Governor Cuomo Urges New York Constitutional Amendment Legalizing Casino Gambling: Good Idea or Serious Mistake?

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Posted in: Tax and Economics

Earlier this month, during his “State of the State” address, New York Governor Andrew Cuomo expressed enthusiastic support for a constitutional amendment to legalize casinos in New York.  Not everyone shares the governor’s enthusiasm, however.  From the governor’s father, former Governor Mario Cuomo, to Professor Robert Frank of Cornell University, quite a few prominent figures have opposed casino legalization and made a variety of arguments against it.

One argument, on which I will focus here, has characterized casinos as imposing a sort of regressive tax—that is, a tax that disproportionately burdens less affluent people.  In this column, I will take up the regressive-tax argument and consider whether it offers a convincing case against Governor Cuomo’s call for legalization.

What, Exactly, Is a Regressive Economic Policy?

First, let us consider what it means to say that casino revenues are regressive.  A progressive income tax is one that requires larger payments from those whose incomes are greater than from those of more modest means.  In the United States, we have a progressive federal income tax.  To oppose the progressive approach, some recent political candidates, including Herman Cain and Rick Perry, have called for a “flat tax.”  A flat tax, by contrast to one that is progressive, demands a uniform percentage of income from everyone, wealthy and poor alike.

Here is an example:  If you earned $15,000 a year, and your doctor earned $515,000 a year, you would both pay the same proportion of your income to the government under a flat tax regime.  If the rate were 20%, then (the $15,000/year-earning) you would pay $3000 in income tax, and your ($515,000/year-earning) doctor would pay $103,000.

One could go a step further and object that even a percentage tax is actually progressive, because you must pay more if you earn more money.  Such an objector might favor a “head tax,” under which every individual owes not the same percentage, but the same absolute amount of money in income tax as everyone else does.  If you earned $15,000, for example, you might have to pay $5000 in taxes, and if your doctor earned $515,000, he too would have to pay $5000 in taxes.  So far as I know, none of the Republican (or Democratic) candidates have proposed a head tax system (yet).

It is not difficult to understand the intuitive appeal of non-progressive income taxation.  The government collects taxes in order to function, and every individual is, in theory, equally entitled to receive the corresponding benefits offered by a functioning government.  You may walk down the same paved streets as your doctor, and you and your doctor may both call 9-1-1 for an ambulance, or for the intervention of police or firefighters.  National parks are maintained for the benefit of the whole group, embracing you as well as your doctor.  Thus, you might ask, “If people who earn more in income do not receive more in benefits from the government, then why should they have to spend more of their money to support the government’s operation?

There are responses to this question, including one that would dispute the premise that poor people benefit as much from a functioning government as affluent people do.  Rather than focus on the pros and cons of progressive taxation, however, it is fair to say that few would vocally champion a “regressive” tax, one that disproportionately burdens the poor, at least in those terms.

Imagine, for example, an income tax that required someone who earned $10,000 a year to pay $2500 in taxes but required someone who earned $500,000 a year to pay only $1500 in taxes.  Most of us would probably disapprove of such a tax, whether we favor a progressive income tax or a flat tax.  Fairness, at the very least, would appear to require high-earning people to pay as much as poor people do.

Yet some taxes can be fairly characterized as regressive.  Sales taxes on consumer goods, for example, require a greater proportion of a poor person’s income than of a rich person’s income.  If you (in the $15,000/year hypothetical case) and your ($515,000/year-earning) doctor both pay a seven percent sales tax, then the amount of money you pay in sales tax will almost certainly represent a greater percentage of earnings than the amount of money that your doctor spends on sales tax.  Another regressive source of revenue is the Social Security component of Federal Insurance Contributions Act (FICA) taxes, which apply only to the first $110,000 or so of an individual’s income.

