WPRI Report
Volume 25, No. 5
September, 2012

Do Additional Casinos Make Economic Sense for Wisconsin? (Continued)
By Daniel Alesch, Ph.D.
Executive Summary
 

From a Statewide Economic Perspective, Do More Casinos Make Good Sense?

A primary criterion for deciding whether to expand off-reservation gambling in Wisconsin is whether doing so is likely to generate a net economic benefit to the people of the state or whether benefits will accrue only to those few localities where they are located and to some tribes at the expense of other tribes. The answer to these questions depends on whether more off-reservation casinos actually stimulate net additional economic activity or simply shift it from one place to another.

It is a matter of supply and demand and of market saturation — the extent to which the supply of gambling opportunities matches or exceeds the demand for them. Whether more casinos make good economic sense for the people of  Wisconsin depends on the answer to two questions. First, is the market for casino gambling in Wisconsin saturated or nearly so? And second, if the market is saturated or nearly so, what happens when the supply of gambling opportunities increases? Addressing these two questions requires looking at both the supply and demand sides of casino gambling. The answers are not entirely obvious.

The Supply Side: Opportunities to Gamble in Wisconsin Casinos Today

Today, virtually everyone in Wisconsin is within a two-hour drive of a casino. Gambling opportunities are numerous and ubiquitous. As of October 2010, the casinos in the state boasted 16,643 gaming devices (slot machines, etc.) and 345 gaming tables for poker, roulette and so forth. Casinos are located in 17 of Wisconsin’s 72 counties (Wisconsin Legislative Fiscal Bureau, 2011). There are facilities to serve almost every taste. Wisconsin casino gambling facilities include full-scale, Las Vegas-style gambling (excluding sports betting casinos) with associated restaurants, hotels and recreational amenities including golf, conference facilities and upscale restaurants. Other casinos are at the other end of the spectrum, consisting of a few slot machines in a mini-mart or gas station. In addition to all these, the Ho-Chunk Nation owns and operates a facility in Madison that is classified as a Class II casino. Class II facilities do not require a compact with the state and do not make payments to the state.

Every one of Wisconsin’s neighboring states has casinos, many of them located adjacent to Wisconsin’s borders. All the casinos in Illinois are commercial enterprises, paying taxes on earnings and collecting sales taxes from all gamblers. There are no Native American casinos in Illinois at this time, but there are in Iowa, Minnesota and Michigan.

Each of the recognized tribes in Wisconsin has one or more casino operations on land that was reservation land prior to 1988. A few of those tribes have reservations near population centers, major highways or desirable recreation areas. Others are not so fortunate. Some of those tribes obtained approval for mini-reservations on which casinos are located in high-traffic, high-population or high-density recreational areas. The Potawatomi have a casino in Milwaukee, far from the reservation, and the Ho-Chunk Nation has gaming facilities in Wisconsin Dells, Tomah, Black River Falls, Madison and Wittenberg. The Wittenberg casino is located fewer than 20 minutes from the Northstar Mohican Casino Resort in Bowler and about 40 minutes from the Menominee Thunderbird Casino in Keshena. The Northstar and Wittenberg facilities are not really comparable: Northstar is a big casino with hotel and golfing, while Wittenberg is small casino with no other attractions. Presumably, they serve different clienteles. The Ho-Chunk tribe’s mini-reservation facilities are located where they can capture a significant share of casino gambling in Wisconsin.

When looking at the supply of gambling opportunities and whether Wisconsin would benefit from more casinos, it makes sense to look at where the casinos are and where proposed casinos would be built. Almost a dozen casinos are at or near Wisconsin’s borders. This includes one in the Upper Peninsula of Michigan community of Watersmeet; several in Illinois; two in Dubuque, Iowa; and five in Minnesota.

Clearly, there is no shortage of opportunities for Wisconsinites to gamble in casinos. Would more casinos increase casino business in the state, attract business from surrounding states, contribute to a better non-casino economy, and generate sufficient revenue for state and local governments to cover the costs of having more casinos in Wisconsin? To answer those questions, we look first at the demand side for gambling and, then, in subsequent sections, at the social and financial aspects of casinos.

Table 1

Location of Wisconsin Class III Gambling facilities by Tribal Owner, County, and Number and Types of Games

Indian Tribe	County	# of slot machines/games	# of gm. tables
Bad River	Ashland	446	9
Ho-Chunk	Sauk	2297	46
Ho-Chunk	Wood	667	12
Ho-Chunk	Jackson	634	10
Ho-Chunk	Shawano	514	0
Ho-Chunk	Monroe	98	0
Lac Courte Oreilles	Sawyer	648	16
Lac Courte Oreilles	Sawyer	74	0
Lac du Flambeau	Vilas	822	13
Menominee	Menominee	848	19
Menominee	Menominee	32	0
Oneida	Brown	820	21
Oneida	Brown	519	0
Oneida	Outagamie	135	0
Oneida	Brown	664	8
Oneida	Outagamie	115	0
Oneida	Brown	76	0
Oneida	Outagamie	64	0
Oneida	Brown	32	0
Stockbridge-Munsee	Shawano	1065	14
Potawatomi	Milwaukee	3150	106
Potawatomi	Forest	504	9
Red Cliff	Bayfield	199	4
Sokaogon Chippewa	Forest	484	9
St. Croix Chippewa	Barron	1224	38
St. Croix Chippewa	Burnett	368	11
St. Croix Chippewa	Burnett	144	0

Source: Wisconsin Legislative Fiscal Bureau, State of Wisconsin, Tribal Gaming in Wisconsin. Informational Paper 89.

Table 2
Distribution of Gaming Devices by Tribal Ownership, Wisconsin Casinos, 2010

Tribe	Gaming Devices	Percentage
Ho-Chunk	4210	25.3%
Potawatomi	3654	22.0%
Oneida	2425	14.6%
St. Croix Chippewa	1736	10.4%
Stockbridge-Munsee	1065	6.4%
Menominee	880	5.3%
Lac du Flambeau	822	4.9%
Lac Courte Oreilles	722	4.3%
Sokaogon Chippewa	484	2.9%
Bad River	446	2.7%
Red Cliff	199	1.2%
	16643	100.0%

Source: Wisconsin Legislative Fiscal Bureau, State of Wisconsin, Tribal Gaming in Wisconsin.
Informational Paper 89.

The Demand Side: How Many Gamblers and How Much Wagered

Measuring whether casino gambling is saturated in a state is not at all like measuring whether a sponge is saturated. Under specified conditions, one can determine when a sponge is holding all the water it can and cannot hold one drop more. Measuring whether the demand for casino gambling is saturated is considerably more complicated. The market for casino gambling is dynamic: It is saturated only when the supply of machines, tables and locations at a particular time matches or exceeds the demand. Up to a point, adding a casino venue and facilities could actually increase demand. If the supply exceeds the demand, then casinos with better locations and better amenities will draw business from casinos with fewer amenities and a less desirable location: The new ones will cannibalize the old ones with no increased wagering or profits.

Demographics and Demand. The demand for casino gambling is defined by both how many gamblers exist in the pool and the amount they are collectively willing to wager. The number of gamblers in any market area is likely to change through time. For most goods and services, including gambling, demand can grow or decline. One factor affecting demand is the demographic characteristics of the population in the market area. If, for example, a large proportion of retired people in Wisconsin gamble, then the pool of potential gamblers gets larger as the number of retired people in the state increases. The size of the pool varies, too, with fluctuations in the net difference of tourists coming to Wisconsin to gamble and those leaving Wisconsin to gamble elsewhere.

One would assume that relationships exist between the characteristics of a given population and the proportion of them who gamble. But some of the most rigorous analyses about those relationships contradict one another. A 1997 state of California publication cites a number of studies and draws the following demographic summary of those most likely to gamble (Dunston, 1997). “Men and women tend to have different preferences in their gambling. Men are more likely to gamble in games such as blackjack and lotteries, and women are more likely to engage in bingo and raffles.” Dunston also reports that “the older one becomes, the less likely she or he is to gamble.” Single, divorced and separated people were found to be more likely to gamble than married people. Community size may be a factor; Dunston reports that residents of big cities gamble more than people from smaller towns. Catholics were found to be more likely to gamble than Protestants and other religious groups, and they were found to be less likely to disapprove of gambling than other religious groups. Dunston reports mixed results in the relationship between social class and gambling: Some studies find a relationship while others do not.

A 1999 Gallup Poll found that 63 percent of those with incomes under $25,000 per year reported that they gambled in at least one of 10 possible kinds of gambling (ranging from buying a lottery ticket or participating in an office pool to gambling in a casino), while 75 percent of those in high-income brackets reported that they gambled. Higher-income gamblers wagered about three times more than lower income gamblers. The survey found that those over 65 are significantly less likely to gamble than younger people (Ludwig, 1999).

