Casinos, Indians and Beer
Last night, after the debate caucus, a group of us retired to Brit’s Pub as is traditional (actually we went to Sweeney’s. Lying about where we go is also traditional). There I argued with Craig Westover and TFB from Jo's Attic about Indian casinos and whether the state should be involved with gambling. As I am wont to do over beers, I wasn’t as clear (or polite!) as I should have been. So here, upon the sobriety of day, is why I think we should license non-Indian casinos.
All sorts of goods and services have bad effects on people around those that use them. Economists call these effects “negative externalities.” Some of these products (say, heroin) are believed to have such large negative externalities that we just make the product illegal. Others, like alcohol, we make legal but regulate and tax heavily. The tax has two good effects. One, it lowers overall consumption of the product in question (by raising its price) and thus lowers the overall negative effects on others, and two, it raises revenues for the state, allowing them to lower taxes on things we actually want to encourage, like earning income. There is nothing inherently illogical about believing casino gambling is more like heroin than alcohol and thus the proper policy is to simply ban it.
However, we don’t really have that choice. Distributed throughout Minnesota are little pockets of sovereign Indian territory where the state can neither outlaw nor tax casino gambling, and thus there now exist enormously profitable casinos. These enormous profits are due directly to the fact that the state of Minnesota outlaws casino gambling on those portions of Minnesota for which it has jurisdiction to do so (everywhere but the Indian lands). It is exactly what would happen if alcohol were illegal everywhere but on Indian lands. The tribes would just rake in money.
If the negative externalities of casino gambling were felt only within a few miles of each casino, the current situation wouldn’t be so bad for the state. The tribes would be reaping the benefits of these huge profits, but also paying the costs in terms of the negative externalities. But this simply isn’t so. Whatever negative externalities there are (the effects of gambling addictions and so forth) are felt far and wide. So in the current situation, the state feels all the bad effects of casinos, but leaves all the profits to the tribes. It’s pretty near a worst case scenario.
We must take as given that whether we like it or not, and whether we allow non-Indian land casinos, most Minnesotans will live within a short drive of a casino. We simply can’t stop this. By selling licenses to open casinos on non-Indian land, the state can at least recapture the monopoly profits of the tribes with little increase in overall gambling and the ensuing negative effects. Doing otherwise simply leaves the tribes with millions (billions?) of unearned monopoly rents.
All sorts of goods and services have bad effects on people around those that use them. Economists call these effects “negative externalities.” Some of these products (say, heroin) are believed to have such large negative externalities that we just make the product illegal. Others, like alcohol, we make legal but regulate and tax heavily. The tax has two good effects. One, it lowers overall consumption of the product in question (by raising its price) and thus lowers the overall negative effects on others, and two, it raises revenues for the state, allowing them to lower taxes on things we actually want to encourage, like earning income. There is nothing inherently illogical about believing casino gambling is more like heroin than alcohol and thus the proper policy is to simply ban it.
However, we don’t really have that choice. Distributed throughout Minnesota are little pockets of sovereign Indian territory where the state can neither outlaw nor tax casino gambling, and thus there now exist enormously profitable casinos. These enormous profits are due directly to the fact that the state of Minnesota outlaws casino gambling on those portions of Minnesota for which it has jurisdiction to do so (everywhere but the Indian lands). It is exactly what would happen if alcohol were illegal everywhere but on Indian lands. The tribes would just rake in money.
If the negative externalities of casino gambling were felt only within a few miles of each casino, the current situation wouldn’t be so bad for the state. The tribes would be reaping the benefits of these huge profits, but also paying the costs in terms of the negative externalities. But this simply isn’t so. Whatever negative externalities there are (the effects of gambling addictions and so forth) are felt far and wide. So in the current situation, the state feels all the bad effects of casinos, but leaves all the profits to the tribes. It’s pretty near a worst case scenario.
