Gambling Tax Regressivity The Case of Casinos
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1 Gambling Tax Regressivity The Case of Casinos Douglas M. Walker, Ph.D. College of Charleston U.S.A. 7 th European Conference on Gambling Studies and Policy Issues Nova Gorica,, Slovenia, July 1-4,
2 Introduction Many policy discussions take for granted that taxes on casinos are, like lottery taxes,, regressive But the tax burden depends on TWO questions What is the tax incidence? Who are the consumers? For the lottery, the entire tax is passed-on to consumers, so only the second question matters But it s s not obvious that this is true for casinos Walker, Casino Tax Regressivity 2
3 Tax Policy Considerations The fairness of a tax is often based on a several considerations Benefit principle: who benefits should pay Ability to pay: those with higher income can better afford to pay taxes Typical justification for progressive income taxes Walker, Casino Tax Regressivity 3
4 Vertical Equity Addresses ability to pay Many people believe those with more income should pay a higher percentage of income in taxes A progressive tax A regressive tax is one for which lower income people pay a higher percentage of income in taxes, relative to higher income people A proportional tax is one in which people of all incomes pay the same percentage in taxes Walker, Casino Tax Regressivity 4
5 Income Taxes Example: Income Tax Paid Avg. Tax Description Rate _ 10,000 1,000 10% 100,000 15,000 15% Progressive 10,000 1,000 10% 100,000 10,000 10% Proportional 10,000 1,000 10% 100,000 8,000 8% Regressive Walker, Casino Tax Regressivity 5
6 Other Taxes Vertical equity concerns apply to other taxes too Suits (1977a) developed an index to measure the degree to which a tax is progressive or regressive Like the Lorenz Curve or Gini Coefficient Suits found the following U.S. taxes were progressive: individual and corporate income; property taxes Regressive taxes included personal property, payroll, and sales/excise taxes Politicians and voters may wish to avoid regressive taxes, due to fairness concerns In practice, it is questionable how much they care Walker, Casino Tax Regressivity 6
7 Suits (1977b) Suits (1977b) examined taxes on gambling Progressive taxes included casinos, and sports books Regressive taxes included lottery, horse tracks, numbers, and sports cards Suits found that taxes on Nevada casinos for the U.S. overall were progressive Higher income individuals are more likely to travel to Las Vegas Among NV residents, however, the casino tax is found to be highly regressive Walker, Casino Tax Regressivity 7
8 Other Studies A recent review ( Taxing( the Poor 2007) concludes that all U.S. gambling taxes are regressive Other studies, including those cited by Anderson at a previous EASG conference, have found casino taxes to be regressive Rivenbark (1998) and Borg, Mason, and Shapiro (1991) are among the studies that find casino taxes to be regressive Walker, Casino Tax Regressivity 8
9 The Lottery Tax Countless studies have examined the implicit lottery tax In the U.S., around 45 is paid in prizes, 20 goes toward admin./expenses, and 35 represents tax revenue (varies by state) Buyers pay the entire tax Since poor people spend proportionally more of their income than rich people on the lottery, the lottery tax is regressive Walker, Casino Tax Regressivity 9
10 Tax Incidence In the context of excise taxes, or taxes on particular products, tax incidence becomes less straightforward Who actually bears the burden of the tax? the buyer or seller? Incidence is irrelevant of statutory burden It depends on relative sensitivity to price changes (elasticities of D and S) Walker, Casino Tax Regressivity 10
11 Gambling Taxes Taxes on gambling products are forms of excise taxes Since the goal of legal gambling is often to raise tax revenue, who bears the tax is of interest However, most studies appear to take for granted that the consumers bear the entire burden for gambling taxes Walker, Casino Tax Regressivity 11
12 Lottery Tax Burden In the case of lotteries, it is true that consumers bear the entire tax burden This is the result of the government controlling supply, price, and the tax So the regressivity of the lottery tax can easily be established by examining consumption patterns vis-à-vis income Walker, Casino Tax Regressivity 12
13 Graphical Explanation The lottery is supplied by government Horizontal supply curve Tax burden falls entirely on consumers Walker, Casino Tax Regressivity 13
14 Tax Burden: Lotteries $ Lottery Tickets $1.50 P consumers pay Includes prizes paid (45 ) and admin. exp. (20 ) $ Tax Rev. Prod. cost Sτ S D Q S shifts higher by the amount of τ= 35 Walker, Casino Tax Regressivity 14
15 Cigarette Tax Burden When government does not supply the product, then the tax burden may be split among buyers and sellers Whoever is more sensitive to price changes can avoid the tax Relative price elasticity matters Then who makes-up the consumers determines regressivity/progressivity Walker, Casino Tax Regressivity 15
16 Tax Burden: Cigarettes $ 4 Cigarettes Sτ S Pc=$ consumers burden producers burden 2 Pp=$ D Walker, Casino Tax Regressivity 16 Q
17 Casino Taxes Many studies seem to take for granted that all gambling taxes are regressive like lotteries But it depends on the extent to which taxes are shifted to consumers If the supply of casinos is fixed by government, then S is vertical Walker, Casino Tax Regressivity 17
18 $ Casino Bets S $1 bet is the price consumers pay, $1 GGR. The casino retains 95, and pays 25 in taxes. $1 75 Tax Rev. Prod. cost D Q Walker, Casino Tax Regressivity 18
19 Casino Taxes, cont. But the supply curve is likely positively sloped, and very steep, up to the quantity limited by government The regressivity of casino taxes depends on 1: To what extent taxes on GGRs are passed-on to customers AND 2: Demographics: who gambles, higher- or lower-income individuals Walker, Casino Tax Regressivity 19
20 Anderson (2005) This paper, presented at a previous EASG conference, addressed the issue But Anderson suggests that researchers assume that the D is vertical, not that the S is horizontal He suggests that the legal restrictions on gambling create rents, and taxes can be seen as an attempt to capture the rents This raises questions about the relevance of regressivity Walker, Casino Tax Regressivity 20
21 Are Casino Taxes Regressive? The question has not been adequately addressed here or in other studies The extent to which consumers bear the tax is not as obvious as is commonly thought It could be tested by comparing the price of casinos in different jurisdictions with different tax rates on GGR. If casino games are priced the same in different jurisdictions (with different tax rates), then it may be the case that the casino (seller) bears the entire tax burden Or, do casinos provide fewer amenities in higher-tax jurisdictions, increasing the price? Walker, Casino Tax Regressivity 21
22 Summary and Conclusion Casino taxes are often assumed to mimic lottery taxes as demographics of lottery and casino players may be similar. However, it is not clear the extent to which the taxes are borne by consumers If casinos bear the taxes entirely, then the regressivity question may be moot Subsequent analysis will include empirical work Comments/questions? Walker, Casino Tax Regressivity 22
23 Contact Information Doug Walker Dept of Economics and Finance College of Charleston 5 Liberty Street Charleston, SC USA WalkerD@cofc.edu Walker, Casino Tax Regressivity 23
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