The Initial Impact of Casino Gaming on Bankruptcy Filings in Louisiana

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1 The Initial Impact of Casino Gaming on Bankruptcy Filings in Louisiana Dr. Barbara J. Davis Dr. Helen B. Sikes Centenary College Abstract Louisiana voters overwhelmingly approved riverboat casino gaming in The hypothesis of this work is that casino gaming has a relationship with the observed increase in per capita bankruptcies. The expectation of this research is that the number of bankruptcies is greater in parishes with casino gaming given the increases in sales tax receipts with decreases in unemployment. The gaming industry is quick to recognize the added economic benefits and stimulation due to increases in employment, multiplier effects of salaries paid to employees and increases in tax payments to local municipalities. The study contributes to the literature by providing analysis to support or question the claims of the gaming industry. Introduction Casino gambling is one of America s fastest growing and most profitable industries. Total casino gaming revenues were $24.5 billion in 2000 growing to $25.7 billion in 2001 (American Gaming Association, 2002, p.2). Gaming revenues from Louisiana s riverboats exceeded $1.63 billion in 2001 (Louisiana State Police Gaming Control Board website, 2001). The economic expectations of casino gaming in area markets are initially positive. Local businesses are expected to benefit from increased population and newly created employment opportunities produced by casinos. Experience has demonstrated that the introduction of gamingentertainment will expand the economic base and help strengthen the economy in local communities. Gaming is generally considered as a means of economic stimulation and job creation, and as an additional source of tax revenue for those states where gaming is legalized. The casino gaming industry contributes to their local economies in the form of wages and taxes. Casino establishments made payments in 2000 of an estimated $3.5 billion in taxes to federal, state and local governments and paid wages in excess of $10.9 billion to approximately 370,000 casino employees. Related industries additionally employed 450,000 people to support the growing casino markets (American Gaming Association, 2002, p. 3). The casino gaming industry appears to have a significant positive impact on a region s economy using employment rates and taxes to summarize economic indicators. Some of the expected economic impacts from the introduction of casino gaming in the Louisiana market include creation of new full-time jobs and the related increases in population and tax payments to state and local governments. These benefits notwithstanding, the hypothesis of this work is that the number of personal and business bankruptcy filings increases in parishes with casino gaming. The purpose of this study is to examine the effect of the casino gaming industry in Louisiana on the number of bankruptcy filings as influenced by local sales tax receipts and unemployment. Supporters of casino gaming often argue that the gaming industry helps economies by improving local economic activity through reductions in local unemployment rates.

2 The newly employed spend their wages which increases local sales tax receipts. If casino gaming has a positive effect on the economy, the hypothesis addresses an expected decline in number of bankruptcies in parishes with approved casino gaming. Alternatively, a negative impact of gaming is observed in Louisiana through increases in bankruptcies in parishes with riverboat casinos even though the gaming industry publications document resounding benefits to local economies from casino operations. The expectation of the study is that the decline in unemployment observed in gaming communities should generate wages, increasing excess disposable income that is totally or partially consumed in retail outlets and gaming establishments. As consumers spend and increase their credit card limits, sales tax receipts rise. Excess disposable income for these consumers may be inadequate to maintain personal debt service. When minimum required debt service increases, so also does the probability that these consumers might be forced to file bankruptcy. The presence of gaming in a parish is expected to positively increase the number of bankruptcy filings due to the likelihood that individuals will spend or gamble more than excess disposable income allows. Recognizing the ease in availability of personal unsecured credit, consumers in gaming communities might increase credit limits beyond affordable levels and therefore, be forced to file bankruptcy. Literature Review Eadington (1999) examines the major changes that have developed in the casino and gaming industry over the past forty years. In his study, the potential gains from gaming include expected economic ancillary benefits that include job creation, investment stimulation, tourism development and improvement of the economic status of underprivileged groups. Local economies also benefit from increases in local taxes paid by gaming organizations. According to Truitt (1996), the primary motivation for legalized gambling appears to be to capture the tax revenues it generates. The study investigated casino gaming in Illinois and assessed the impact of gambling on businesses in gaming communities. His findings suggest that gaming in Illinois has not stimulated economic development and tourism to the degree expected. One goal of the Illinois gaming legislation was to stimulate economic development particularly in the tourism industry. Findings indicate mixed results. Riverboat gaming spawned many new businesses yet some of those new businesses failed. Casino gambling in the large metropolitan Illinois riverboat communities does not appear to have stimulated much economic activity other than in the gambling arena (Truitt, 1996). Wagoner and Walker (1998) examine the effects of employment growth on retail sales between Mississippi counties that have approved legalized gaming and those counties that have not approved legalized casino gaming. Employment increases typically improve retail sales in the region. However, they hypothesize that some of the income generated by the increase in employment activity from casinos will be spent in gaming activities. Based on their results, they report no significant difference between casino and non-casino counties when examining employment growth effects on retail sales. Caneday and Zeiger (1991) surveyed residents and entrepreneurs in Deadwood, South Dakota concerning the impact of gaming and tourism on the economy and lifestyle of residents. Their study confirms three conclusions suggested by Eadington 1986:1). The character and reputation of the host community is undeniably altered because of tourism generated by gambling. 2) Individual attitudes toward gambling depend on its improvement or deterioration of personal quality of life. 3) Economic activity tends to be concentrated in the geographic vicinity of the gambling district (Caneday and Zieger, 1991). Anders, Siegel, and Yacoub (1998 b) analyze the impact of the introduction of Indian casino gaming on transaction privilege taxes in Arizona. Their empirical results suggest that Indian casinos have destabilized projected Arizona sales tax revenues. They present evidence of