The Argument for Casinos as a Form of Regressive Taxation

Why would anyone characterize a casino as imposing a regressive tax?  One reason is that people with less money may be more inclined to frequent casinos, as a general matter, than people with more money.  The odds consistently favor the House in a casino, so the people who tend to visit casinos will, on average, lose money.  If these people, in turn, are poor, then poor people will be the biggest losers.

On top of this, poor patrons’ losses will also represent a greater proportion of income than the comparable losses of wealthier casino patrons.

A Comparison:  Health Expenditures

One might draw a comparison here to health expenditures by uninsured Americans.  Affluent people are likely to be insured and therefore to pay only a fraction of what a doctor or hospital might charge an uninsured person for a visit or other intervention.  Furthermore, even when a poor person spends the same amount of money as a rich person does on medical care, the expenditure represents a higher proportion of the poor person’s income than of the rich person’s income.  In addition, poor people in this country are less healthy than rich people, so the former may need to consume more medical care than the latter, thereby further increasing the cost disparity.

There is one difficulty, however, in characterizing the money that people spend at casinos as a regressive exaction of revenue:  Visits to a casino, unlike taxes, are voluntary, and unlike hospital visits, are undertaken for pleasure.  Even when casinos are legal, the law does not require anyone to patronize them.  Therefore, if one opposes the legalization of casino gambling because it disproportionately takes money from the less affluent, then one is advocating for the prohibition of voluntary behavior as a means of protecting competent adult actors from themselves.  In a word, one is promoting paternalism.

What’s Wrong With Paternalism?

To worry about a paternalistic measure is not necessarily to embrace a thoroughgoing libertarianism.  The simple fact that a law aims to protect an individual from herself may not be enough, alone, to call the legitimacy of the law into question.  Many of us are glad, for example, that the law requires people to wear seatbelts.  Similarly, we do not yell “Nanny State!” whenever the government takes into account human beings’ “predictable irrationality” (to use a phrase coined by Duke Professor and behavioral economist Dan Ariely) in formulating policy.

On the other hand, when we consider supporting paternalistic legislation, it is important to make sure that we are not underestimating the value to an individual of what seems to us, from the outside, to be self-destructive behavior.  Attitudes toward casino gambling may be a good example of underestimating the value of apparently self-destructive activity.

As I noted above, the House at a casino has better odds than the people who visit a casino—otherwise, casinos would not be profitable.  In talking about a casino, however, we sometimes treat its patrons as though they are in reality laborers.  If you go to work with $100 in your pocket and leave with only $20, you have had a very bad day at the office.  By analogy, if an employer hoped to hire you to do a job that would cause you health problems, the cost of which would exceed your earnings by a factor of five, it would be eminently sensible for the law to prohibit the employer from offering you such a job, even if you were willing to take it.

For most people, however—even those of modest means—going to a casino is more like going to the movies or a sporting event than it is like going to work.  People visit a casino to be entertained, not to earn a living.  When you go to the movies, you leave with less money than you had when you arrived.  The same is true when you attend an NBA basketball game or a rock concert.  And it is also the case that a poor person who goes to the movies, or a game, or a concert will spend a greater proportion of her income for a ticket than a wealthier person attending the same event and paying the same prices.  The poor person (or her wealthier counterpart) may even leave the event wishing that she had stayed home and saved her money, particularly if she found the movie, game, or concert less entertaining than she had hoped and expected it would be.

Yet no public official in the United States has suggested that we ban movie theaters, professional sporting events, or concerts.  It is in the nature of entertainment that the consumer pays for it, rather than receiving money in return for consuming it.  And any consumer good will cost more, as a proportion of income, for people who earn less money than for people with higher earnings.

An opponent of casinos has a response to this analogy, which goes as follows:  Casinos, unlike theaters and other entertainment venues, seduce people with the possibility of great wealth.  That possibility does something to our brains, and we may be unable to resist the temptation to spend more than we can afford, in the vain hope of becoming rich.