In 1995, Thompson, Gazel and Rickman conducted surveys at Wisconsin Indian casinos. The resulting “profile of Wisconsin gamblers reveals less affluent and older gamers than reported in a recent national survey by Harrah’s casino organization” (Thompson, et al., 1995) and does not corroborate either the 1997 California report or the 1999 Gallup Poll. Thompson, et al., found that about 80 percent of all gamers at the casinos surveyed were from Wisconsin and about 20 percent had come from out of state. The average age of gamblers in the casinos was 60 with a median age of 57. Three of five gamblers was a woman. Racial and ethnic characteristics mirrored the Wisconsin population. Most of those who were employed were working in blue-collar, clerical or white-collar jobs. About one-third of those surveyed were retired, and one in eight classified herself as a homemaker or housewife. Contrary to Dunston’s report, Thompson found that more than one-fourth of those who responded to the survey had an annual income under $20,000. The typical income was between $20,000 and $30,000. Only one in eight had an income over $60,000. As to how much those surveyed gambled, the median number of visits respondents reported was 52 visits per year. The respondents reported that they spent 58 percent of their time at slot machines and another 31 percent playing bingo. The median amount of money respondents reported that they wagered while at the casino that day was $60.

On the whole, one can expect that those who frequent Wisconsin gambling facilities will be older, have lower incomes, and wager less than those who travel long distances for expensive entertainment and high-stakes gambling. As Wisconsin’s baby boomers age, they will very likely increase the size of the pool of older gamblers at Wisconsin’s generally user-friendly, presumably safe and very accessible casinos.

Price and Income Elasticity of Demand. The extent to which demand changes based on the price of the game and income of the players measures what is called the elasticity of demand.

We normally expect the demand for a service to increase as the price goes down and to decrease as the price goes up. The number of gamblers and how much they collectively wager changes as the price of gambling goes up or down. Demand also changes with increases or decreases in the incomes of those who wager and with changes in individual and collective tastes and preferences. Finally, it is necessary to consider competition.

There are lots of ways to gamble; casino gambling is just one of them. Sometimes, competition for a good or a service actually stimulates demand for each of the competitors. Other times, one kind of gambling simply substitutes for another.

When discussing the elasticity of demand for a good or service as a function of its price or of players’ income, economists attempt to isolate the effects of those variables from the effects of possibly confounding effects of other variables. Economists want to measure the elasticity of demand as a function of price or income quite separately from changes in demographics or competition. Thus, economists generally caution their readers that elasticity measures are sensitive to the condition ceteris paribus, a term meaning “all other things remaining constant.” The problem, unfortunately, is that other things rarely remain constant. A critical variable in price elasticity is the ability of consumers to find a satisfactory good or service at an equal or lower price to substitute for the original good or service. Thus, elasticity of demand for a good or service changes through time as competing goods or services enter the market.

Elasticity is measured in terms of demand and supply. In the case of casino gambling, an analyst would measure changes in the amount wagered when the “price” of a game goes up and down. The price of gambling goes down if the payout percentage increases. Illustratively, if slot machines in a casino were set to pay back 80 percent of the amount wagered and then reprogrammed or replaced with new machines programmed to pay back 90 percent, then the price of gambling there would have been reduced. The price would also be decreased if the casino provided free or subsidized amenities to gamers, such as free chips or tokens, discount coupons for the casino restaurant, complimentary valet parking, and so forth.

Casino gambling has been the subject of dozens of scholarly articles on price and income elasticity, primarily among economists working to measure it more accurately with continual improvements in the data and the method of analysis. Reliable conclusions depend on good methodology applied to good numbers. Indian tribes are known for keeping gambling costs, revenue and earnings data to themselves, except as explicitly required in their compacts with the various states. Then, too, regulations affecting play and payback in those states with commercial, non-Indian gaming change from time to time and, for them, longitudinal data series often require manipulations or simplifying assumptions that sometimes confound the analysis. As a result, competent and generally unbiased analysts working with different data sets for differing time periods sometimes come up with disparate findings.

A 2008 study by the Indiana Legislative Services Agency attempted to estimate “the elasticity of wagering at casinos by gamblers due to changes in the percentage of those wagers that are retained by the casino” (Landers, 2008). The study found that casino gambling is just slightly price elastic in the short run, but is much more price elastic in the longer run. According to the analysis, price changes in the long run approach unit elasticity; i.e., if the price of the good changes, the quantity demanded will change inversely by the same proportion. A 10 percent price increase in gambling would result in about a 10 percent reduction in wagers. The relatively small effect of price reductions in the short term may be because casinos rarely post what proportion of the gross handle is paid back, much less changes in the payout rate. Frequent players sometimes learn which casinos’ slot machines are “tight” and which casinos have “loose slots,” tell others and, over time, adjust where they play and which games they play. In any event, we can generalize from the literature to say that gambling is sensitive to the price of gambling, at least in the long run.

The study also concludes that the results “appear to be consistent with prior research suggesting that wagering handle is highly responsive to income variation, whether the wagering is on lottery games, pari-mutuel racing, or casino gaming” (Landers, 2008) The more money available to those who gamble, the more money they will gamble. We can generalize from the literature to say that, on average, for every 1 percent increase in income, gamblers wager 1.5 percent more than they did previously. A key thing to remember is that behavior often changes through time and that gambling behavior varies with those who gamble in different areas and settings.

A second key thing to remember is that neither price nor income elasticity of demand necessarily means that more people are gambling; it simply means that more or less will be wagered. Additional people may be drawn into the pool, but that is not necessarily a consequence of either price or income changes.

The Effects of Competition on Demand. Changes in tastes are one form of competition. Sometimes, gambling preferences change simply because the law changes, offering alternative, more attractive opportunities for entertainment, distraction or social interaction. The spread of state-run lotteries across the United States pretty much put illegal numbers games out of business. Not so very long ago, Wisconsin gamblers were excited about attending and wagering on greyhound races, but the last greyhound track in Wisconsin closed in 2009 in Kenosha. Clearly, Wisconsinites are more interested in playing slot machines than in watching dogs chase ersatz rabbits.

There is not much literature on the conditions under which and the extent to which casinos compete with each another, but that which does exist is informative. The literature suggests that casinos and lotteries tend to cannibalize one another (Walker and Jackson, 2008). The advent of casino gambling in Wisconsin, in fact, had an adverse effect on lottery ticket sales during the first few years. Walker and Nesbit (2012) conducted a spatial analysis of Missouri casinos in an attempt to ascertain the extent to which casino revenue is sensitive to competing casinos.⁶  They concluded, in general, that “casinos compete with each with respect to machine games.” Table games, though, appear to have a more complementary effect. That is, they concluded that when casinos near one another increase the number of table games, demand for those games increases. Beyond a few articles in that genre, most of the evidence is found in articles in the popular press and addresses specific cases.

It appears from such articles that a primary source of competition is the accessibility of gambling facilities. Competition from areas where casino gambling was previously illegal, for example, is blamed for the current economic problems in Reno, Nev. Casino gambling in Reno, once a mecca for gamblers from northern California, is suffering badly. Reno’s downtown showcase casino, the Silver Legacy Resort, built in 1995, filed for Chapter 11 bankruptcy protection in May. “Instead of driving a couple of hundred miles, . . . Californians just headed for slot machines . . . close to home” (Onishi, 2012).

Competition for casino gambling takes many forms. One source of competition in Wisconsin is the state-run lottery. In fiscal year 2010-’11, total lottery sales in Wisconsin were about $503 million. The state keeps 31 percent of the gross sales and, in 2011, the State applied $129 million of that revenue to property tax relief (Wisconsin Department of Revenue, 2012). The lottery pays back only about 50 percent of the amount wagered, compared with at least 80 percent mandated by compact at tribal casinos, but the chance to win $100 million or more on the lottery is attractive to many, especially when, even if you lose, about 30 percent of your loss goes toward to reducing your property tax.

Just as the owners of Wisconsin’s casinos hope to attract gamblers from other states, owners of a dozen casinos in Illinois, about 16 in Iowa, half a dozen in the Upper Peninsula of Michigan, and 21 in Minnesota hope to attract gamblers from Wisconsin. Many of those casinos are located close to Wisconsin’s borders and, for some Wisconsinites, are just as accessible as Wisconsin casinos. There is more distant competition as well. The reason there are frequent direct flights with low airfares to Las Vegas from several Wisconsin airports is because there is sufficient demand for them. Las Vegas has vast gambling facilities and adds to its magnetism by offering an extraordinary array of big-name entertainment and lavish casinos, hotels, and price breaks on hotel rooms and buffets to attract visitors and conventions. Prostitution is illegal within the borders of the City of Las Vegas, but the city is still called “Sin City” by many, and its “What happens in Vegas stays in Vegas” slogan is widely touted. Las Vegas, of course, is a destination site for vacationers, but, then, a number of Wisconsin casinos also claim to be destination sites and bring big name acts to their casinos.

