According to the American Gaming Association (AGA), between 1975 and 2003 the gross revenue taken in by the legal gambling industry increased from $3 billion a year to nearly $73 billion a year; a significant portion of this growth took place during the 1990s, when gross gambling revenue (GGR) doubled. GGR is the money taken in by the industry minus the winnings paid out. In other words, it is equivalent to sales. When operating expenses, wages, benefits, taxes, and salaries are subtracted, the profit to the industry is left.
Commercial casinos, which are nearly all owned by corporations, control 41% of the legal gambling revenue pie, compared to 21% controlled by tribal casinos and 27% by lotteries. In 2003, according to statistics published on the AGA Web site (www.americangaming.org), commercial casinos had $27 billion of GGR after paying winners. This figure is up dramatically from only $9.6 billion in 1992.
Corporations
CASINO OWNERS AND OPERATORS. Corporations have profited the most from legalized gambling since taking over the small casinos of Las Vegas during the late 1960s, when organized crime was pushed out by the government. As gambling became more and more profitable, corporations invested money in new and bigger properties in Las Vegas and around the state of Nevada. In 1978 the first casino hotel opened in Atlantic City, New Jersey. Corporations became increasingly involved in the gambling business over the next few decades. Today, most corporations in the industry own and/or operate several commercial casinos. Some companies, such as Harrah's Entertainment, also manage casinos for Native American tribes. Tribes are increasingly partnering with large well-known corporations to take advantage of their name recognition and corporate experience.
The seven largest and best-known corporations in the gambling industry are listed below.
- Caesars Entertainment, Inc., is one of the world's largest gambling corporations, with twenty-eight gaming properties and 52,000 employees worldwide. It was formed in 1998 as Park Place Entertainment Corporation and adopted its new name in January 2004. Its casino resorts operate under the brand names of Caesars, Bally's, Flamingo, Grand Casinos, Hilton, and Paris. U.S. properties include Caesars Palace, The Flamingo, Bally's, and Paris in Las Vegas, Nevada; The Flamingo in Laughlin, Nevada; The Hilton in Reno, Nevada; Caesars at Lake Tahoe, Nevada; Bally's, Caesars, and Hilton in Atlantic City, New Jersey; Dover Downs racino in Delaware; Bally's and Grand Casino in Tunica, Mississippi; Bally's of New Orleans, Louisiana; Grand Casinos in Gulfport and Biloxi, Mississippi; and Caesars of Indiana. The company also operates Caesars Palace at Sea, shipboard casinos and facilities in Canada, Australia, Asia, and South America, as well as resort and hotel casinos in South Africa, Australia, Uruguay, and Canada. The 2003 corporate revenue of Caesars Entertainment was $4.455 billion, up slightly from $4.437 billion in 2002. The largest single revenue source in 2003 was slot machines, accounting for 50% of the total.
- Harrah's Entertainment has twenty-five U.S. casinos operating under the brand names of Harrah's, Harvey's, Rio, and Showboat. Properties include Harrah's in Atlantic City, New Jersey; Council Bluffs, Iowa; East Chicago, Indiana; Joliet and Metropolis, Illinois; Lake Tahoe, Las Vegas, Laughlin, and Reno, Nevada; Lake Charles and New Orleans, Louisiana; North Kansas City and St. Louis, Missouri; and Tunica and Vicksburg, Mississippi. In addition, four tribal casinos are operated by the company: Harrah's Cherokee in Cherokee, North Carolina; Harrah's Phoenix Ak-Chin in Maricopa, Arizona; Harrah's Prairie Band Casino in Mayetta, Kansas; and Harrah's Rincon–San Diego in Valley Center, California. Other company properties include the Bluffs Run Casino in Council Bluffs, Iowa; Bill's Lake Tahoe and Harvey's Lake Tahoe in Stateline, Nevada; Rio All-Suite Casino in Las Vegas, Nevada; and Showboat in Atlantic City, New Jersey. In addition the corporation operates the Louisiana Downs thoroughbred horseracing track in Bossier City, Louisiana. Harrah's Entertainment employs more than 40,000 people. Net revenues were $4.3 billion in 2003, up from $4.1 billion in 2002. In July 2004 Harrah's finalized purchase of Horseshoe Gaming Holding Corporation with casinos in Bossier City, Louisiana; Tunica, Mississippi; and Hammond, Indiana. Also in July 2004 Harrah's announced plans to purchase Caesars Entertainment. The $9.4 billion deal will include payment of $5.2 billion in cash and stock and assumption of $4.2 billion in debt.
