For release: Jan. 2, 2003

Contact:	Charles B. Henderson
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Casinos: Do They Really Help the Economy?

ST. LOUIS — While casinos are often touted as a boon for jobs and tax revenue, residents and legislators in local communities and states should carefully sift through the perceived economic benefits, said an economist at the Federal Reserve Bank of St. Louis.

The economist is Thomas Garrett, who reviewed the economic issues associated with casinos for the Winter 2002-03 issue of Bridges, a quarterly newsletter published by the St. Louis Fed's Community Affairs Office that reviews regional community development issues, projects and regulatory changes.

In the past two decades, casinos have become a major industry in the United States, with 30 states having legalized casino gambling. Many states have approved casino gambling because they believe it will enhance economic growth—specifically, increased employment, greater tax revenues for state and local governments and greater local retail sales.

Garrett analyzed the three issues:

• Employment. "Because the local unemployment rate sometimes drops after the casino opens, it's assumed that the casino helped," says Garrett. "The real issue, however, is that changes in local unemployment should be compared with statewide unemployment changes, as well as changes in population and local business conditions. Another key question local residents should consider is whether the workforce for the new casino will come from their area. In relatively urban areas, for example, there may be enough skilled workers to fill those jobs. In a rural area, on the other hand, that labor may come from somewhere else, leaving the unemployment rate for the local population unchanged."

• Tax Revenue. Proponents of casinos, and state and local governments, promote taxes on casinos as a revenue benefit. Garrett said this revenue is not "new" money, because taxes result in a transfer of income from one group to another—in this case, from casino owners to state and local governments. In addition, many states have declared that casinos' tax revenues be earmarked for certain programs, such as public education. Contrary to popular belief, however, those additional revenues don't necessarily translate into increased spending for the schools. "Let's say the casinos generate $100 million a year for taxes," he said. "Therefore, you'd expect total spending on education to increase by $100 million, but state legislators can simply reduce the total amount of funds budgeted for education by $100 million and use the funds elsewhere." Although he said this "swapping" of casino revenues hasn't been tested, studies of the same issue regarding lotteries have shown that state spending on education has not increased beyond an expected trend level.
  
  
• Retail Sales. Garrett said that the "substitution" effect comes into play with casinos. That is, consumers substitute casino gambling for other leisure pursuits, such as eating out or going to a movie. If a casino is part of a tourist destination or vacation, however, then local retail sales would probably increase. He said another issue to consider is the sales tax generated by the restaurants, shops and hotel rooms associated with some casinos. "Items purchased in these places are taxable under state and local laws," said Garrett. "As a result, a possible loss in retail sales in the local community may be partly offset by an increase in retail sales activity in the casinos."

Regardless of the specific issues, Garrett noted that casino gambling is here to stay and the only question is to what degree its popularity will increase in the future. "Very simply, citizens and government officials need to understand these issues when they debate casinos and economic development," he said.

A subscription to Bridges is free and can be obtained by calling (314) 444-8809. The publication is also available on the St. Louis Fed's web site: www.stlouisfed.org (click on "community development").

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern
Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the US government.

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