Even the casual observer will notice what look like electronic slot machines in Wisconsin restaurants, bars, and taverns. Do these constitute competition for Indian-owned casinos? That question is difficult to answer authoritatively. The machines are, indeed, electronic facsimiles of slot machines. Under current Wisconsin law, the penalty for possession of five or fewer video gambling machines at an establishment licensed to serve alcohol has been reduced from a felony to a civil offense, with a possible forfeiture up to $500 per machine. Using such machines for gambling purposes is, however, illegal in Wisconsin except in Indian casinos. The electronic video machines that simulate poker and other casino-type games in Wisconsin’s bars, taverns and restaurants are “for entertainment purposes only.” The player must put money in the machines to play the games, but it is a misdemeanor for a patron to use the games for gambling. In most cases, the payback box on the machine is covered and bolted shut. Some allege that some taverns pay winners of the entertainment-only games under the table (or over the bar, as the case may be). As of 2003, the Wisconsin Department of Revenue had sole authority to investigate and enforce violations of state laws that make possession or operation of five or few video gambling machines in a licensed alcohol beverage establishment a civil offense. “Only special agents of the DOR certified as law enforcement officers by the law enforcement standards board may make arrests under this particular law”(Wisconsin Legislative Reference Bureau, 2004, p. 1.). The onus for enforcement has been removed from local law enforcement agencies.

The existence of slot machines in restaurants and taverns is a very political issue with the Tavern League, tribes and regulatory bodies. Tribes have conducted studies that indicate that should Wisconsin change the constitution and legally allow machines in taverns and restaurants, the revenue would be much greater than the revenue collected from tribes. A model often used in discussing this is the South Dakota model. The tribes argue that the existence of these machines means that they do not have the exclusive right to gambling and they should not have to pay the state of Wisconsin. (Adams, 2012). (On Wisconsin: Shullsburg future tied to casino’s. Wisconsin State Journal, April 17, 2012).

A potential explosion in internet gambling poses the likelihood of far greater competition for Wisconsin casinos than electronic games of chance in the neighborhood sports bar, lotteries, or the casino in Watersmeet, Mich. High-stakes gambling on almost anything almost anywhere in the world is likely to become immediately accessible to everyone with a computer and internet access. Internet gambling presents a new and unique challenge for regulators. More than a decade ago, Schwarz (1999) noted “(U)nlike gaming of the past, internet gambling does not even need to be hosted in the state or the country where the player logs in.”

Internet gambling is thought to have begun in Antigua in 1996 and has grown very rapidly worldwide. The growth in the United States was slowed in 2006 with the enactment of the Unlawful Internet Gambling Enforcement Act (Philander, 2011). Court cases continue, however, and it appears that the door is open or opening for at least some forms of online gambling. More than a decade ago, the emerging problem was clear: “The fact that internet gambling knows no boundaries adds an additional layer of complexity that distinguishes it from its predecessors” (Schwarz, 1999). Schwarz argues that there are serious questions about whether state governments can either regulate or tax internet gambling. Nonetheless, today, some states are trying to do just that. Nevada and the District of Columbia are authorizing online poker. New Jersey and California legislators are working hard to legalize it, and New Jersey’s Gov. Chris Christie said he wants to make New Jersey an “epicenter” of the online gambling industry (Cooper, Jan. 17, 2012). On June 1, Delaware approved a law that could make it the first state to offer internet casino gambling. The governor said that intense competition from Maryland and Pennsylvania was projected to reduce Delaware’s gambling revenue by $40 million. Internet gambling was intended to put the state back “in the forefront” (Cooper, Aug. 2, 2012).

Having the equivalent of a casino on virtually every computer and, presumably, on most smart phones and mobile electronic pads, raises big-time concerns. One concern to state officials is obviously the extent to which, if any, states will be able to regulate internet gambling and obtain revenue from it. For states like Wisconsin, permitting internet gambling off reservations is presumably unconstitutional and any attempt to tax it or regulate it may result in having to renegotiate compacts with tribes. There is concern, too, that the ready access to internet gambling will increase the frequency of problem gambling.

Research on the extent to which online gambling is likely to compete with casino gambling is still in its infancy, primarily because the pool of available data is small. One study stands out. Philander’s analysis of data from before the enactment of the Unlawful Internet Gambling Enforcement Act indicates that online gaming is found to be negatively related to commercial casino revenues, indicating that they substitute for one another. A $1 increase in online gaming revenue is estimated to coincide with a 28-cent reduction in commercial casino revenue (Philander, 2011).

If Philander’s conclusions are borne out by subsequent analyses, then a substantial increase in online gambling could have a devastating effect on Indian casino revenue.
Is Casino Gambling in Wisconsin a Saturated Market?

Since the recession began in 2007, the amount of money wagered in casinos in almost every part of the United States has declined. Wisconsin is one of those places where wagers and casino profits have fallen and sales in the state-run lottery have been fairly static. At the same time, internet gambling has increased by some unknown amount. If it were not for the recession and the largely unknown effects of both legal and illegal internet gambling, it would be much easier to ascertain whether Wisconsin’s market for casino gambling is saturated or is nearly so. The reality is that the effects of the recession and the largely undocumented growth of internet gambling make the analysis extremely difficult. This section of the paper is an attempt to make sense of the data that does exist in the light of scholarly articles on the subject.

The question of whether casino gambling is saturated is not unique to Wisconsin, and it is not an idle contemplation. It is a question being asked in many states. Cooper (Aug. 2, 2012) states that the endless one-upmanship among states has some analysts wondering at what point the entire market will become saturated, and whether the industry has already reached a point of diminishing returns. Recently, during a panel of Wall Street experts, the managing director of Deutsche Bank Securities said that an additional casino might hurt, rather than help, Atlantic City’s casino market. “Everybody’s a loser. When you add supply to a market that’s not growing very much, everybody gets cannibalized,” he said. “We need some of this capacity to close and go away. I would have thought that would have happened two years ago, but the properties are still here” (Parry, 2012).

Class III gambling casinos exist almost everywhere across Wisconsin and the nation. At some point, as casinos are found almost everywhere, supply inevitably exceeds demand, average return on investment at facilities declines, some facilities go out of business, and some communities and some tribes suffer significant losses.

The Standard Approach: the Product Life Cycle Curve and Market Saturation.

Marginal utility and marginal satisfaction are important concepts when looking at market saturation. As one obtains more of a good or service, then the marginal satisfaction of that good or service diminishes. If one piece of pie is good, two might be better, but, by the time one gets a 10th piece of pie in a day, one’s interest in more pie has most likely declined appreciably. One would expect that the same is true with gambling, at least for those who are not pathological gamblers. What is true for most individuals is also true for an aggregate population. The marginal utility of a good or service declines as a population acquires or uses more and more of that good or service.

The diminishing value of the next incremental amount of a good or service is a widely recognized phenomenon. Over time, consumer demand for a product usually follows an S-shaped curve known as the Product Life Cycle Curve, the Standard Logistics Curve, the Sigmoid Curve, or, simply, the S curve. When the product or service is first introduced, demand grows, perhaps slowly at first, but then more rapidly. As demand becomes close to saturation, the demand curve flattens out and, as the market becomes saturated or as substitutions for the product or service emerge, total demand may even decline.

When color television sets hit the market more than half a century ago, demand grew slowly at first, then very rapidly, and then it leveled off. At the same time, demand for black and white television sets declined rapidly. The same held true for TV innovations, such as plasma and LCD sets. Almost all new product innovations follow the same S curve, including minivans, SUVs, Western movies, and casino gambling. The curve is familiar to virtually every business school student who takes Marketing 101, and it plays a large part in marketing and in the introduction of new models and new features.

Moss, Ryan, and Wagoner (2003) found that the growth pattern of casino winnings was consistent with the product life cycle curve. That is, initial steep growth in revenue appeared to be followed by a marked leveling off of growth rates as the market matured. In the case of casino gambling in Wisconsin, demand grew quickly when it became available.

Casinos are now ubiquitous — available anywhere in the state to anyone over 21. Total wagers peaked a few years ago and then flattened out and have actually declined recently. That suggests the market is essentially saturated. Flattening of the aggregate demand curve is to be expected when a market matures.

As casinos were added across the state, tribal profits increased along with the amount wagered. From 1998 to 2007, the gross amount of wagers at Wisconsin’s Native American gambling facilities increased 24.2 percent. It peaked in 2007, the year the recession began, and since then, gross handle has declined almost every year. There has been not only a flattening of the curve over the past few years, but there has been an actual decline in wagers (and a consequent downward turn of the aggregate demand curve). Figure 2, Tribal Net Win and Handle, 1998-’11 (in billions of dollars), illustrates the increase in gross handle from $9.1 billion in 1998 to $16.18 billion in 2007, along with the decline to $15.31 billion by 2011 (Wisconsin Division of Gaming, 2012). In the four years for which we have data since the peak, the total amount wagered is down 5.4 percent. Net profits to Wisconsin tribes peaked in 2008 and declined by about $500 million or about 4 percent by 2011. (Amounts are not adjusted for inflation.)

