LOTTERY EFFECTS ON PARI-MUTUEL TAX REVENUES**

Transcription

1 LOTTERY EFFECTS ON PARI-MUTUEL TAX REVENUES** 0. DAVID GULLEY* AND FRANK A. SCOTT, JR.* N the past two decades lotteries have Background I become an increasingly popular method of generating revenue. Currently 28 states Determining the extent to which the and the District of Columbia have a lot- introduction of a lottery reduces a state's tery, and three (Kentucky, Indiana, and revenue from other gambling taxes re- Minnesota) voted to approve a lottery in quires an investigation of the demand for November The decision whether or these other gambling forms. We will focus not to adopt a lottery usually prompts a on the impact of lotteries on the demand lively (to put it mildly) debate involving for wagering at thoroughbred racetracks various special interest groups. In states because thoroughbred horseracing genwhere alternative forms of gambling al- erates more tax revenue than other nonready exist the gambling interest groups lottery types of gambling. If a lottery has understandably have been opposed to the any significant effect on the tax revenues introduction of a lottery. They typically generated by other gambling forms, it is argue that substitution by consumers to- most likely to be detectable in the thorwards a lottery will cause tax revenues oughbred horseracing market. emanating from their sectors to fall. Thoroughbred horseracing has been the The major gambling alternatives to lot- subject of many economic analyses. Studteries are thoroughbred racing, harness ies by Coate and Ross (1974), Gruen (1976), racing, dog racing, jai-alai, and casino Suits (1977,1979), Morgan and Vasche gambling. In 1986, lotteries generated (1979), Pescatrice (1980), and Thalheimer $4.69 billion in tax revenues for twenty- and Ali (1987) have found attendance and two states and the District of Columbia. handle significantly affected by one or Thoroughbred horseracing generated $422 more of the following variables: takeout million for the twenty-eight states that rate, weather, income, unemployment, permitted it. Dog racing and harness rac purses, and other gambling opportunities. ing generated $215 million and $108 mil- The demand for lottery wagering has also lion, respectively.' Given the dollar been studied by economists. Clotfelter and amounts involved, an important part of Cook (1986), Mikesell and Zorn (1987), and the lottery cost-benefit calculation should Mikesell (1987) have found lottery play be the reduction, if any, in the other gam- variously affected by race, age, income, and bling tax revenues resulting from the im- the age of the lottery. plementation of a lottery. It is apparent that a variety of common This paper will address the issue of factors influence wagering on thoroughsubstitution among the two most promi- breds and on the lottery. However, little nent forms of gambling, lotteries and empirical work has been done on the ecothoroughbred horseracing, as follows. The nomic relationship between these two next section highlights existing work on forms of gambling. In the only published gambling tax revenues and motivates our study of which we are aware, Simmons and study of thoroughbred racing and lotter- Sharp (1987) examined eighty-nine thories. The following section explains our oughbred meets in They separated empirical approach and sources of data. their sample into lottery and non-lottery After that we present the empirical re- groups, and regressed average daily ban sults, and then discuss the significance Of dle on the takeout rate and other varithose results in the concluding section Of ables separately for each group. The takethe paper. out rate was found to have a greater impact on average handle in lottery states *University of Kentucky, Lexington, KY than non-lottery states. They also re gressed average daily handle on a lottery 89