We must take as given that whether we like it or not, and whether we allow non-Indian land casinos, most Minnesotans will live within a short drive of a casino. We simply can’t stop this. By selling licenses to open casinos on non-Indian land, the state can at least recapture the monopoly profits of the tribes with little increase in overall gambling and the ensuing negative effects. Doing otherwise simply leaves the tribes with millions (billions?) of unearned monopoly rents.
posted by Harsh Pencil | 2/17/2005 12:01:00 PM
CRAIG WESTOVER RESPONDS:
Best argument I've heard for casino gambling. But the real question is . . . . My comment --
Sound economic argument, but you left out one key point of the battle over beers last night, and that is the form of casino gambling that is favored.
If the question is “Resolved -- Minnesota should be open to a private casino industry,” then you have an argument in the affirmative. The social consequences argument is the negative argument.
However, if the question is “Resolved -- Minnesota should open a state-run (state-partnered, bid for limited license) casino(s),” then the issue ceases to be an economic issue and becomes a question of the legitimate role and authority of government. That is the question the way Pawlenty is currently framing it.
For the negative --
1) Government has no legitimate authority to enter into a business that competes with private business. I’m not talking about Indian casinos, but about entertainment businesses in general and more broadly any business competing for discretionary dollars.
2) Government has no legitimate authority to set license fees or tax rates arbitrarily. Fees should be commensurate with the costs incurred by the state to regulate a business for the protection of Minnesota citizens, not as a profit center. Casinos should be taxed at non-discriminatory rates compared to other like entertainment venues.
3) The state has a legitimate compelling interest to limit casino licenses, but not for the purpose of creating a supply shortage and a bidding war for those licenses.
4) And finally, it is totally unethical and an abuse of power to offer the Indian tribes a guaranteed monopoly (selling legislation) in exchange for a percentage of their profits, which the state is not legally allowed to extract through fees and/or taxes.
The validity of your argument depends upon which debate you are having.
CHRIS’ RESPONSE:
I agree about it being a dumb idea for the state to actually operate a casino. But that is only because it is usually a dumb idea for the state to actually operate anything that can be outsourced. There’s nothing about a casino, as opposed to some other business, that makes it better or worse for a state government to operate.
1) Government has no legitimate authority to enter into a business that competes with private business.
Bad idea, but no legitimate authority? Why not?
2) Government has no legitimate authority to set license fees or tax rates arbitrarily and
3) The state has a legitimate compelling interest to limit casino licenses, but not for the purpose of creating a supply shortage and a bidding war for those licenses. The state taxes alcohol for dual legitimate purposes: to hold down consumption and raise revenue. The state could achieve exactly the same outcome by auctioning licenses to sell the amount currently sold and not taxing at all. The auction prices would capture the revenue raised by the taxes. These are simply two ways to skin the same cat. Holding down consumption of gambling services by limiting the number of licenses is legitimate precisely because of the negative externalities associated with gambling.
4) And finally, it is totally unethical and an abuse of power to offer the Indian tribes a guaranteed monopoly (selling legislation) in exchange for a percentage of their profits, which the state is not legally allowed to extract through fees and/or taxes.OK. Let’s do the following. Auction the right to open a casino just outside the border of each Indian casino. If the tribe wants to bid on the license, it is free to, and can certainly then simply hold on to it, thus keeping its local monopoly. No coercion and no threats, but the state gets a big portion of the monopoly profits currently going to the tribes.
Economics cannot be the only driving force to supporting a Casino. After all, shouldn't we view indian casinos as "temporary ills." It will be much easier in the future to shut down a few indian casinos than it will be to shut down a vast market of multiple private enterprises that would employ tens of thousands.
Perhaps it is better to merely tax the jeepers out of the indian casinos rather than build our own. This way the state can reap the returns of the casino monopoly, while at the same time moving towards a policy of ending indian casino gambling. For goodness sakes, get the indians to build computer chip factories instead.
Publius: This whole controversy is due to the fact that we CAN'T tax the casinos. They are on sovereign Indian land.
You write "Economics cannot be the only driving force to supporting a casino." If by that you mean money, then I agree. There are lots of non-monetary costs to casinos (broken lives due to gambling addictions and so on.) My point was that since everyone can take a short drive and get to a casino now, and there is nothing we can do about this, these effects are here no matter what we do. Given this, we might as well get the money.