Nationally, gross gaming revenue at U.S. Indian casinos increased from $22,578.8 billion in 2006 to $26,482.4 billion in 2009. That is a 17.3 percent increase. Even so, the rate of increase has slowed considerably since 2006. During the same period, though, gross handle at Wisconsin’s Indian casinos declined by 3.05 percent. It may be that new casinos were created in states that didn’t have any or many and that the national increase in handle reflects growth from new markets, but it may reflect market saturation.
A typical product life cycle curve would suggest that total handle would begin to flatten in 2006 and 2007, but it would not predict the decline in Wisconsin casinos in either gross handle or net win over the subsequent four years. This decline very likely represents the combined effects of the recession, market maturity and competition from other kinds of gambling opportunities.

Figure 2

Tribal Net Win and Handle Summary for Wisconsin, 1998-2001 with   ​   
Overlaid Generalized Product Life Cycle Curve (in billions of dollars)

 

Figure 3

A Comparison of Annual Gross Gaming Revenue: U.S. Commercial Casinos, U.S.
Indian Casinos, and U.S. Online Players, 1998-2009.

Figure 3 illustrates the pattern one would expect from a maturing market. It shows American commercial gambling with declining revenues since 2007, likely because of competition from Indian casino gambling and the recession. Total revenue at Indian-owned casinos in the United States demonstrates the expected S-curve of a maturing market, with the tailing off in 2008 and 2009 likely due to the recession. The reason the total revenue has not declined in those casinos as it has in commercial casinos is most likely due to new venues in previously unsaturated markets. The pattern for internet gambling clearly demonstrates the impact of legislation in 2006 making most internet gambling illegal, with a subsequent increase suggesting that the desire for internet gambling is overcoming reluctance due to it being illegal.

Confounding Variable: Likely Effects of the Recession on Casino Revenues. Not only are the amount wagered and net profits in Wisconsin casinos down from previous years, but casino gambling is experiencing similar declines in many parts of the country.

Gross gaming revenue at commercial casinos nationally fell about 10 percent from 2007 to 2009. Singer (2012) states that, nationally, revenue from casino gambling is down about 15 percent since 2005. Some previously very profitable casinos are in serious financial trouble, including some Indian-owned casinos. Foxwoods Casino, for example, the largest casino in the Western Hemisphere, is owned by the 900-member Mashantucket Pequot tribe in Connecticut. It boasts 6,300 slot machines and 10,000 employees. Today, it is fighting for survival and struggling with a $2.3 billion debt. Foxwoods and the neighboring Mohegan Sun Casino, the second-largest casino in the Western Hemisphere, have paid Connecticut about $6 billion over the years, but as the amount of money wagered declines, so will those payments.

Combined revenue for Foxwoods and Mohegan was down about 5 percent in 2008, 7 percent in 2009, and another 4 percent in 2010 (Singer, 2012). The chief financial officer of the Mohegan Sun said that the casino was hurt by the recession, but also by increased competition. He said that attendance was remaining relatively constant, but that customers were spending less money and looking for bargains (Singer, 2012). The number of customers stayed about the same, making it is difficult to determine whether competition or the recession was a more important factor.

The deep and persistent recession has resulted in a significant, but as-yet-unmeasured, downturn in state and national casino revenues over the past few years. Casino operators say that attendance appears to be stable, but gamblers are wagering less. It makes sense; people simply have less to spend. The problem is that we can’t tell how much of an effect the recession has had because competition is also part of the mix.

Confounding Variable: the Effects of Internet Gambling on Casino Gambling Revenues. If the effects of the recession on casino gambling are difficult to quantify, the same is doubly true for the effects of internet gambling. Internet gambling is a very hot topic among casino owners and regulators, but the situation is somewhat amorphous.

Some argue that we cannot even tell today what is legal and what is illegal: “. . . although the past few years have seen a new federal law in 2006, new agency regulations in 2009, and a host of controversial enforcement actions, the law remains frustratingly murky” (Ciaccio, 2010). This is not a review of the current status of the law, however; it is an attempt to assess the impact of current internet gambling, whether legal or illegal, on casino revenues.

The American Gaming Association clearly has a stake in the outcome of whether internet gambling is legalized and how it is regulated, but in a recent white paper, the association provides its best estimates of how much is being wagered on the internet. The paper states that “from 2003 to 2010, Americans spent approximately $30 billion to gamble online.” The report goes on to say that “millions of Americans have continued to bet billions of dollars a year at offshore websites. Americans like to gamble online and have demonstrated that they will do so even if their government tells them it is illegal (American Gaming Association White Paper, 2011, p. 2).

An analysis completed for the National Indian Gaming Association and Member Indian Nations and Tribes in 2010 (Spectrum Gaming Group, 2010) offers additional information. The year that the Unlawful Internet Gambling Enforcement Act of 2006 was enacted, U.S. gamblers spent an estimated $6.88 billion dollars on internet gambling. The following year, U.S. internet gamblers’ wagers dropped significantly, but by 2009 they had bounced back from the 2007 low to $6.36 billion. That amounted to just about 10 percent of the total revenue at U.S. commercial casinos ($30.74 billion) and at U.S. Indian-owned casinos ($26.48 billion). From 1998 through 2009, U.S. internet gambling increased from virtually nothing to 10 percent of the total market, despite the 2006 law.

If Wisconsin gamblers are at all similar to gamblers in other states, some of them engage in online gambling. We do not know what the number is, but suppose that Wisconsin on-line gamblers represent 2 percent of the national number (Wisconsin is just about 2 percent of everything in the U. S.) and they gamble an amount equal to the national average. If that is reasonable to assume, then they would have contributed about $138 million to internet gambling revenues in 2009. If they lose, on average, 20 percent of their total wagers, that means they would have contributed a gross handle of about $690 million that same year to internet venues. That is equal to about 4.4 percent of the gross handle in 2009 of Wisconsin casinos. If these calculations are accurate even within an order of magnitude, then one might well conclude that internet gambling is already cutting into tribal gross handle and earnings rather significantly.

Drawing Inferences about Casino Market Saturation in Wisconsin

Given the recession, declines in the amount wagered and in casino profits alone are not compelling evidence of market saturation. On the other hand, the flattening out of casino and lottery revenues in Wisconsin and the steady decline in the rate of growth of revenues in Indian-owned casinos nationwide since about 2005 are an important indication of increasing market maturity. The striking decrease in the rate of growth of both gross wagers and tribal profits in Wisconsin closely mirrors what analysts would normally expect in a mature market. Given the S-curve phenomenon, the flattening out of demand in Wisconsin is strong, if not compelling evidence that the gambling market has matured and that the demand for additional gambling is essentially saturated.

There are indications of market maturity in the lottery as well. As gross casino handle was actually declining, Wisconsin lottery sales increased only very slightly (about 2 percent) since 2006. Lottery sales fluctuated from year to year while advancing, ranging from $493 million in fiscal year 2006-’07 to $473 million in fiscal 2008-’09 to $503 million in fiscal 2010-’11 (Wisconsin Department of Revenue, 2012).

It appears that the demand for casino gambling is at or near saturation. It is likely to remain essentially flat or to grow slowly for some time unless internet gambling is legalized. Gambling in brick and mortar casinos could experience a surge in demand if the tribes (or the state) operate internet gambling in brick and mortar casinos that attract on-line gamblers. It is possible that Indian casinos could capture a portion of the internet gambling activity on their internet sites. That would not contribute to more customers in the brick and mortar facility, but it might result in employment opportunities for specialists in web site operations and security as well as boosting revenue.

Likely Outcomes of Adding More Casinos to a Saturated Market. Eleven tribes have a collective monopoly to conduct Class III casino gambling in Wisconsin. Failing a constitutional amendment or some wholly unforeseen event, they can expect to continue to have that monopoly for some time to come. Considerable disparity exists, however, within the monopoly in terms of the benefits realized from casino gambling. Half the tribes control about 80 percent of the gaming facilities in Wisconsin. Taken together, the tribes do constitute a monopoly, but a closer look suggests that the monopoly more closely represents an oligopoly. An oligopoly exists when a market or industry is dominated or controlled by a small number of sellers. The distinction is important in terms of the likely consequences of adding more supply to a stable or very slowly growing market.

Oligopoly Behavior in a Saturated Market. Monopolies are markets in which there is a single supplier of a good or service. When monopolies are motivated by profit, they tend to limit supply and keep prices high in an attempt to maximize profit. Oligopolies, however, may engage in several other kinds of behaviors. One of these is collusion.

Collusion in an oligopoly means the members of the oligopoly work together to divide up the market, control supply, fix prices, or share profits. Several of the compacts between the tribes and the state say that the tribes would seek ways to share revenues to benefit all other tribes. While we believe this has happened, we have found no evidence of it. One illustration of oligopoly sharing comes from the Shakopee Mdewakanton Sioux in Minnesota. The tribe has realized enormous profits from its casinos in the Minneapolis-St. Paul metropolitan area. According to Global Gaming Business Magazine, the tribe, “has given away more than $192.7 million dollars in grants and charitable donations . . . In total, the SMSC (Shakopee Mdewakanton Sioux Community) has committed over half a billion dollars in loans and grants to Indian tribes, American Indian organizations, schools and educational organizations, charitable organizations, and others.” Reportedly, the tribe gave more than $17 million in economic development grants to 18 tribes, including one or more tribes in Wisconsin (indiancountrytodaymedianetwork.com, 2011). In fact, the Shakopee reportedly gave $1 million to Wisconsin’s Lac Courte Oreilles tribe to develop a business plan to recover from its current financial difficulties.

