Since the genie was let out of the bottle 30 years ago, expanding gambling has been a popular way to increase government spending without raising taxes. Now we may use it to finance a new football stadium.
Economics cannot say if this is good public policy. But some insights from economics may help frame the debate.
First, money in general is fungible and so are government revenues. If new revenues from gambling are a socially beneficial way of paying for a stadium, they would be an equally good way of paying for existing programs and thus reducing existing taxes. And, if we would not consider expanding gambling to fund current programs or reduce current taxes, why would this be a great option for a new publicly funded stadium?
If one believes that governments should not do what the private sector can do more efficiently, then there is no reason government itself should sell gambling to the public. In Minnesota, most consumer spending on gambling takes place in Indian casinos, at a horse track or in connection with charitable formats like pull-tabs. But we do have the Minnesota State Lottery and we participate in multi-state enterprises like PowerBall. Instead of expanding gambling, perhaps we should be talking about getting out of the business entirely.
We could sell existing state-owned operations off to the highest bidder, or we could simply allow private businesses to offer gambling services as they choose, perhaps on a licensed basis – as we do with serving liquor. We could apply a uniform state tax on gambling receipts, but not run any of the business ourselves. Elementary econ theory argues that gambling enterprises would be more efficient under private ownership. And if we want to maximize the satisfaction of society as a whole, removing legal barriers to entry into gambling businesses would do so.
Of course, doing that could cut state revenues.
Because of a near-total ban on gambling that existed for over a century, the state has a position of monopoly. It can extract monopoly profits from its control over the total amount of gambling services offered to the public. It can offer such services itself, through an agency like the Minnesota State Lottery, or it can tax the gross revenues of private businesses that it allows to operate. And it could auction off licenses or concessions to operate such businesses.
Such monopoly profits, actual or potential, are a hard thing for a state to give up. But we would never think of realizing similar monopoly profits by taking over, for example, the distribution of gasoline or medicines. The public outrage would be enormous because it would disrupt existing businesses and existing property rights. The increase in costs to households would be highly visible.
So why do we cling to a monopoly that government only has by historical accident?
One may argue that gambling, like alcohol and tobacco, is something that some humans inherently want, but that can cause significant harm not only to the users themselves, but to others. Yet the desire for gambling is so strong that there is less social harm in allowing its sale under strictly regulated conditions than to try to maintain a complete ban.
This is an argument I agree with myself. But if one would take this to its logical conclusion, why not finance a new stadium with state-operated or state-taxed brothels or cocaine and marijuana shops?
One may argue that the external costs imposed on others by prostitution or drugs is greater than with gambling, and thus a ban is justified in one case and not in the other. I am not convinced of that, nor are the increasing numbers of students I see who are Ron Paul Libertarians. Expand gambling to fund a stadium and you advance the day that we have to face this muddiness in our thinking about why we regulate some vices while banning others.
You can argue that because of the harm done to others because of gambling or alcohol, the best public response is a tax, so that the purchaser of the service or good in question faces the marginal cost to society of her consumption. British Economist A.C. Pigou made this argument 90 years ago and virtually all economists, liberal and conservative, think he hit the nail on the head. But if you agree this is correct, then you also should support emissions taxes to control pollution, or a second-best variation called cap-and-trade, in place of existing policies.
There is nothing like gambling to expose our own conflicting values and muddled thinking.