I could be convinced by a MORAL argument. Suppose for instance, the Federal Government decided we couldn't stop the tribes from opening brothels on their lands and the Indians were raking it in from that. Does that mean we should license brothels near the Indian lands to get some of the profit? I would say no, but only because prostitution is so vile that I don't want the state to have anything to do with it, even if it is giving up a huge amount of money by doing so. But I don't think gambling, and I haven't heard anyone here argue, that casino gambling is nearly as morally wrong (or morally wrong at all) as prostitution.
CRAIG RESPONDS (AGAIN)
I agree about it being a dumb idea for the state to actually operate a casino. But that is only because it is usually a dumb idea for the state to actually operate anything that can be outsourced. There’s nothing about a casino, as opposed to some other business, that makes it better or worse for a state government to operate.
Whoa, Chris, you’re making a couple of “conservative” mistakes. “Limited” government or “smaller” government is not the same as “outsourced” government. Government outsourcing to private industry a function it has no legitimate authority to perform is neither limited nor smaller government. While they may be nothing different about running a casino, the real question is “why should the government operate any business in competition with private enterprise?”
1) Government has no legitimate authority to enter into a business that competes with private business.
Bad idea, but no legitimate authority? Why not?
The high-sounding reason is “Government derives it’s just power from the consent of the governed,” which means the governed cannot consent to government any power that they themselves do not have as individuals.* As individuals, we have no power to coerce those we compete against. On a practical level, image the government opening a department store in the Mall of America that didn’t charge sales tax and undercut competitor’s prices, while at the same time raising the general sales tax. On another front, think about being in the commercial alternative-rock radio station owner, paying personal and corporate tax to the government who uses those funds to fund a Public Radio station that directly competes for your market.
[*Let me anticipate an off-topic argument -- government can tax, but individuals cannot. Are you one of those nuts who believe in no taxes at all? My answer is “no.” Although individuals cannot tax others, but individuals can charge others for services provided. That power is consented to government and the form of payment to government is taxes.]
2) Government has no legitimate authority to set license fees or tax rates arbitrarily and
3) The state has a legitimate compelling interest to limit casino licenses, but not for the purpose of creating a supply shortage and a bidding war for those licenses. The state taxes alcohol for dual legitimate purposes: to hold down consumption and raise revenue. The state could achieve exactly the same outcome by auctioning licenses to sell the amount currently sold and not taxing at all. The auction prices would capture the revenue raised by the taxes. These are simply two ways to skin the same cat. Holding down consumption of gambling services by limiting the number of licenses is legitimate precisely because of the negative externalities associated with gambling.
This is the “throw a brick though your window with a note attached offering window repair service” model. Unlike alcohol, there is no legal off-reservation gambling now. Consumption = zero. There is no need to reduce consumption. Thus, the only reason to allow gambling is to increase revenue. But by auctioning limited licenses, the state is creating an unnatural monopoly. There is also a federalism question. At the state level, licenses should be open to achievement by all -- the state licenses physicians, but anybody who puts in the time and effort can obtain a license. It should be left to municipalities to determine how many casinos they would allow under an open private system.
4) And finally, it is totally unethical and an abuse of power to offer the Indian tribes a guaranteed monopoly (selling legislation) in exchange for a percentage of their profits, which the state is not legally allowed to extract through fees and/or taxes.OK. Let’s do the following. Auction the right to open a casino just outside the border of each Indian casino. If the tribe wants to bid on the license, it is free to, and can certainly then simply hold on to it, thus keeping its local monopoly. No coercion and no threats, but the state gets a big portion of the monopoly profits currently going to the tribes.
Your solution does not remove the coerce nature and abuse of government power. Let’s establish a sales tax free mall just down the block from existing malls and let people bid on the property. If Rosedale wants to keep its business, it can bid on the property. Make any sense?
CHRIS: I will leave Craig with (almost) the last word, except for this. Indian casinos are not private business. They are businesses run by a competing sovereign government.
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