An alternative to collusion or cooperation in an oligopoly is fierce competition among the members. Competition in an oligopoly might manifest itself in competing in terms of price, product quality, image, market niche, location or some combination of those characteristics. In the case of the casino gambling oligopoly, some of the competition is likely to come from adjusting prices downward by using slot machines and other gambling devices that provide higher payouts to gamblers and by providing additional desirable amenities to customers at low or no cost.

In Wisconsin, it appears that tribes are competing with one another mostly in two ways. One is location. It is, of course, no accident that most of the existing and proposed off-reservation casinos are located in popular recreation areas, near centers of population and along major thoroughfares. At this time, a few tribes are capturing the most and the best locations. The second way tribes are competing with one another is in terms of amenities. Some casino venues offer big-name entertainment, convention centers, hotels and other recreational features intended to mark them as vacation destinations.

Given the historical profitability of Class III casinos and the oligopolistic nature of the supply, one should expect continuing efforts on the part of tribes with sufficient resources to establish additional casinos in prime locations. If we are correct in our conclusion that casino gambling is essentially saturated in Wisconsin, then the tribes that develop casinos will probably continue to build more modern and more attractive casinos in attractive locations. Tribes with casinos in less desirable locations will pay the price. Under conditions of near saturation, the pie does not get bigger, but is simply re-divided so that some get larger portions than they had before and some get smaller portions.

Consequences of Increasing Supply in a Crowded Market. What is increased competition among casinos in a crowded market likely to mean for communities, tribes, and the state? No one can say for certain, but if, as we believe, the casino market is at or near saturation, some outcomes are more likely than others:

First, all the evidence indicates that a new casino generates economic benefits, at least in the short run, to those localities in which they are built and for the tribes that own them. New casinos in Kenosha, Beloit, Sheboygan and/or Shullsburg will very likely generate economic benefits for those communities. However, in a saturated market, the gains in those communities will be offset by losses in communities that already have casinos. It is axiomatic. When demand is constant and supply increases, revenues are reallocated rather than increased. If the Wisconsin casino gambling market is at or near saturation, adding casinos will redistribute revenues among local governments, will not have any appreciable net positive effect on the aggregate Wisconsin economy, and will not generate additional revenues to the state government.

Second, there are implications for tribal casino owners. Research cited previously concluded that casinos in proximity to one another and featuring electronic games of chance tend to attract business from one another rather than generating additional wagering. If that is the case, then those new casinos will attract business from other casino venues. The Potawatomi are very likely correct in their belief that a new casino in Kenosha between their Milwaukee casino and the Chicago market will cut into their earnings. If more casinos are built in a crowded market, competition for gamblers and wagers will increase. Unless more demand can be generated, that will result in diminished average profitability for the casinos, simply because of the increased expense of attracting customers.

When one casino draws business from another, it is called cannibalization. Adding supply in when demand is saturated will result in cannibalization. The question is which casinos will be cannibalized and which ones will do the cannibalizing. Will more casinos in southern and southeastern Wisconsin cannibalize casinos located in Wisconsin’s north woods? Or, will the casinos in the more populous part of the state cannibalize one another without having much effect on far northern casinos? This question is inseparable from the question of whether some tribes will benefit from the competition at the expense of other tribes.

When a market is saturated or nearly saturated, accessibility and location make a big difference. Northern California casinos compete very effectively for California gamblers with casinos in Reno, Nev. Mallach reports that new casinos in Pennsylvania are drawing gamblers who previously left Pennsylvania to gamble in Atlantic City (Mallach, 2010).

There are not many articles on how gamblers choose where to gamble, but those that examine the relationship between proximity and use agree that, other things being equal, gamblers tend to choose casinos close to home (Sèvigny, 2008). When a relatively fixed number of dollars is gambled by a relatively fixed number of gamblers and more gambling venues are added, then the average take per venue will decline. The venues that are more attractive (in terms of location, ambience, and amenities) will experience revenues above the mean, and those in less desirable locations and with lesser amenities will receive below-average revenues. Based on the research, one is led to conclude that the casinos located to take advantage of the market in southeastern Wisconsin and northeastern Illinois will compete with one another. If demand is relatively fixed, cannibalization is almost certain to occur among those casinos.

What about northern casinos? To the extent that vacationers choose the northern Wisconsin forests and lake country in the same numbers they do now and with the same proclivity to gamble, the casinos in the far north will probably not experience nearly as much cannibalization as the ones in the southeastern third of the state. If, however, a significant proportion of those vacationers are drawn to destination casinos like the ones proposed for Sheboygan and Shullsburg, then the northern casinos will suffer. They already compete with large casinos in Minnesota near the Wisconsin border and with half a dozen casinos in the Upper Peninsula. The northern casinos survive on a relatively small resident population and those who come north to stay in their summer homes and for fishing, boating, camping, fall colors, hunting, and/or winter sports. People who are intent on gambling and not on experiencing the North Country are unlikely to drive five or six hours to get to a casino in the woods when they have one close at hand.

All that does not mean there may not be serious challenges for northern casinos in a crowded market, particularly during a recession. On Aug. 21, 2012, Wisconsin Public Radio reported that the Lac Courte Oreilles Band of Lake Superior Chippewa sent a letter to tribal members saying it is near bankruptcy and $50 million in debt (Simonson, 2012). The Lac Court Oreilles band owns and operates a casino near Hayward in northwestern Wisconsin. According to Wisconsin Public Radio, “The letter to tribal members from its governing board dated August 13th says ‘The tribe is near bankruptcy and to do nothing is not an          option.’ ” The three-page letter goes on to say that the tribe faces “…a serious financial burden of more than $50 million in bonds, bank loans and deferred revenue assessments.” Tribal officials said that casino revenue dropped from $6 million in 2006 to $2 million in 2011. The tribe, supported by a $1 million grant from the Shakopee Sioux in Minnesota, has hired consultants to develop a financial recovery plan (Simonson, 2012).

The precipitous decline in revenue at the Lac Courte Oreilles Band’s Hayward casino over the past five years is serious and unpleasant news for that band of Chippewa and for Hayward itself. Casinos across most of the country have experienced revenue declines because of the recession, but the decline of approximately 67 percent at the Hayward casino is much greater than the 5.4 percent decline in aggregate gambling revenue in Wisconsin from 2007 through 2011. An analysis of the Lac Courte Oreilles Band’s experience would be informative for public policymaking if it were to help attribute the precipitous decline to competition, the recession, management difficulties or market saturation. Such an analysis could shed light on the prospects for other northern casinos in an increasingly tight market.

On Balance: Do More Casinos in Wisconsin Make Economic Sense?

More casinos in Wisconsin would make economic sense if they were to stimulate a net increase in employment, income and revenue to state and local government. If the casino gambling market is at or near saturation, adding more casinos will not do that. It will simply redistribute employment, income and revenue to local governments.

If it were not for the recession and for the murky world of internet gambling, it would be much easier to ascertain whether Wisconsin’s casino gambling market is at or near saturation. The recession means that gamblers have less money to wager. Illegal internet gambling competes for the money that is available for wagering. Both depress aggregate casino revenue. Even after accounting for those factors, it appears that the rate of increase in demand for both casino and lottery gaming has slowed significantly. The demand curve is flattening out after having increased rapidly, just as it does for almost all products. That flattening reflects a mature market, and a mature market means slowly increasing, steady or declining demand.

The maturation of the market means that, if new casinos are built in Beloit, Kenosha, Sheboygan, and/or Shullsburg, those communities will benefit, but other communities will suffer in about the same proportion, and the state, on the whole, will not be better off.
Aggregate wagering will increase somewhat from current levels if and when economic conditions improve. Rather than indicating growing demand for casino gambling, any increase in wagering will most likely represent increased outlays by a relatively fixed number of people who are already making wagers. Some actual growth in the number of casino gamblers might be expected as Wisconsin’s population ages.

There is one important caveat. If internet gambling is legalized and if casinos can capture a significant share of it, then the demand for gambling in casinos will very likely increase. If, on the other hand, internet gambling occurs in the home or other non-casino venues, the impact on casino revenues will be mostly negative.

In the face of market maturity, the future for those who choose to stake the well-being of their community on build a casino there may not be nearly as rosy as they hope and expect. Every casino added relatively close to another casino, regardless of whether it is in Wisconsin or just over the border, will face considerable competition. New, more attractive casinos in better locations will presumably prosper, barring internet competition or construction of even newer casinos in still better locations. For some communities, the gleaming prospect of more jobs and revenue may become tarnished. Once dependent on casino revenue, fluctuations in the flow, reductions in the flow, or no payments at all to local governments would become onerous.