2 90 NATIONAL TAX JOURNAL [Vol. XLII dummy and other variables, and found a to allow population to have nonlinear efsignificant negative coefficient for the fects.' lottery dummy. A major drawback of Betting behavior at horse tracks is likely Simmons and Sharp's study is that it does to be influenced by similar factors though not permit one to determine the extent to some differences do exist. The takeout rate which dollars bet on the lottery replace probably affects the betting decision to a wagering on horseraces. greater degree than the attendance deci- A clear methodological approach thus sion. The unemployment rate (as a proxy exists for investigating the demand for for idle time) may influence the attengambling activity. The contribution of this dance decision, but is unlikely to affect the paper will be to investigate the substitute betting decision, as long as income effects relationship between lotteries and thor- are controlled for. Over the course of a oughbred horseracing. We use a more ex- racing season weather is not likely to intensive horseracing data set than has been fluence betting. Real purses are not inused before and explicitly incorporate lot- cluded in the average handle equation betery spending so that the precise nature cause the relationship between handle and of the substitution can be estimated. purses is for all intents and purposes an accounting identity. Finally, while the Data and Empirical Approach existence of a lottery may reduce track attendance, it is the dollar volume spent There are two facets to the demand for playing the lottery that probably affects wagering on thoroughbred horseracing. the level of betting at the horse track. First, individuals must decide whether to The time period for this study is 1976 attend a day's racing at a particular track Complete data are available for Second, those who attend must decide how sixty-one different tracks around the 4 much to bet. The existence of substitute country. All nominal dollar measures forms of gambling such as a lottery may have been deflated using the Consumer affect either or both the attendance de- Price Index ( ). The primary cision and the betting decision. In this source of data for the racing statistics is section we describe the empirical ap- the Horseman's Benevolent and Protective proach to be used in evaluating these re- Association Racing Statistics. This is the lationships and the data to be used in the only source of which we are aware that estimation. has information on the distribution of the Attendance at horse tracks is likely to betting handle by source for every track depend on attributes of the entertain- in the country summarized in a yearly ment being provided, the availability of document, which permits construction of competing forms of entertainment, the actual takeout rate. Other studies have weather, and economic and demographic had to use the statutory takeout rate, characteristics of the market area.' The which does not include breakage or allow entertainment value is a function of the for exotic wagering. The publication was number of races run during the racing discontinued in 1980, which is the reason season, the quality of the horses (proxied for our ending date. Use of this data set, by real purse sizes), and the percent of each which is much more extensive than has dollar bet not returned to bettors (the been used before, should improve our untakeout rate). Competing forms of enter- derstanding of the determinants of bettainment most likely to influence atten- ting behavior and provide a vehicle for dance include other gambling opportuni- analyzing substitute relationships rigorties such as a lottery, harness racing, dog ously for the first time. racing, or jai-alai. Economic and demographic market characteristics likely to affect attendance include unemployment, Empirical Results average real income, racial composition, To allow track-specific effects as well as and age distribution. The dependent vari time-specific effects to be captured, a able is expressed as attendance per capita variance components model was esti-

3 No. 1] LOTTERY EFFECTS 91 mated using the approach suggested by purposes is reported in the average han- Fuller and Battese (1974). These results dle regression. The estimated coefficient for the attendance per capita and average for real lottery revenue per capita is 0.18, handle per patron equations are con- which indicates that an additional dollar tained in the first and second columns of bet per capita on the state lottery leads to Table 1. The most important result for our a decline of approximately eighteen cents T@ble 1: ]&Viricql- P4esults* variable Attendance Handle qbtal (mean, std. dev.) p!gr Capi per Patron Handle intercept (1.99) (0.41) (0.79) number of races (796.2, 620.7) (5.56) (-0.60) (4.41) takeout rate (.18,.013) (0.11) (-4.31) (-3.49) real per capita income (4110.7, 449.6) (-2.16) (4.55) (0.45) percent black (12.3, 9.4) (0.12) (4.53) niedian age (30.5, 2.3) (-0.58) (0.10) total real purses 1.14XIO ( , ) (4.48) average temperature (62.7, 10.8) (0.17) unemployment rate (6.75, 1.92) (1.24) lottery d=tiy (.39,.48) (-0.07) lottery age (2.37, 3.46) (-2.16) gambling dummy (.67,.47) (-4.92) (-0.96) population ( , ) (7.64) real lottery revenue per capita (4.47, 8.39) (-1.49) --- total real lottary revenue ( , ) (-1.23) *t-statistics are in parentheses. Means and standard deviations of the three dependent variables are (0.837, 1.002), (50.50, 15.44), and ( , ).