3 income shifting from taxable businesses such as restaurants and bars to non-taxable gambling establishments. In another study, Anders and Siegel find that expansion of riverboat casinos was associated with a decline in expenditures on other forms of entertainment (Anders and Siegel, 1998 a). Although a study completed by the Louisiana State University-Shreveport Center for Business Research (1999) suggests that casino gaming was not a primary cause for bankruptcy filing, the participants in the study indicated that gaming and the ease of securing credit at all hours of the day and night was a secondary cause of bankruptcy filings. The researchers interviewed Gamblers Anonymous members to identify the hidden costs and indirect benefits of casino gaming in a community for stakeholder groups. Description of the Data The data are compiled from several sources: Federal District Bankruptcy Courts in Louisiana, the Center for Business and Economic Research at Northeast Louisiana University (LEAP) and the State Department of Revenue and Taxation. A regression model estimates the relationship between variables representing number of bankruptcies by parish, unemployment, sales tax receipts and a dummy variable representing the presence of casino gaming for 1996, 1997 and Table 1 presents the definition of variables and data source. BANKRUPTCIES UNEMPLOYMENT SALES TAX GAMING Definition Table 1 Definition of s Number of Chapter 7, 11, & 13 bankruptcy filings by parish as reported by the Western, Eastern, and New Orleans Districts of the U. S. Bankruptcy Court Rate of unemployment by parish. Source: Center for Business and Economic Research at Northeast Louisiana University (LEAP) Parish Sales Tax Collections as reported by the Louisiana Department of Revenue and Taxation Indicator variable (1 for a parish with gaming, 0 for a non-gaming parish). Source: Louisiana Tech Center for Business Research This study explains the relationship between number of bankruptcy filings in Louisiana, the presence or absence of casino gaming and local economic and demographic data. The research utilizes a regression model testing for a significant relationship between independent measures of unemployment, sales tax revenues and the presence or absence of casino gaming and the dependent variable number of bankruptcy filings. If a significant relationship exists, the implications should be important for a local economy. Table 2 presents descriptive statistics for the data set. The average number of bankruptcies for the sixty-four parishes in Louisiana increased during the study period. In 1995, the average number of bankruptcies per parish was as compared to in The standard deviation for number of bankruptcies has also increased which illustrates the greater number of bankruptcy filings in certain parishes. Average unemployment for the sixty-four parishes declined