- MGM Mirage owns and/or operates fifteen casinos, including the Bellagio, MGM Grand, New York–New York, the Mirage, the Golden Nugget, and Treasure Island in Las Vegas, Nevada; the Golden Nugget in Laughlin, Nevada; Whiskey Pete's, Buffalo Bill's, and Primm Valley Casinos along the Nevada/California state line; Beau Rivage in Biloxi, Mississippi; and MGM Grand in Detroit, Michigan. The Company owns 50% of the Borgata casino resort in Atlantic City, New Jersey. The company employs more than 45,000 people. The corporate revenue was $3.9 billion in 2003, up 3% from 2002. In June 2004 the company announced plans to purchase Mandalay Resort Group for approximately $7.9 billion.
- Mandalay Bay Resort Group has sixteen casinos that it operates, owns, or in which it has a majority interest. These include Mandalay Bay, Luxor, Excalibur, Circus Circus, and Monte Carlo in Las Vegas, Nevada; Silver Legacy and Circus Circus in Reno, Nevada; Railroad Pass in Henderson, Nevada; Nevada Landing and Gold Strike in Jean, Nevada; Colorado Belle and Edgewater in Laughlin, Nevada; Gold Strike in Tunica, Mississippi; Grand Victoria riverboat casino in Elgin, Illinois; and MotorCity in Detroit, Michigan. The company employed over 26,000 people and had net revenues of $2.5 billion in 2003.
- Boyd Gaming Corporation has eighteen casinos, including Par-A-Dice Casino in East Peoria, Illinois; Blue Chip Casino in Michigan City, Indiana; Treasure Chest Casino, Sam's Town of Shreveport, and Delta Downs racino in Louisiana; Sam's Town in Tunica, Mississippi; and the Barbary Coast, California, El Dorado, Fremont, Gold Coast, Jokers Wild, Main Street Station, Orleans, Sam's Town, South Coast, and Stardust in and around Las Vegas, Nevada. Boyd is a joint-venture partner with MGM Mirage in the Borgata Casino in Atlantic City, New Jersey. The corporation employed nearly 14,000 people in 2003. Net corporate revenue was $1.25 billion in 2003.
- Argosy Gaming Company runs six riverboat casinos in the United States, including the Argosy's Alton Belle in Alton, Illinois; Argosy Casino–Riverside near Kansas City, Missouri; Argosy Casino–Baton Rouge in Louisiana; Argosy Casino–Sioux City Casino in Iowa; Argosy Casino–Lawrenceburg in Indiana; and the Empress Casino–Joliet in Illinois. The company employs more than 6,000 people. Net revenue was $960 million in 2003.
- Station Casinos, Inc., has eleven casinos in and around Las Vegas, Nevada, catering to local markets. The properties include Palace Station, Boulder Station, Fiesta Rancho, Santa Fe Station, Texas Station, Wildfire, Wild Wild West, Fiesta Henderson, Sunset Station, Barley's Casino and Brewery (joint venture) and Green Valley Ranch (joint venture). In addition, the company manages the Thunder Valley Casino for the United Auburn Indian Community in Lincoln, California. The company employed more than 10,000 people in 2003 and had net corporate revenue of $858 million.
Most corporations involved in gambling enterprises, including the ones listed above, are publicly held, meaning that investors can buy shares in the companies on the stock market. In return, investors receive a portion of the profits (if any) made by the company. Publicly held companies are answerable to their shareholders. The U.S. Securities and Exchange Commission (SEC) requires publicly held companies to disclose certain financial and other information to the public. Some casino companies are privately owned. This means they do not offer shares of stock to the public on a stock exchange and therefore do not have to meet the strict SEC disclosure requirements of public companies.
OTHER GAMBLING CORPORATIONS. Different companies play major roles in other realms of the gambling industry. Two publicly traded companies, Churchill Downs and Magna Entertainment, are major organizations in the thoroughbred horse racing business. Churchill Downs operates tracks in California, Florida, Illinois, Indiana, Louisiana, and Kentucky. Magna Entertainment, a Canadian-based corporation with racetracks throughout North America, operated fifteen tracks in 2003. According to Hoovers Online, a financial information source, Churchill Downs had revenues of $424 million in 2003 and Magna Entertainment had revenues of $709 million.
