FUNDAMENTAL ISSUES CONFRONTING RHODE ISLAND IN DETERMINING POLICY TOWARD PERMITTED GAMING

1
FUNDAMENTAL ISSUES CONFRONTING RHODE ISLAND IN
DETERMINING POLICY TOWARD PERMITTED GAMING

• Testimony before the Rhode Island Special House
  Commission to Study Gaming
• February 12, 2003
• William R. Eadington, Ph.D.
• Professor of Economics
• Director, Institute for the Study of Gambling and
  Commercial Gaming
• University of Nevada, Reno

2
CURRENT REALITIES ABOUT GAMBLING IN AMERICA

• Over the past two decades, public acceptance of
  commercial gaming has slowly but steadily
  improved, making it easier for states to consider
  expanded gambling as one of their policy options
• We are now far more knowledgeable about the
  economic and social consequences of permitted
  gambling in communities and regions than we were
  a decade ago, when we last saw a rush to legal
  expansions
• There are still concerns about too much
  gambling, or the wrong types of gambling, that
  constrain policy makers and worry the general
  public
• The expansion of permitted gaming is ultimately
  driven by the fact that a high proportion of
  citizens want to spend their money gambling
  rather than doing other things

3
There is a long list of possible motivators for
legalizing or expanding gambling

• Revenue enhancement for government
• Taxes, infrastructure investment, job creation
• Economic development or redevelopment in
  economically depressed areas
• Urban strategies, tribal benefits
• Saving race tracks
• Stimulation of tourism, and as a catalyst for
  tourism diversification
• Regain past glories (A.C.) replicate Las Vegas
• Combat illegal gambling and related corruptions
• Gambling will exist anyway why not tax it and
  control it

4
The Situation in 2003

• Many states are in desperate financial straits,
  often as a result of the ongoing economic
  slowdown and spending commitments made in the
  1990s
• Gambling is viewed as a relatively palatable form
  of revenue generation, compared to traditional
  tax increases
• The politically acceptable forms of gambling
  (this year) are race track casinos and Indian
  gaming
• There are at present no real initiatives for
  authorizing traditional commercial casino
  legalization in the United States Rhode Islands
  consideration comes close
• Slot machines in bars and taverns is generally
  seen as a bad idea (and correctly so)

5
Legalization of gambling is typically a political
decision, with various motivations

• When gambling is legalized or constraints are
  relaxed, then under many circumstances, Economic
  Rents will be created
• Economic Rents are the sustainable long term
  profit created by changing the legal status of an
  activity, such as gambling
• Rents are sustainable if legislation
  undersupplies the market, or if the market
  created is not otherwise subject to the laws of
  the invisible hand, i.e. legislated monopoly or
  oligopoly
• Economic Rents are the financial source for many
  of the purported benefits that come from gambling
  legalization or liberalization

6
The existence of Economic Rents creates Rent
Seekers and Rent Seeking Activity

• Typical Rent Seekers in the process of legalizing
  gambling include
• Governments (for tax revenues, infrastructure)
• Gaming suppliers (for exclusive franchise
  benefits)
• Specific groups (hoping to benefit from
  privilege)
• Typical Rent Seeking Activities include
• Lobbying at the local, state or federal level
• Public relations efforts to sway public opinion
• Initiatives and other efforts to change the laws

7
Political jurisdictions actively compete for
Economic Rents from gambling

• Drawing customers from across borders results in
  an economic drain in a jurisdiction and political
  pressures to correct the situation
• Import substitution is nearly as important as
  gambling spend from out-of-region tourists
• Cross-border legalization can have a domino
  effect in a region
• Riverboats in the Midwest and the South from 1989
  to 1993 race track casinos in various states at
  present (i.e. Maryland, Delaware, Pennsylvania)

8
Increasing competition has the effect of eroding
Economic Rents

• If jurisdictions authorize too many forms of
  legal gambling, they can reduce the capability of
  permitted gaming from subsidizing a variety of
  other activities
• If the primary purpose for permitting gambling is
  to fulfill these other activities, disappointment
  will follow
• But increased competition works to the benefit of
  the consumer
• Lower prices, better quality, greater choice
• Consumer surplus accrues back to the consumer
  rather than being captured by other Rent Seekers