Social Consequences of Indian Casino Gambling

Both positive and negative social consequences have resulted from casino gambling in Wisconsin. Some tribes in Wisconsin have made huge profits from casino operations and have used those profits to provide employment on reservations where unemployment and underemployment were previously abysmally and unconscionably high. Where tribes have used the profits to build social and educational facilities, to send young people to college, and to improve health and healthcare on the reservation, long-term benefits will continue to accrue. Other tribes have allocated a large share of the profits to individual members of the tribe, moving them from poverty well into the middle class. The Milwaukee Journal Sentinel, for example, reported that each of the 1,500 members of the Forest County Potawatomi Tribe received about $70,000 in 2009 from the profits of their Milwaukee casino (Spivak, 2009). Some tribes both build their communities and distribute payments to enrolled tribal members.

The larger community has benefitted as well. The casinos provide an alternative form of recreation in a generally safe environment and, in Wisconsin where many of the customers are elderly, casinos provide a recreational and social experience many find enjoyable. Casinos can attract out-of-area money and generate multiplier effects in the community, contributing to the local economy. In addition, some casino venues offer restaurants, music and other entertainment, hotels, and shopping. One needn’t gamble to go to the venue.

Unfortunately, there are adverse side effects to gambling as well. Those adverse side effects are the focus of this section of the paper.

Numerous challenges come into play when we attempt to weigh the pros and cons of the social consequences of controversial public policies. One major problem is that there is no common yardstick for measuring the merit of arguments that are based on values and beliefs, especially when they involve a lot of money. The extent to which conflicts can be resolved amicably usually depends on the extent to which values and priorities of the contending parties overlap. As it turns out, however, each of us places somewhat different weight on the many components that constitute our personal preferences. It is impossible, when values vary among decision-makers, to come up with an optimum solution.7 How does one weigh the benefits of a job for the primary breadwinner of an unemployed Indian family against the costs incurred when a mother gambles away her child’s education fund? One’s decision often depends on the vantage point from which one is looking at the phenomenon.

Problem Gambling

What is problem gambling? Research indicates that most adults who choose to gamble do so responsibly. Unfortunately, some do not and become problem gamblers. Problem gambling is an impulse disorder characterized by obsessive and uncontrolled gambling behavior. It is a very real phenomenon not easily overcome. Pathological gambling is the most severe form of problem gambling. It is a mental disorder defined by the American Psychiatric Association as consisting of “persistent and recurrent maladaptive gambling behavior” (Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, 2000).

How widespread is problem gambling in Wisconsin? No one knows for sure how many problem and pathological gamblers there are in the United States or in Wisconsin at any given time. One estimate is that perhaps as many as 4 percent of adults “may meet criteria for pathological gambling disorder at some point in their lives” (Encyclopedia of Mental Disorders, 2000). The American Gaming Association cites research conducted by the National Gambling Impact Study Commission in 1999 that “pathological gambling is confined to about 1 percent or less of the U.S. adult population” (American Gaming Association, 2012).

The Wisconsin Council on Problem Gambling estimates the number of problem gamblers in Wisconsin as ranging from 5 to 7 percent of adults or about 333,000 (Gruber, 2012). The Council estimates that 1 to 3 percent of those, between 3,000 and 10,000, are pathological gamblers. The American Gaming Association (2012) estimates that about 2 million of U.S. adults meet criteria for pathological gambling in any given year. Another 4 million to 6 million men and women would be considered problem gamblers.

Do casinos contribute to the incidence of problem gambling? Scholarly and not-so-scholarly papers draw various conclusions about the extent to which the proximity of a casino contributes to problem gambling. Schwarz (1999) sums up our sense that “evidence suggests that the problem of addictive gambling grows even greater as access to gambling devices increases.” The National Gambling Impact Study Commission concluded that a casino within a 50-mile radius of a population doubles the incidence of pathological gambling in that population (Thompson and Schmidt, 2002). The Wisconsin Council on Problem Gambling has concluded that women are more likely to gamble (and become problem gamblers) when gambling opportunities are nearby and easily accessible (Gruber, 2012).

What are the social costs of problem gambling? One way of looking at adverse social consequences is to look at how much the adverse social effects associated with gambling at casinos cost us in Wisconsin each year in dollar terms. Thompson, et al., (1995) list the following items as social costs of problem gambling: loss of productive work time; costs to the criminal justice system; costs of police work; costs of imprisonment of problem gamblers who commit felonies in pursuit of money with which to gamble; costs of insurance to protect governments and businesses from embezzlement; costs of social work, counseling and other treatments; and family welfare costs. Thompson and Schmidt conclude that “the average problem gambler imposes costs of $9,469 upon Wisconsin society each year.” In the same report, they conclude that “the government of Wisconsin and its local communities must spend $63.3 million a year in additional social and criminal justice costs because of the behaviors of its citizens that are associated with the presence of casinos in the state” (2002).

The social costs are borne by the families of those with gambling problems and by society when, as usually happens, there are spillovers beyond the family. Gamblers Anonymous and the Wisconsin Council on Problem Gambling are two organizations in Wisconsin working on problem gambling. These organizations are largely funded by contributions and grants from private foundations and governments. In Wisconsin, support for addressing problem gambling from tribal gaming revenues and from state government revenues from casino gambling cover only a small proportion of the cost of the important work by those organizations.

Criminal activity associated with casinos typically involves stealing money. Some steal the belongings of others to fence them. Others embezzle money from their employers. Embezzlement is typically the most newsworthy of the crimes, particularly when it involves middle-age women embezzling large amounts from a church ($500,000) or a county government ($250,000) to support a gambling habit. Sometimes, those directly involved with casinos are arrested for committing other kinds of crimes, such as the three people who were indicted on bribery charges in connection with Ho-Chunk casino contracts in 2011. It was alleged that more than $3 million in bribes were
paid (WisconsinLawJournal.com. 2011, and the Jackson County Chronicle, 2011).
Gazel, et al., (2001) found that “the existence of a casino within the boundaries of a county led to an increase in the county’s crime rates. They also found that there is a strong spillover effect, with counties adjacent to casino counties experiencing higher crime rates.

The finding is consistent with those of others. The research, along with anecdotal information, particularly around the more sensational crimes that make for provocative reading, suggest strongly that problem gambling, facilitated by the ubiquitous presence of casinos, generates too much white-collar crime to be ignored in the decision of whether to create more casinos.

The amount of revenue generated by casino gambling is staggering, but so are the associated social problems. Any reasonable analysis would conclude that a greater proportion of those revenues be allocated to reducing the incidence of the adverse consequences and to alleviating the problems to which they contribute.

Tribal Sovereignty in Grover’s Corners⁸

The definition of what constitutes tribal sovereignty has changed through time, largely as a result of U.S. Supreme Court decisions. Today, the practical consequences of tribal sovereignty are that the states generally cannot enforce civil laws on Indian land unless specifically authorized by the individual tribes. Income earned by tribal members living on tribal land and earning money from tribal enterprises is not taxable by the state or its local governments. Sales to tribal members on Indian land are not taxable. The states can regulate gambling in Indian casinos only to the extent that the compact between the tribe and the state permits. Local governments are similarly limited in their jurisdiction, even if the Indian lands are within the municipal boundaries of a city. As a result, local government does not control zoning or land use on Indian land, cannot tax the property, and provides services to those lands receiving payment only by means of agreement and contracts. In short, when a parcel of land within a municipal jurisdiction becomes Indian land, it is roughly equivalent to having a very small foreign nation within the city or village.

When both a local government and an Indian tribe want a casino on a sovereign parcel within the community, they develop an agreement. The agreements almost always provide payments to the local government in lieu of taxes as some percentage of tribal net winnings. Arrangements are typically made for contracting for municipal services, including water and sewer, public safety, and the like. Some local governments can exert sufficient leverage over the tribe to ensure some compensation for infrastructure that the city or county build to facilitate casino operations, traffic loads, and so forth. Since the compacts are public documents, local governments examine the compacts made between other local governments and tribes to help structure theirs.

Before the casino is built, local officials probably look at the agreement as though it covers every contingency, but those who enter contracts and those who write agreements on complex matters know that they never do. Local officials sometimes find that having a sovereign state within their boundaries is more troubling than it was at first look. The agreement may specify the duration of the tribe’s possession of the land and it may not. As communities change, it often makes sense to change land use or to make other changes to adapt to or to be proactive with respect to change. When critical or keystone parcels are in the hands of a sovereign nation, that often becomes difficult.

It should not come as a surprise that conflicts sometimes emerge between local governments and Indian reservations adjacent to or overlapping the local government boundaries. The Village of Hobart and the Oneida Tribe of Indians are and have been in conflict on a number of matters, some of which have ended in litigation in federal court. The problems, it is fair to say, result more from the Oneidas’ casino-generated wealth than from the casinos themselves. Hobart’s problems are unique. The village was created in 1908, entirely within the boundaries of the original Oneida reservation, which was fully discontinued by the federal government in 1909. The tribe provides no money to the incorporated village and continues to purchase land within the village, land that is then placed in federal trust for the tribe. 