4 92 NATIONAL TAX JOURNAL [Vol. XLII in a typical track's average handle per pa- ous attempt has been made to quantify the tron. This result is very robust. In differ- magnitude of such switchinlent specifications of the regression equa- Our results indicate that an additional tion the lowest coefficient estimate for this dollar bet per capita on the lottery revariable was Greater play in state duces the average bet per patron at thorlotteries has apparently resulted in re- oughbred horseracing tracks by eighteen duced betting at thoroughbred race tracks. cents. States keep approximately forty Lotteries also lead to a drop in atten- percent of lottery wagers, but less than dance. While the lottery dummy coeffi- five percent of every thoroughbred horsecient is not significant, the lottery age ef- racing bet. Applying these percentages to fect is negative and significant at the five- the estimated relationship above, each cent level. A two-year-old lottery in a additional dollar per capita played on the market with population one million is es- lottery brings in 40 cents per capita, while timated to reduce horseracing attendance causing horseracing pari-mutuel tax rev by 62,000 patrons (.031 x 2 x enue to fall by less than one cent per pa- 1,000,000).5 tron (.05 x.18).8 The other regression results contain no The bottom line is: lotteries do lead to surprises, which lends credibility to the a significant substitution away from pariper capita lottery revenue coefficient es mutuel betting. State tax revenues intimates. The number of races, income, and crease, however, because states keep a the size of purses significantly affect at- much larger proportion of lottery wagers. tendance. Income, the takeout rate, and Of course, other parties suffer when the the percent of the population that is black horseracing pari-mutuel handle falls. significantly affect handle per patron. The Payments to horsemen via purses typitakeout rate coefficient implies a price cally comprise five to six percent of han- 6 elasticity of dle, and the track itself may keep from The third regression contained in Table six to nine percent of handle. Their op- 1 combines both attendance and handle position to a lottery is therefore quite uneffects. Total real handle is regressed on derstandable. The pari-mutuel tax revethe number of races, the takeout rate, nue reducing effects of a lottery, however, population, income, and total real lottery seem rather small. revenue. This specification, which resem bles Simmons and Sharp (1987), captures the combined impact on handle of re ENDNOTES duced attendance and wagering per pa- **The a thors would like to thank two anonymous referees Mark Berger, Glenn Blomquist, Bill HoA tron. Each additional dollar bet on the u state lottery is estimated to lead to a de- and participants in the Applied Microeconomics cline of three cents in thoroughbred rac- Workshop at the University of Kentucky for helpful ing handle. comments. The Research was supported with funds from the National Science Foundation and the Coinmonwealth of Kentucky through the Kentucky Conclusions EPSCORprogram. 'Sources: (14, 15). State-sanctioned lotteries have enjoyed 'The market area is defined to be the Standard tremendous growth in the past two deeades. While total lottery revenues make wmarket area is defined to be the county of location Metropolitan Statistical Area if the track is located ithin an SMSA. If the track is not in an SMSA, the up a relatively small proportion of total plus all contiguous counties. state government tax revenues (4.82 per- 3A description of the data which includes more complete definitions and sources is available from the cent in 1986), the dollar amounts are not authors upon request. insignificant.' Several states have intro- 'A complete list of the individual tracks is availduced lotteries on top of existing compet- able upon request from the authors ing forms of gambling such as horse and "Average attendance per capita equals 0.837, so to dog racing, jai-alai, and casinos. MTliile tal attendance in a market with population 1 million would be 837,000 for a typical track. substitution by gamblers among different 'Since most other horseracing demand studies have games is acknowledged to occur, no seri- generated higher elasticity estimates, we undertook

5 No. 11 LOTTERY EFFECTS 93 a comparison. Using our data we re estimated other 5. The Horseman's Benevolent and Protective Asso authors' specifications (or at least as close to their ciation Racing Statistics edition. specifications as our data set would allow). The orig 6. Mikesell, J. L "The Effect of Maturity and inal elasticity estimates from these earlier papers fol- Competition on State Lottery Markets." Journal low, along with our reformulated ordinary least of Policy Analysis atid Management, 6, pp. 251 squares and variance components estimates Mikesell, J. L. and Zorn, C. K "State Lot Variance tery Sales: Separating the Influence of Markets Author Original OLS Components and Game Structure." Growth and Change, 18, pp. Gruen (1976) Suits (1979) Morgan, W. D. and Vasche, J. D "Horse Morgan Vasche racing Demand, Parimutuel Taxation and State (1979) Revenue Potential." Natwnal Tax Journal, 32, pp Pescatrice 0.70 to (1980) Peseatrice, D. R "The Inelastic Demand for Wagering.".4pplied Economics, 12, pp 'Sources: (14,15). 10. Simmons, S. A. and Sharp, R "State Lot 'Since attendance is also predicted to decline, the ac teries Effects on Thoroughbred Horse Racing." tual reduction in pari mutuel tax revenues may be Journal of Policy Analysis and Management, 6, slightly greater. pp Suits, D. B "Gambling Taxes: Regressivity and Revenue Potential " National Tax Journal, REFERENCES 30, pp Suits, D. B "The Elasticity of Demand for 1. Clotfelter, C. T. and Cook, P. J "Implicit Gambling." The Quarterly Journal of Economics, Taxation in Lottery Finance." National Tax dour February 1979, pp n@al,35, pp Thalheimer, R. and Ali, M "An Economic 2. Coate, D. and Ross, G "The Effects of Off- Analysis of the Demand for Wagering: A Case Track Betting in New York City on Revenues to Study of the Florida Thoroughbred Racetrack In the City and State Government." National Tax dustry." Univ. of Kentucky Working Paper #E Journal, 27, pp Fuller, W. A. and Battese, G. E "Estima- 14 U.S. Bureau of the Census. State Government Fz tion of Linear Models with Crossed Error Struc- nances. U.S. Government Printing Office, Washture." Journal of Econometrics, 2, ington, DC , 1986 eds. 4. Gruen, A "An Inquiry into the Economics 15 U S Bureau of the Census. State Government Tax of Race Track Gambling." Journal of Political Collections in U.S. Government Printing Economy, 84, pp Office, Washington DC.