4 slightly from 8.56% in 1995 to 7.50% in Sales tax receipts increased during 1996 and 1997, but declined in 1999 with the average over the period ranging from $10.8 million to $12.2 million. N=63* Table 2 Descriptive Statistics for the Data Set 1995** Std. Dev. BANKRUPT UNEMPLOYMENT 8.56 (UNEM) 2.52 SALES TAX 10,818, Std. Dev ,237, Std. Dev ,782,868 25,073,538 27,995,538 26,666,327 * Louisiana has 64 parishes. Jefferson Parish does not separately report number of bankruptcies. This parish reports bankruptcy filings with Jefferson Davis parish. **1995 data represent 50 parishes. The New Orleans District U. S. Federal Bankruptcy court could not provide data prior to 1996 (14 parishes) Std. Dev ,824,520 26,696,257 Table 3 summarizes descriptive statistics for gaming parishes as compared with non-gaming parishes. Average number of bankruptcies in gaming parishes increased from 110 in 1995 to 166 in 1998, a 50.91% increase in gaming parishes. Non-gaming parishes observed a 100% increase in bankruptcies during the same time period. One possible explanation for the larger increase in nongaming parishes is a displacement effect that occurs when people from contiguous, rural parishes come to the urban, metropolitan gaming parishes in Louisiana to spend their money and gamble. The gaming concentration and greater number of spending outlets in Shreveport-Bossier, Lake Charles, New Orleans and Baton Rouge present more opportunities for the rural gaming patrons than are available in their home communities. This explanation is also supported by the large percentage of increase in sales tax receipts in the gaming parishes. Sales tax receipts in gaming parishes increased 53.65% as compared to the 15.0% increase in sales tax receipts in non-gaming parishes. These descriptive statistics illustrate the increase in consumer spending in gaming parishes compared to the dollars of consumer spending in the non-gaming areas. Table 3 Descriptive Statistics for Gaming Parishes vs. Non Gaming Parishes N=63 (9 Gaming; 54 Non-Gaming) Gaming/ Non-Gaming Gaming/ Non-Gaming Gaming/ Non-Gaming Gaming/ Non-Gaming BANKRUPT UNEM % SALES TAX (000s) 5,234 7,355 5,916 8,276 6,775 8,001 8,042 8,459 Unemployment steadily decreased in gaming parishes from 9.4 percent in 1995 to 7.0 percent in 1998, a 25.53% decline. Non-gaming parishes experienced a drop in unemployment from 8.4% to 7.2%, a 14.29% decrease. It is interesting to note that the unemployment rate decreased at a faster rate in gaming parishes than in non-gaming parishes. With lower rates of unemployment, personal disposal income increased during the steady period which led to the increases in consumer

5 spending, evidenced by the increase in sales tax receipts. This increase in spending, if not cautiously managed by the consumer, could ultimately lead to bankruptcy. Model Specification A regression model estimates the relationship between variables representing number of bankruptcies, unemployment, sales tax receipts and the presence or absence of casino gaming for 1996, 1997, and In the regression model, number of bankruptcy filings is hypothesized to be a function of the unemployment rate, sales tax receipts and gaming. The variables are not lagged, the data represent observations for each measure during the study years. Multicolinearity between the independent variables is not problematic as evidenced by the correlation matrix, see Table 4. Table 4 Correlation Matrix 1998 Pearson Correlation Coefficients VARIABLE BANKRUPT UNEM % SALES TAX BANKRUPT UNEM % SALES TAX (000s) Correlation between the two independent variables does not exceed.50. White s test for model misspecification is not significant for the most recent study year, 1998 (F-statistic 1.05, prob ). Therefore, the test does not indicate the presence of heteroskedasticity in the data set. We estimate the following equation: BANKRUPT = β 0 + β 1 UNEMPLOYMENT + β 2 SALESTAX + β 3 GAMING (1) For the model, the dependent variable number of bankruptcies is a function of the independent measures of unemployment, sales tax receipts, and gaming. The expectation is that the presence or absence of gaming will have a significant impact on the number of bankruptcies filed in each parish. The related employment and demographic variables should also significantly impact the bankruptcy measure because of the effects on consumer disposable income. The unemployment rate (UNEMPLOYMENT) in a parish is expected to impact the number of bankruptcies filed in the parish because of the lack of consumer disposable income. When parishes legalize casino gaming, the population rate is expected to increase to meet the demand for jobs in the service industries and associated construction and products industries. Any population increase should reduce the number of bankruptcy filings because of the associated job growth that spurs additional consumer disposable income. In parishes with casino gaming, the unemployment rate is expected to be lower than in parishes without casino gaming. Consumer spending is proxied by local sales tax receipts (SALESTAX). Local sales tax revenues increase when consumers make purchases by paying cash or using available credit. Historically low interest rates over long time periods and ease in credit standards have made it possible for borrowers to increase their level of unsecured debt. Some consumers are likely to take advantage of the ease in securing additional credit and increase personal spending and credit