The difficulties associated with dealing with a sovereign state are compounded by the limited availability of tribal financial information to local governments and the general public. Because of sovereignty, the federal and state governments are unable to share the information they receive from the tribes concerning casino revenues.

On Balance

The social costs of casino gambling are, at best, difficult to estimate reliably. All the evidence, however, indicates that the costs are high and are borne primarily by the citizens of the states in which the casinos exist. Problem gambling; associated crime; continuing, sometimes escalating, conflicts among state government, local government and Indian tribes; and the emerging competition and conflict among tribes all suggest that, on balance, the addition of more casinos on newly acquired Indian land across the state is not a good idea.

Effects on State and local Government Finances

Examining the effects of Indian casinos on state and local government finance is not a simple matter. There is no central source for nongovernmental analysts to learn how much money is paid to local governments within which casinos on newly acquired lands are located. The extent to which there are uncompensated direct costs to state and local governments in the form of the costs of infrastructure to support casino development are also a mystery. Government savings because of casino revenues to tribes are similarly hard to identify and isolate. No one really knows the extent to which welfare payments to Indian families have been reduced over the years because Indian families obtained jobs or other income from casinos. There are myriad additions to and subtractions from the economy and government budgets.

Despite the complexities of the task, some generalizations can be made about the net financial effect of casino gambling on state and local government finances. The really tricky part comes when one attempts to ascertain the marginal effects on state and local finance of an individual casino built on recently acquired land. The best that can be done within the limited scope of this paper is to focus on several main questions and to generalize the financial consequences from those.

Payments From Tribes to the State Government

Indian tribes make periodic payments to the state under the terms of the compacts between the tribe and the state. Since neither the state nor local government can tax the earnings or the property, the payments from the tribes reflect the tribal view that they are “payments agreed to by the tribes in recognition of an exclusive right to operate Class III gaming without additional competition from other parties in the state” (Wisconsin Legislative Fiscal Bureau, 2011).

The payments made to the state from the tribes amounted to $576.4 million from fiscal years 1999-2000 through 2009-’10. Annual payments from each tribe vary depending on the terms of their respective compacts. The total amount paid to the state fluctuates significantly from year to year. Wisconsin received no payments from some tribes in fiscal years 2006-’07 or 2007-’08 because those tribes withheld payments awaiting the outcome of a case being heard by the Wisconsin Supreme Court that would affect tribal compacts with the state.

Figure 4
Total Payments to the State of Wisconsin from the 11 Federally  ​     
Recognized Tribes With Casino Revenue, FY 2003-’04 Through FY 2009-’10

The $576 million the state received from all the tribes from 1999 through 2011 amounted to about 5.25 percent of net tribal winnings over the same period. Had the casinos all been Wisconsin corporations rather than non-taxable casinos, they would have paid 7.9 percent on net winnings, or about $867 million, during the same period. Thus, the “franchise fee” for the tribal monopoly on Wisconsin casino gambling was about two-thirds of what tax revenues would have been had the casinos been commercial enterprises. The state would have also captured sales, hotel, and excise taxes for all products sold in the casinos and their appurtenant enterprises, rather than only on the portion of sales made to non-Indians. In a 2002 publication, Thompson and Schmidt concluded that the Wisconsin tribes were not paying sufficient money to the state when compared with the costs of externalities imposed on the residents of the state by the casinos (Thompson and Schmidt, 2002).

The variability of tribal payments to the state from year to year makes it difficult for officials to forecast general fund revenues for budgeting purposes very far in advance. In five of the seven years for which data is included in Figure 4, the tribes paid as much as $77.5 million less than the state had projected. In one year, the tribes paid $47.7 million more than anticipated.

Tribal Conditions Placed on Money Paid to the State. Taxes paid by commercial gambling casinos, were there any in Wisconsin, would go into the state’s general fund to be spent as elected officials choose. However, the compacts with tribes earmark a substantial portion of the money for projects related directly to Indian interests. For example, in fiscal year 2010-’11 more than $1 million of the money paid to the state was to go to “gaming economic development and diversification loans and grants.” Another $1 million went to medical assistance matching funds for tribal outreach positions and federally qualified health centers. About $800,000 was designated for tribal medical relief block grants, and $250,000 went to tribal language revitalization grants. To be sure, $5 million went to the fish and wildlife account of the conservation fund and $8.2 million went to general tourism marketing, but a substantial amount of the money paid by the tribes to the State of Wisconsin goes directly back to the tribes to pay for programs aimed at benefitting their members.

Effects on Other State Government Revenue. In a study focused on New Mexico, Popp and Stewein (2002) find that gross tax receipts for state and local government decline in rough proportion to the number of casinos in a county and in adjoining counties. Most of the decline in gross tax receipts is because local money gamblers lose in casinos substitutes for sales of other goods and services that presumably would have been purchased in or near the county in which the casino is located. When wagers substitute for local goods and services, then the state and the local government lose sales tax revenue. Increases in gambling revenue at the casino may result in additional money being paid to the state or local government, depending on the terms of the specific compact with the state and agreement with the local governments. Tracking the net effects on revenue and on any revenues stemming from a multiplier effect are beyond the scope of this paper.

Effects on Lottery Revenue. Scholars who have looked at the question generally find that money spent on casino gambling substitutes for money spent on state-run lotteries. Siegel and Anders (2001), for example, studying the effects of casinos on lottery sales in Arizona, find that “an expansion in Indian casino gaming in Arizona is associated with a decline in lottery revenues.” Indeed, as casino gambling has expanded in Wisconsin, state lottery proceeds first declined, then grew, and then essentially flattened out. Lottery sales increased only 2 percent between fiscal years 2006-’07 and 2010-’11. During that period, the most sales occurred in the most recent year ($503 million) and, from fiscal year 2006-’07 through 2009-’10, fluctuated between a high of $495 million and a low of $473 million.

Effects on Income Taxes. Federal income tax forms provide lines on which to enter gambling winnings and losses. Losses are deductible and not taxed.9  Wisconsin doesn’t have a line in its tax returns specifying gambling winnings or losses, but it does permit those losses (or winnings) to be carried over to state income tax returns. Because gamblers cannot deduct losses in excess of winnings, the direct impact of casino gambling on state income tax revenue is probably negligible (because, in aggregate, gamblers in the State lose about 20 percent of their wagers). It is unlikely, though, that most of those casino gamblers who actually end up winning money over a year report those winnings that are less than the amount for which casinos are required to withhold income for the state.

Other effects on income tax revenue of adding casinos in the state are problematic. Casinos far from reservations will most likely employ people who are not enrolled tribal members and not living on Indian land. They will pay state income taxes. However, if, as we suspect, casino gambling is essentially saturated in Wisconsin, those earnings will be offset to some extent by income lost to casino workers in reservation-based casinos that lose business to the new casinos in better locations.

A Looming Concern. Many questions surround the likely emergence of legalized internet gambling and the impact on the states that permit Indian but not commercial gambling. Tribes recognize this and have been attempting to gain some control over how internet gambling will be regulated at the national level so as to protect their favored position. How it works out will affect Wisconsin.

If internet gambling is approved by the federal government, will the states have any means of outlawing it, regulating it or taxing it? If Wisconsin cannot regulate internet gambling and it occurs within the state, do the 11 tribes still retain a monopoly on casino gambling in Wisconsin? If there is no state level control, how would that affect Wisconsin’s constitutional prohibition of casino style gambling except on reservations and in the lottery? If Wisconsin must permit internet gambling and attempts to earn revenue from it, then the existing compacts may be invalidated. One can foresee extensive litigation on the horizon as internet gambling develops further.

Is it Enough Money? The State of Wisconsin is getting approximately $100 million per year from Wisconsin’s tribes. Thompson and Schmidt (2002) estimate it costs more than $60 million per year to deal with the social problems generated by casino gambling in Wisconsin. In addition, a goodly share of the $100 million paid to the State is earmarked for projects directly and almost exclusively benefiting Indian people. The payments, less the funds spent on tribal activities, hardly seem sufficient to cover the costs of administration, regulation, service provision, and externalized costs, much less providing compensation for the privilege of having a monopoly on casinos and casino gaming devices. On reflection, it appears that tribal payments to the state and to the affected local governments are significantly inadequate for the benefits the tribes receive and the externalized costs generated by their casinos.

When the state has the option of concurring with or not concurring with a Department of the Interior decision to permit casino-style gambling on land newly acquired by a tribe, the state has considerably more leverage in compact negotiations than when the casino is on pre-1988 reservation lands. There is no reason for the governor to agree to an additional casino without receiving a higher percentage of the revenue than in the previous compacts.

Payments to Local Governments

Local governments in which casinos have been built on recently acquired land usually get money from tribes that operate the casinos in their respective communities. How much money the localities get and for what purposes depends on the specific arrangements in the agreements negotiated with the local government before the casino is approved. Tribes may also pay for public services received from the municipality if that is part of the agreement. Some of the tribal agreements with local governments include a provision that a portion of the money received by the municipality is paid to the county in which the municipality is located.

