculations for this upon request.  As the KCEP blog points out, tax revenues for this category of gaming are growing, although not as rapidly as instant wagering.