6 beyond affordable limits. Additional credit is readily available when average disposable income rises, one result of low unemployment. Sales tax receipts will rise following increases in consumer spending. A positive relationship between sales tax receipts and number of bankruptcy filings is anticipated. GAMING is an indicator variable that identifies the nine parishes in Louisiana that have legalized gaming. Bossier, Caddo, Calcasieu, Jefferson, East Baton Rouge, Orleans, St. Mary, Avoyelles, and Allen parishes have one or more gaming facilities in each parish. Expected coefficient signs for UNEMPLOYMENT, SALESTAX and GAMING are positive. As unemployment increases, the probability of consumers filing bankruptcy increases due to the decline in disposable income. Increasing sales tax revenues indicates more spending from consumers that may or may not be able to afford to repay consumer credit. The presence or absence of gaming is expected to positively increase the number of bankruptcies due to the likelihood that individuals will spend more than they should coupled with the ease in securing short-term credit and therefore, be forced to file bankruptcy. Results Table 5 summarizes regression results. The F-statistic indicates that there is an overall significant relationship between unemployment, sales tax receipts, the presence of casino gaming and the number of parish bankruptcy filings. For each of the study years, Panel 1 of Table 5 summarizes the F-statistic and Adjusted R-squared for the model. The Adjusted R-squared ranges from.67 to.86 to indicate the explanatory power of unemployment, sales tax receipts and casino gaming on the number of parish bankruptcy filings. Panels 2, 3, 4, and 5 summarize annual regression coefficients for the model. For all years, the model is significant in explaining variation in number of bankruptcy filings as evidenced by the F-statistic (p-value). Annual sales tax receipts and the presence of gaming are significant explanatory variables in each of the four study years. Both of these measures are significant at the.05 level for each year except The coefficient sign for these two measures implies that there is a positive relationship between sales tax receipts, the presence of gaming and number of bankruptcy filings. However, parish unemployment rates do not contribute to the explanatory power of the model. This measure is not significant in any of the study years. Table 5 Regression Results BANKRUPT = β 0 + β 1 UNEMPLOYMENT + β 2 SALESTAX + β 3 GAMING n=63 (9 Gaming; 54 Non-Gaming) Panel 1 YEAR Prob. (F-statistic) Adjusted R-squared

7 Panel 2: 1995 Coefficient Std. Error t-stat P-value INTERCEPT UNEMPLOYMENT SALES TAX E E GAMING Panel 3: 1996 Coefficient Std. Error t-stat P-value INTERCEPT UNEMPLOYMENT SALES TAX E E GAMING Panel 4: 1997 Coefficient Std. Error t-stat P-value INTERCEPT UNEMPLOYMENT SALES TAX E E GAMING Panel 5: 1998 Coefficient Std. Error t-stat P-value INTERCEPT UNEMPLOYMENT SALES TAX E E GAMING Summary and Conclusions This study implies that a positive relationship exists in Louisiana between parish bankruptcy filings, local sales tax receipts and the presence of casino gaming. One early implication from the regression results is that if parishes approve casino gaming, unemployment will decrease (which impact disposable income) and sales tax receipts will rise as individuals increase spending. The number of individual and corporate bankruptcy filings should follow suit as some consumers increase spending beyond their debt-servicing ability. This indicates that some consumers may spend more dollars after obtaining additional lines of unsecured credit which are also soon exhausted. Given time, individuals and businesses cannot continue to juggle incoming cash to meet rising interest and principle payments. The option to file for bankruptcy protection appears to present an easy solution to the consumer s endless list of required minimum payments. The study results imply that the presence of casino gaming positively impacts the number of bankruptcy filings in a gaming parish. Further study in this area should include economic measures for unemployment and consumer credit availability.

8 References American Gaming Association. State of the States: The AGA Survey of Casino Entertainment pp Anders, G and Siegel D.(1998). The Impact of Indian Casinos on State Lotteries: A Case Study of Arizona. Working Paper Arizona State University West pp Anders, G and Siegel D. and Yacoub M. (1998) Does Indian Casino Gambling Reduce State Revenues? Evidence From Arizona. Contemporary Economic Policy Vol. 16 No. 3. pp Caneday, L. and Zeiger, J. (1991). The Social, Economic, and Environmental Costs of Tourism to a Gaming Community as Perceived By Its Residents. Journal of Travel Research Vol. 30 pp Center for Business Research, Louisiana State University-Shreveport. (1999, March). The Impact of Gambling on Personal Bankruptcy. Christiansen, E. M. (1988, March). Gambling and the American Economy. The Annals of the American Academy of Political and Social Science Vol. 556 pp Eadington, W. R. (1999, Summer). The Economics of Casino Gambling. Journal of Economic Perspectives Vol. 13 no. 3 pp Eadington, W.R. (1986). Impact of Casino Gambling on the Community: Comment on Pizam and Pokela Annals of Tourism Research, Vol. 13 pp Louisiana Gaming Control Board website, Truitt, L. J. (1996, Winter). Casino Gambling in Illinois: Riverboats, Revenues, and Economic Development. Journal of Travel Research, Vol. 34 pp U.S. District Bankruptcy Court, Western, Eastern and New Orleans Districts. Wagoner, C. and Walker C. (1998). Differential Impacts, Casino Gaming, and Economic Activity. Working Paper Delta State University, pp