A Question of Balance By Andrew Tottenham, Managing Director, Tottenham & Co September 3, 2020 at 5:20 am After I posted a link to my last article on LinkedIn, one of my contacts asked for my thoughts on whether a more relaxed approach to gambling was a good thing. Do the benefits of a liberal regime outweigh the negative consequences? Should governments “encourage” people to gamble or perhaps more accurately, not disincentivise them from doing so? Should they promote investment in gambling services? Before I can answer, I think we should agree on what the negative consequences and the benefits might be. Economists will argue that consumer choice is a good thing. However, that may be taken to extreme in arguing that free access to things that can damage you and/or others is a good thing. Clearly, some people are harmed by gambling. I clumsily think of these as made up from two groups. The first consists of people who are addicted, i.e., cannot control their gambling, along with those who “get into trouble” from gambling more than they can afford. The second are those who are not addicted, but don’t necessarily understand how gambling works and chase losses, or perhaps gamble while intoxicated, not realising how much they have lost. Let me discuss the second group first. To me, in my simplistic view, education about gambling, what it is and isn’t, is the best way to help people who are not addicted, but get into trouble from gambling more than they can afford, because they do not know that you cannot win in the long term (believe me, there are some that think they can!) or that they can get out of trouble by chasing losses because it has worked before. People in the first group clearly need help and should not gamble. This poses a couple of questions. Does greater access to gambling give rise to more people who are addicted to gambling? Or does it just make it harder for those with a gambling addiction to abstain? Perhaps a more pertinent question is whether access to gambling should be restricted for the general public, in an attempt to protect those who are or could become addicted. Currently in Western Europe, the answer would appear to be a strong yes. However, it is somewhat hypocritical, because at the same time, governments have been legalising online gambling, which, by its very nature, is ubiquitous. The libertarian in me thinks that gambling should be allowed, as the overwhelming majority of players enjoy the experience. It should be regulated, but we need to get the balance right. What are the some of the other negatives that have been associated with large-scale land-based gambling? One is that it leads to higher levels of personal bankruptcies and crime in the locality. However, studies conducted in the 1990s in the U.S. have shown no statistically significant increase in the number of personal bankruptcies after large-scale casinos were introduced. Obviously, on an individual level, some did gamble to the point of having to declare bankruptcy. It is fair to say that after the introduction of large-scale gambling, crime did increase, but not on a per-capita basis when the number of tourists was included. Many of the recorded crimes took place in the casinos, such as stealing of chips, purses, etc. In other words, you were less likely to be the victim of crime after the casino opened. Arrests for prostitution increased, but this is similar to any place that attracts a large number of tourists, especially conventioneers. Orlando, Florida, home of Disney World, has the same problem. The old adage is, “Fishers fish where the fishes are”. What are the benefits for society from a more relaxed attitude to gambling? These include increased employment, increased economic activity, higher tax receipts, and in the case of integrated resorts, the promotion of tourism. In my last article, I explored why the European gambling industry has no friends, explaining that it is difficult for people to see any of the benefits, because the regulatory and tax environment minimises any benefits apart from tax receipts, which the general public do not see. There are different schools of thought as to whether gambling is a “good” thing or not. Some people are morally opposed to gambling. The Protestant, Methodist, Calvinist belief is that gambling, i.e. the pursuit of money for money’s sake, is unproductive and immoral. (This group does not understand why people gamble.) Others just don’t like it and no amount of rational argument will persuade them otherwise. Still others believe gambling is net harmful to society and should either be banned or restricted. This is tied to the first two viewpoints above. And of course, many people don’t care either way, while many others quite enjoy gambling. The first three groups, despite any benefits, would be happy if gambling were banned or severely curtailed. Legislators are happy to oblige in a number of ways, by restricting the number of licenses, imposing high levels of taxation and/or enacting onerous operating conditions. By onerous conditions, I mean restricting the size and/or location of each venue, reducing the product offer (no or low numbers of slot machines, etc), and making the games less attractive. However, if governments only restrict the size and have high levels of gambling tax, there is a risk that it will result in many small, widely distributed venues, rather than fewer but larger venues. The Budd Report, or to give it its full title, “The Report of the Gambling Review Body,” which was published almost 20 years ago (can it be that long?), argued against highly distributed gambling product or what the Committee called “ambient gambling”, believing easy access to be bad for problem gamblers. Some legislators believe that only the state can be trusted to operate gambling services and create state-owned monopolies. The thinking is that without a profit motive, the operator will be less predatory. Does a more liberalised approach maximise the benefits? A more liberal regime would allow gambling, not restrict the number of licenses, and have a low level of gambling taxes. Nevada is a good example of such a regime. Over 40 million people visited Nevada each year in pre-COVID days. Nevada would not be such a tourism generator with a gambling tax rate of 25%. The amount of capital deployed would be decreased and it is that capital that fuels tourism generation. The gaming tax generated in 2019 was approximately US$900 million. In a way, operators in Nevada had no choice but to invest in their product if they were to stay competitive against the backdrop of an “explosion” of casino gambling that took place in the U.S. in the last decade of the last century and the first decade of this one. It could no longer rely on gambling as the only draw, when 40 other states offered some form of casino gambling. The integrated resort was born and relatively cheap and available debt did the rest. Reducing the number of licenses and imposing a higher level of gambling tax (including license fees) won’t discourage significant investment. Singapore, as an example, has two large integrated resorts with a total invested capital of over $10 billion and a gaming tax rate of 5% for VIP play and 15% for mass play, generating annual tax receipts in 2019 of $2 billion approximately, compared to Nevada’s almost $900 million. Tourism, a stated policy goal of the Singaporean government, has grown from approximately 10 million visitor arrivals before the opening of the two integrated resorts to over 19 million last year. Macau gambling revenues are as high as they are (US$36 billion in 2019), because it sits next door to China and arguably enjoys a monopoly on this market. The number of licenses are limited, the gambling tax rate is approximately 38% of GGR and the total invested capital is over US$30 billion. Tourism arrivals, controlled by the Chinese government, reached more than 30 million last year and could have been higher if visas were more freely available. In the same year, tax receipts from gambling amounted to US$11 billion. Employment by the gambling industry exceeds 53,000. Due to the lack of external competition, operators had to be cajoled into investing in the non-gambling elements of their resorts, if casino gambling is ever legalised on the mainland, they will be glad they did. To summarise, policy makers can pull a number of levers: the effective gambling tax rate, the number of licenses, and the operating conditions. Meanwhile, they can do nothing about several other conditions, but may need to take into consideration, for example, the external competition and the population in the addressable market. Depending on what the government wants to achieve, they can pull (or not) the different levers. To maximise the non-fiscal benefits, the more competitive the market, the lower the gambling tax rate must be. If all that is desired is to maximise tax receipts, then to achieve this there needs to be no limit on the number of licenses and a high tax. A single license for a market with a large population base will support a significant investment, even with a high gambling tax rate. And there are obviously points in between that can be selected depending on the policy objective In Europe, we seem to have our policies about gambling upside-down. We don’t have clear policy objectives, or they change over time. Due to our regulatory (less liberal) and fiscal environments (high gambling tax), I believe we have most if not all of the “costs” and less of the benefits. It is a question of balance. But the balance is clearly wrong.