Booms, Busts, and Gambling: Can Gaming Revenues Reduce Budget Volatility?

Over the past 20 years, state and provincial governments in North America have expanded legal gambling opportunities to consumers. One of the primary policy goals of this expansion of gambling opportunities has been to increase government revenues. Gambling is an attractive source of new government revenues because consumers are relatively insensitive to the implicit “tax” rate imposed on gambling activities and gambling is a voluntary activity; only those who chose to gamble are subject to this implicit tax. In this paper, we document the contribution that gambling revenues make to state and provincial tax receipts, and the extent to which variation in gambling revenues contributes to the volatility of tax revenues over time. We adopt an approach from the finance literature. In finance, the relationship of the return to an individual stock to total return in a portfolio, or total return the entire stock market, is often summarized by a “Beta” which can be estimated from actual returns on portfolios and individual stocks. We investigate the contribution of gambling revenue, and revenue from other sources, to variation in total government revenues, by estimating a beta for various government revenue sources in states and provinces in North America over the period 1989-2009. The estimated betas for gambling revenue in many provinces and states are negative, indicating that variation in gaming revenue has negative correlation with variation in own source revenues, reducing the variation in total state and provincial revenue over time.