9
The future of gamings growth and evolution will
depend on the ability to control the negatives

• Problem and pathological gambling is a concern in
  most jurisdictions
• With widespread gambling, more people encounter
  others with gambling problems
• Many industries and regulatory bodies are
  addressing it
• The scientific understanding of problem gambling
  is increasing
• Some gaming industries still suffer because of
  links to Organized Crime, Money Laundering, Loan
  Sharks, Political corruption
• Good competent professional regulation is the
  best remedy
• Gambling is still seen as an activity of
  questionable moral characteristics by many in
  society
• Some religions still oppose it it is looked down
  upon especially by elites

10
Issues specific to Rhode Island and New England

• In 2003, many states in the region are desperate
  to find new sources of revenue
• Among the easier places to look are the sin
  taxes of tobacco, alcohol, and gambling
• Solving short term solutions with long term
  commitments may not be a good idea
• If permitted gaming is introduced for fiscal
  purposes, it is unlikely or unwise that it should
  be eliminated when fiscal crises diminish
• Some kinds of permitted gaming are much more
  palatable than others
• Compare the casinos in Eastern Connecticut with
  the slot arcades of South Carolina in the 1990s
  or with existing race track casinos in Rhode
  Island

11
THERE ARE INTERESTING EXAMPLES OF JURISDICTIONS
PERMITTING TO MUCH GAMBLING, RESULTING IN
PUBLIC AND POLITICAL BACKLASH

• Issue often centers around gaming devices
  permitted outside casinos and site-specific
  venues
• Australia in the 1990s
• Freeze on new expansions
• Experiments to see if problem gambling can be
  solved by mandating re-engineered gaming devices
  
• Quebec and other Canadian provinces in the past
  few years
• Concerns over both problem gambling and economic
  drain in smaller communities to the provincial
  capital

12
HOW PUBLIC OFFICIALS SHOULD LOOK AT THE OPTIONS
OF PERMITTED GAMING

• Government is the largest stake-holder in the
  picture in almost all circumstances
• Because of that, they need to play close
  attention to the possible adverse social impacts
  that arise from expanded gambling
• In many states, and other countries, this implies
  a substantial role of government in funding
  problem gambling treatment, research, and
  education initiatives
• Government should understand why it is
  authorizing permitted gaming
• Is it for the benefit of capturing economic rents
  in spite of negative impacts on its citizenry?
• Is it because of a commitment to freedom of
  choice and respect of individual prerogatives?

13
STRATEGIC CONSIDERATIONS FOR THE STATE OF RHODE
ISLAND

• If your objective is to capture the largest
  possible segment of economic benefit from
  expanding permitted gaming, then
• You should be sensitive to the fundamentals of
  market segmentation
• You should look at the evolutionary patterns of
  gaming markets such as Las Vegas
• You should answer the question How important is
  gaming as one of the entertainment options
  available for Rhode Island citizens?
• You should accept the reality that with expanded
  permitted gaming will be expanded social costs
  and fiscal outlays associated with it, and plan
  accordingly

14
There are important trade-offs you should consider

• Maximizing revenue to the state from casino-style
  gaming will probably create an unattractive
  gaming industry
• The public will be less accepting of permitted
  gaming that is down-market, single-purposed, and
  seemingly exploiting lower income and
  disenfranchised groups
• An attractive gaming industry is one that offers
  a variety of non-gaming amenities along with
  gaming product
• Incentives must be in place to encourage
  non-gaming investments in complementary
  facilities
• Retail, entertainment, hotel, outdoor recreation

15
THE LONG(ER) TERM PERSPECTIVE

• Given trends over the past 30 years, it is likely
  that other states will expand permitted forms of
  gaming
• Economic rents accruing to the state will
  undoubtedly diminish
• Therefore you need to design a gaming model that
  is sustainable in the longer term, is attractive
  to a high proportion of the population, is
  economically viable in the long term regardless
  of actions in other jurisdictions, and is
  responsive to the perceived and real adverse
  consequences that come along with it