That worry is undoubtedly merited—for some people.  But many of those who visit casinos are seeking the same sorts of fun and diversion that they might seek at one of the other, uniformly legal, entertainment options.  Going to a casino, in other words, is not inherently irrational behavior if we understand it as entertainment, rather than as financial investment.

The Dangers of Prohibiting Fun Activities for Paternalistic Reasons

To think of visiting casinos as fun, rather than as a misguided attempt to earn a living, is useful in two ways.  First, this perspective enables us to better appreciate the rationality of going to a casino, despite the odds of losing.  Second, it alerts us to the possibility that some opposition to casino gambling may reflect the desire to save people’s souls, rather than to protect their pocketbooks.  Theologically motivated prohibitions against “sinful” but fun activities have long been with us and deserve our critical attention.

“Fun” activities that have inspired morality-based prohibitions include adult consensual sex between people who are not married to each other, the consumption of alcohol, and the use of drugs.  Less than thirty years ago, the United States Supreme Court, in Bowers v. Hardwick, upheld a Georgia criminal law that prohibited consensual sodomy and carried a penalty of up to twenty years in prison for offenders.  Fortunately, the Court has since overruled its homophobic precedent in Lawrence v. Texas.  The history of sodomy laws in the United States, however, and the Court’s decision in Hardwick afford a cautionary tale about legislation that targets behavior traditionally considered sinful.

The issue of alcohol and drugs is more complicated than that of consensual adult sexual relations, in part because we can readily identify third-party victims of these substances.  Many progressive women in the early Twentieth Century, for example, supported the prohibition of alcohol, because alcohol use can disinhibit violent behavior and has contributed to domestic violence against women and children.  My mother used to tell me stories about her life as a child in a small Polish town in the 1920’s, where the day after the men received their paychecks, their wives’ faces would be marred by black eyes and other bruises.

Opposition to alcohol and some drugs can therefore reflect a non-paternalistic concern for the health and wellbeing of people other than the user.  One might say, similarly, that the gambler who fritters away his family’s assets to stay at the Blackjack table shares something in common with the drinker who goes home and abuses his spouse.  Both may call for government intervention.

Yet Prohibition in this country was hardly a huge success and, of course, it ultimately ended, with the passage of the Twenty-First amendment.  Prohibiting alcohol had created and exacerbated numerous social ills, including organized crime, without solving the problems associated with alcohol abuse.  Much the same can be and has been said of prohibiting other psychoactive drugs, as we do today.  Such prohibitions have given rise to an elaborate underground market, complete with gangs and violent crime, without having made a serious dent in the ills associated directly with drug abuse.

And then there is gambling.  As with alcohol and drugs, people can become physically and/or psychologically addicted to gambling.  The plight of addicts may, indeed, be the strongest paternalistic argument for prohibition.  No one should have the “right” to engage in an activity that truly robs them of their capacity to control their own impulses, and that will predictably lead them to destroy their own and others’ lives, if not stopped.

Yet not everyone who gambles is addicted to gambling, any more than everyone who drinks wine or beer on occasion is an alcoholic.  And those who are addicts need help that may be easier to offer in an environment that does not criminalize their activity.

The New York Pro-Casino Amendment:  On Balance, a Good Idea

When Governor Andrew Cuomo suggests that the time has come to legalize casinos in New York, it is easy to question his motives.  He plainly wants New York to benefit from gambling profits that currently travel to New Jersey and elsewhere instead.  And, in his enthusiasm for the prospect of increased revenue, he may not even be thinking very much about the harm that compulsive gamblers inflict on themselves and their families.  But if we are sincerely concerned about the impact of gambling addiction (and drug, alcohol, and food addictions as well, for that matter), we ought to try in the first instance to find ways to address the problem by investigating and then utilizing best practices in rehabilitation, rather than through bans.

Addicts do not generally respond well to legal prohibitions and, instead of abstaining, will find other ways to get their next “fix.”  And the rest of society—the majority of people who enjoy gambling, but have no addiction to it—is entitled to at least the same regard that we extend to people who entertain themselves by eating unhealthy food, seeing bad movies, and watching mind-numbing shows on cable television.  As the cliché goes, it is, after all, a free country.