If the casinos were commercial enterprises, the local governments would receive property tax revenues and user charges for various municipal services but would not, of course, share in the gambling profits. Whether the payments to a specific community through the terms of the agreement with the tribal casino are greater or less than the taxes and fees that would be paid by a commercial casino depends on the individual case.

The Wisconsin localities in which casinos are currently proposed expect to receive payments from the sponsoring tribes. Early in 2012, the city manager of Beloit said that the casino “could result in annual ‘net win’ payments to the City of Beloit and Rock County of between $5 million and $7 million” (O’Brien, 2012). No agreement has yet been signed, but the 2 percent net win payment and “other financial arrangements” would be in lieu of property tax payments and compensate the community for services provided to the casino by city and county employees. The city is hoping for more than 1,000 new jobs. The city will be responsible for front-ending the cost of necessary off-site infrastructure improvements, but, reportedly, the costs will be offset by a $2 million infrastructure down payment from the Ho-Chunk Nation.

Three percent of the net win from the Potawatomi casino in Milwaukee is split between the City of Milwaukee and Milwaukee County. Actually, the amount is 3 percent of the net win, less the amount paid to the state. The Milwaukee County executive’s budget for 2012 anticipated a payment of $4,084,441 from the Potawatomi tribe. Presumably, the city’s share is the same, but it is difficult to ascertain how much it anticipated from the Potawatomi from the city’s statement of revenues. The payment from the tribe amounts to 1.08 percent of the County’s revenues. It is certainly a considerable amount of money, but hardly seems to be the kind of financial boon to Milwaukee County that Beloit and Rock County officials appear to anticipate.

About 6 million people visited the Milwaukee casino in 2010. Together, they lost about $350 million dollars (Davis, 2011). A looming concern to the Potawatomi and presumably to the City of Milwaukee and Milwaukee County is the proposal by the Menominee tribe to build a casino in Kenosha (see previous section discussing the four proposed casinos in Wisconsin). If the Kenosha casino is approved, and if we are correct in our conclusion that casino gambling in Wisconsin is largely saturated, then it is entirely likely that the Kenosha casino would draw substantial business from the Milwaukee casino. Kenosha is, after all, in a direct line between Milwaukee and the Chicago area market and very accessible to the Wisconsin population from south of Milwaukee to the Illinois border. If the Kenosha casino were to draw a fourth of the business from Milwaukee, the city and county would each lose at least $1 million  a year in direct payments from the Potawatomi. The Potawatomi would stand to lose about $90 million. Casino officials estimate that about 90 percent of those who come to the Milwaukee facility are from out of town (Davis, 2011), so Milwaukee would also lose the benefit of expenditures outside the casino by the portion of those visitors who choose, instead, to gamble in Kenosha. Kenosha, of course, would benefit depending on its compact with the Menominee and whatever money visitors spend there outside the casino.

Uncompensated Expenditures. Local governments incur expenses to provide support for local businesses and residents and for those who pass through their communities. Street and highway construction and maintenance costs increase with traffic volume and composition. Interchanges must be designed and built for the expected traffic counts. Sewer and water facilities must be sized to accommodate maximum anticipated demand. Refuse collection and sanitation costs vary with the quantity of waste collected and disposed of. Fire departments must be prepared to fight fires in the most complex and crowded facilities in the community. Police staff must be adequate to deal with heavy traffic and large numbers of people. In short, both the state and the communities within it that host casinos spend a significant amount of money initially and over time to ensure adequate infrastructure for businesses.

Many local governments in the United States levy a fee on new developments within their boundaries to cover the cost of externalities. More people require more park land, traffic controls, schools, police officers, and so forth. It is unfair to charge existing customers the costs of providing for the needs of new residents and businesses. Unless agreements specifically address these matters, casinos will probably not contribute directly to covering those costs. Because Wisconsin has considerable experience with compacts and casinos, state officials are aware of these costs and will presumably negotiate appropriately. The local governments for which casinos are proposed usually go through the experience only once and would probably benefit from counseling by state officials on critical aspects of negotiating agreements with tribal owners.

Costs do not accrue only to the community in which the new casino is built. They also accrue to communities that lose business because of the new casino. When casinos on newly acquired land attract significant amounts of business away from existing casinos in other cities and reservations, then the costs associated with meeting the needs of the casinos losing business are externalized to the community and to the tribe from which they business has been attracted. We have already cited the case of Reno, Nev. Reno lived on casino gambling; now that many of its former customers stay in California to gamble, Reno, while it has not become a ghost town, suffers from major losses to it primary economic engine and is struggling to re-engineer its economy.

Conclusions

The main question addressed in this paper is whether it makes sense from the standpoint of the state as a whole to permit additional casinos to be built on lands acquired by tribes after 1988. An analysis of casino and lottery revenues here and elsewhere and generalizable patterns of market maturation finds that the market for casino gambling is or is nearly saturated in Wisconsin. Even accounting for the effects of the recession and internet gambling, the demand for casino gambling and for lotteries has leveled out.

Casino gambling has an adverse effect on state tax revenues, though the benefits to a local community from adding a casino are generally positive, unless there are competing casinos nearby. In addition, internet gambling is likely to become a major source of competition for brick and mortar casinos and, unless the casinos devise effective coping methods, it is likely to reduce their gross handle and profit significantly.
In conclusion, additional casinos on land newly acquired by Wisconsin tribes for the sole purpose of building a casino will compete with existing Indian casinos. The tribes with few resources will suffer reductions in revenues while tribes like the Menominee, Potawatomi, and the Sokaogon Chippewa Community of Mole Lake compete with one another for revenues with casinos located on interstate highways along the Lake Michigan shoreline in southeastern Wisconsin.

Increased competition among tribes with resources for attractive locations will further saturate the demand for Class III gambling and, most likely, result in higher payouts, lower net profits, and more competition in terms of amenities like big name shows, restaurants, and non-gaming recreational facilities. Ultimately, one would anticipate at least some casino closures.

Regardless of whether the demand for gambling is saturated, the net financial effect of expanded facilities on state and local government budgets does not appear to be favorable except for those communities where casinos flourish despite the competition. If demand is not saturated, then one might expect additional substitution of gambling losses for other goods and services and little additional net revenue, if any, to the state. Given the social costs of problem and pathological gambling, incidents of embezzlement and bribery, the costs to the people of the state of any additional gaming facilities are very likely to exceed benefits to either the state or to the tribes. The evidence seems clear. With the exception of benefits to the most affluent tribes in Wisconsin and the local communities in which they propose casinos, additional casinos in the state are probably ill-advised.

 

Endnotes

1 Gross handle is the total amount wagered. It includes winnings that are put at risk again. Thus, if a person who plans to lose no more than $20 on slot machines on a particular day continues to put all the money paid to him or her by the slot machine back into the machine until the $20 is all gone, then the gross handle includes much more than the original $20. It might be $30, $40 or more, depending on how often the machine is played, less any money with which the player leaves the casino.
2Class III gambling generally refers to casino-style gambling. It includes games such as slot machines, blackjack, craps and roulette. Wagering games and electronic games that are facsimiles of other Class III games, such as video poker, are also defined as Class III games. Some might argue that Native Americans do not have a complete monopoly on gaming because of electronic gaming devices in Wisconsin taverns, although those devices are “for recreational purposes only” and paying winners is illegal.
3Approximately 1.1 percent of Wisconsinites (63,000) identified themselves as American Indian or Native Alaskan in the 2010 census.
4 See particularly The Evolution of Legalized Gambling in Wisconsin. State of Wisconsin, Legislative Reference Bureau, Research Bulletin 97-1, September 1997, and The Evolution of Legalized Gambling in Wisconsin. State of Wisconsin, Legislative Reference Bureau, Research Bulletin 00-1, May 2000.
5See a paper by Mark P. Legg (Oklahoma State University) and Hugo Tang (Purdue University) dated 2010 and entitled Why Casinos Are Not Recession Proof: A Business Cycle Econometric Case Study of the Las Vegas Region.
6 Casino Revenue Sensitivity to Competing Casinos: A Spatial Analysis of Missouri by Douglas Walker of the University of Charleston and Todd Nesbitt of the Ohio State University, as of June 2012, a draft document, subject to change. The authors granted permission to cite the draft.
7The literature on values, differential utility functions, and collective decision-making is extensive. Understanding Arrow’s Impossibility Theorem (also known as the General Possibility Theorem for Social Welfare Functions) is critical to understanding the impossibility of pleasing everyone equally in democratic decision-making. See Kenneth Arrow, Social Choice and Individual Values (2nd ed.).

8This is just a reminder for readers who may have forgotten that Grover’s Corners is the name of a fictional community in Thornton Wilder’s play Our Town.

9IRS Topic 419 - Gambling Income and Losses states that gambling winnings are fully taxable and must be reported on one’s income tax return. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. One may deduct gambling losses only if he or she itemizes deductions. However, the amount of losses one deducts may not be more than the amount of gambling income reported. For additional information, refer to Publication 525, Taxable and Nontaxable Income.

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