Academic journal article Contemporary Economic Policy

The Effect of Casino Proximity on Lottery Sales: Evidence from Maryland

Academic journal article Contemporary Economic Policy

The Effect of Casino Proximity on Lottery Sales: Evidence from Maryland

Article excerpt

The continued expansion of the casino industry has caused increasing concern regarding the cannibalization of other industries, and in particular, state lotteries. For example, Maryland Lottery sales flattened shortly after casinos began opening in the state. Although previous papers have found that casinos and lotteries have a negative relationship with each other, no previous research has analyzed the impact of casino proximity on lottery sales or has examined the relationship between casinos and different types of lottery games. In this paper, we examine ZIP code-level monthly lottery sales data from Maryland between July 2009 and February 2014, in order to test the impact of casino proximity on lottery sales, by type of game. Our findings indicate that aggregate lottery sales decline more in closer proximity to casinos, but that casinos affect different lottery products differently. We discuss the consumer behavior and public finance implications of the findings. (JEL H27, H4, L83)

I. INTRODUCTION

Legal gambling has been an important policy issue for state governments since New Hampshire introduced a lottery in 1964. Other states followed suit, and now only a few states do not have lotteries. Beginning in 1989 legal casinos began to spread outside Nevada and Atlantic City, NJ, and well over 1,000 casinos now operate in the United States. (1) For calendar 2015, U.S. casino revenues were estimated to be $73.3 billion; U.S. lottery sales in fiscal year 2015 were $73.8 billion. (2)

Gambling taxes can be significant sources of state government revenue, and tax revenues have been a primary motivation for the legalization of gambling. The effective lottery "tax" averages around 40%, after accounting for administrative expenses (Perez and Humphreys 2013). Commercial casino gross revenues are taxed at various rates, historically ranging from about 6% in Nevada up to nearly 70% in states such as Delaware, Maryland, New York, and Rhode Island (American Gaming Association 2013). (3)

As casino expansion continues across the United States, there is increasing concern that casino revenues may come at the expense of lottery sales (i.e., revenue "cannibalization"), raising questions about the net tax impacts of casino legalization. Although there have been analyses of the interindustry relationships between casinos and lotteries, many of these studies were published at a time when casinos were relatively isolated. (4) Such casinos could attract large numbers of visitors from out-of-state, which likely mitigated any negative impacts these casinos may have had on a state's lottery. Nevertheless, later evidence still suggests that lotteries and casinos are generally substitutes (Walker and Jackson 2008). No published study to date has addressed the degree to which proximity to casinos impacts lottery sales, nor has any examined the relationship between casinos and specific types of lottery games. These issues are fundamental in understanding the net effects of legalizing or expanding casino gambling, and in particular the likely impact of new casinos on existing lotteries.

In this study, we use ZIP code-level monthly lottery sales data from the Maryland State Lottery and Gaming Control Agency to analyze the impact of casino proximity on the sales of different types of lottery products. Our analysis focuses on Maryland, where the first casino began operating in September 2010. We examine the impact of casinos on lottery sales using lottery sales data from July 2009 through February 2014. Our findings suggest that casinos have had a significant negative impact on Maryland's lottery sales, and that the impact varies by lottery product. Furthermore, our results indicate that the impact of casinos on lottery sales is very sensitive to casino proximity.

This study provides important evidence on how two forms of gambling affect each other, which could be of great interest to policymakers in most states and in jurisdictions around the world. …

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