Thomas A. Garrett

SUMMARY: Electronic gambling (‘slot’) machines are a key component of the global gambling industry. We introduce a theoretical framework which shows that under reasonable assumptions, shifting from a per‐machine licence fee to a gross profits tax (GPT) on machine revenue can help to resolve policy tensions between industry profitability, economic growth and government revenue. We test the theory using data on recent changes to gambling taxation in the UK, in particular the move to a gross profits‐based Machine Games Duty (MGD). Our results reveal that the shift from licence fees to a revenue‐neutral MGD led to a significant increase in the number of machines, as predicted by the theory, and in machine revenue. These results provide useful guidance for all parties involved in the gambling taxation debate, especially those jurisdictions that are considering or are open to a change to their gambling tax system.

Reasons exist for believing that casino gaming revenue does not respond equally to all sources of income over the business cycle. We examine the growth and variability of casino revenue resulting from the growth and variability in different sources of income. We find that casino revenue behaves quite differently in response to short‐run and long‐run variation in each income source, thus revealing that the common use of personal income masks underlying drivers of each state's business cycle. Our results have implications for revenue forecasting models, research on the growth and variability of tax bases in general, and public policy. (JEL H72, H79, L83)

Lottery‐demand models using aggregate data are often used to make inferences regarding individual behavior, the most important being the distributional burden of lottery‐ticket expenditures. It is shown here that estimates for the income elasticity and the cross‐price elasticity will only be representative of individual behavior under extremely restrictive assumptions. In fact, estimation of aggregate‐demand models presupposes that the income elasticity is equal to one. Cross‐sectional analyses using microlevel data face similar restrictions on consumer behavior. Remedies are discussed, but more conclusive evidence on the distributional burden of lotteries will remain elusive until better individual‐level data become available. (JEL D11, H71, H22)

The cost of living varies as much across locations as it does over time. We demonstrate the importance of considering locational cost of living differences in empirical models of the demand for state lotteries. Previous research has shown that the nominal-income elasticity of demand for lottery tickets is less than one, suggesting that individuals and geographic regions with lower incomes tend to have a greater percentage of their income allocated toward lottery ticket purchases than do wealthier individuals and geographic regions. We first provide a conceptual framework that reveals that real-income elasticities generally will be different from nominal-income elasticities. We then reestimate traditional cross-sectional models of lottery demand using a sample of metropolitan statistical areas. We find that the magnitude of income elasticity estimates is smaller when local cost of living is omitted from empirical models, especially in the case of instant lottery games.

This paper measures the extent to which destination resort casinos export bankruptcy back to visitors’ home states. Previous literature has alluded to this possibility, but to date studies have only examined the influence of local casinos on local bankruptcy. Using various survey data, we calculate the number of visits from each state to casino resort destinations in Nevada, New Jersey, and Mississippi. We find strong evidence that states having more residents who visit out-of-state casino resorts have higher bankruptcy filings. This effect is dominant in the south, suggesting that casinos located in wealthier regions are less likely to export bankruptcy.