Posted in: Tax and Economics

  • Steve B.

    New Yorkers over the age of 18 should be treated like adults by our elected officials. Adding table games to the 5000+ VLT’s at Aqueduct Racetrack and the other “racinos” will cause the downfall of our society, but it will help bring convention business to the State of New York. New York voters should be able to decide on whether or not they want full casino style gambling in New York. ~ Treat Us Like Adults! ~

  • Colb’s argument is very effective. Especially her take on “paternalism”.  I would suggest she explore the “paternalism” that motivates Congress and the President of the United States (regardless of who they may be) to continually speak of “strengthening Social Security” — a federal boondoggle of paternalism that is bleeding America dry.  Most people have no idea that the current system already has a $116 TRILLION structural deficit that no amount of “strengthening” can overcome.  Greece has been bankrupted by the paternalism of federal employment for 60% of its population.  America will be bankrupted by the “entitlements” of Social Security that have replaced personal responsibility for one’s own well-being.

    Force me to save 7.65% of my income as an employee or self-employed business owner . . . fine.  But let me do it in an account with my own name on it and with my own opportunity to grow the money over time.  I will be responsible for me.  Unfortunately, in the 20 years that I have strongly advocated that position, I have aged from 40 to 60.  And the government has robbed me of the opportunity to fully fund my later years in life. 

    While I will continue to advocate my position, younger persons will have to become more vocal and more concentrated in their opposition to this singular form of paternalism that will eventually doom America.  Look at the numbers . . . they, unlike politicians, do not lie.

  • Mslancelot

    Sure, everyone loves to gamble . . . if they win. But, the person sitting next to you in church, the man in line at the grocery store, or one of your co-workers; any one of these could be involved with a gambling problem. Imagine your grandmother committing a crime to support her gambling addiction. I am a recovering alcoholic, gambler, and have recovered from other addictive behaviors. I published a book, Gripped by Gambling, where the readers can follow the destructive path of the compulsive gambler, a prison sentence, and then on to the recovery road.
     
    I recently published a second book, Switching Addictions, describing additional issues that confront the recovering addict. If a person who has an addictive personality, doesn’t admit to at least two addictions, he’s not being honest. Until the underlying issues have been resolved, the person will continue to switch addictions. These are two books you might consider adding to your library. I also publish a free online newsletter, Women Helping Women, which has been on-line for more than twelve years and is read by hundreds of women (and men) from around the world.  (www.femalegamblers.info). I have been interviewed many times, and appeared on the 60 Minutes show in January 2011, which was moderated by Leslie Stahl.
     
    Sincerely,
     
    Marilyn Lancelot

  • Bluehawk7

    I lived on an Indian reservation with my Indian husband, (now deceased) when the tribe built a casino.  The casino provided well paying jobs for tribal members, also non tribal members in a rural community that had few jobs available. The profits funded college tuition, room and board, and some expenses for members who wanted to attend college. Senior centers were built, along with buying of surrounding mini-marts, restaurants, opening of camping grounds, a resort level hotel, etc., and major entertainment.  My artist husband painted all the murals,  large paintings, and other art pieces.  In short, it transformed the lives of everyone connected with it . Did some people become addicted?  Of course, but far more people did not. We legalized alcohol long ago when we rightly concluded that even though some folks became addicted, most did not and if someone’s gene pool included an over active addiction gene, then they could be helped.
    When the white house asked for ideas to lower the government debt, I suggested a federal national lotto. The debt would be gone, pronto.
    You cannot legislate morals. People have a free will, and some will not make the right decisions.  That is life, and if you attempt to control people’s behavior they will find a way around it if they are an addict. Look how much crime is involved in making drugs illegal? And the so called war on drugs has little impact and costs the government plenty.