According to the Web site of the National Association of Convenience Stores (www.nacsonline.com), roughly half of all lottery ticket sales during 2003 were in convenience stores. There were more than 130,000 convenience stores in operation in the United States during 2003 and approximately 80% of them sold lottery tickets. 7-Eleven, Inc., is the largest convenience store operator, franchisor, and licensor in the world, with thousands of stores in the United States and abroad. Other large corporations in the convenience store business include Circle K, QuikTrip, and Amerada Hess Corporation.
Many corporations directly support the gambling industry by providing equipment, goods, supplies or services. These may be members of the Gaming Standards Association, an international organization devoted to the development of uniform standards for communication and computer technology used in gambling machines. Some examples of these types of corporations are:
- GTECH Corporation, which introduced the first lottery terminal in 1982. Within two decades it was providing technology services to lotteries in twenty-five states.
- Bally Gaming and Systems, which introduced its first slot machine in 1936 and went on to become a very successful machine manufacturer and distributor.
- Konami Gaming, Inc., a leading producer of high-tech video slot machines and multisite casino management systems.
- WMS Gaming, which is engaged entirely in the manufacture, sale, leasing, and licensing of gambling machines.
GAMBLING AS AN INVESTMENT. The investment firm MUTUALS.com sells shares in the "Vice Fund." This is a mutual fund composed entirely of companies in the alcohol, tobacco, gambling, and defense industries. According to the fund's Web site (www.vicefund.com) as of July 31, 2004, gambling companies comprised 26% of the fund's investments. For the one-year period ending March 31, 2004, the fund had a 57.34% return on investments. This compares with a 35.12% gain for the Standard & Poor's 500 Index and a 32.56% gain for the Dow Jones Industrial Average. According to fund managers, gaming companies including Ameristar Casinos, Inc., Scientific Games Corp., Alliance Gaming Corp., Shuffle Master, Inc., Multimedia Games, Inc., and International Game Technology were major contributors to the fund's growth.
Small Businesses
Small businesses are involved in the gambling industry in a number of ways. Many small casinos and racetracks, minicasinos, and card rooms around the country are owned and/or operated by small companies, families, and entrepreneurs. Other ways in which small businesses are engaged in or serve the gambling industry include:
- The selling of lottery tickets and operation of electronic gaming devices at independently owned convenience stores, markets, service stations, bars, restaurants, bowling alleys, and newsstands
- Internet gambling Web sites
- The manufacture, supply, and distribution of gambling equipment (slot machines, roulette wheels, lottery tickets, dice, cards, etc.)
- Services (advertising, marketing, public relations, accounting, information technology, food services, etc.)
- Horse and greyhound breeding, training, veterinary care, etc.
Most small businesses that offer gambling do so through lottery ticket sales and/or electronic gaming devices (slot machines). These are considered forms of convenience gambling, because patrons do not have to travel to special destinations (like casinos and racetracks) to gamble. Convenience gambling is more controversial than destination gambling. Critics believe that allowing gambling in stores and restaurants and other places that people visit as part of their everyday routine makes it too easy for people to gamble. This is the same criticism leveled against Internet gambling, which patrons can do in their own homes.
Like Internet gambling, some forms of convenience gambling are considered illegal. The legality of elecronic gaming devices (EGDs) is not completely clear in some states. The problem is that many states have exemptions from their gambling laws for machines that dispense small-value merchandise or tickets or tokens that can be exchanged for small-value merchandise. During the late 1990s and early 2000s several states in the Southeast experienced problems with small businesses that began operating electronic games that paid off patrons with small amounts of cash, instead of prizes. Law enforcement officials complained that the machines were not regulated by the state and constituted illegal gambling. Despite court challenges the machines were eventually banned in South Carolina and Georgia.
The operation of video lottery terminals (VLTs) by small businesses has also proved to be controversial. According to the National Council against Legalized Gambling, during 2003 there were six bills that would have allowed lottery ticket machines in stores, that were defeated in six states: Arkansas, Illinois, New Jersey, Pennsylvania, Alaska, and Washington.
INTERNET GAMBLING BUSINESSES. Internet gambling is one of the most controversial markets for small businesses to enter. Industry analysts say that the vast majority of Internet gambling sites are operated by small, virtually unknown companies that operate without regulatory oversight. Most are in offshore locations, mainly the Caribbean. Because Internet gambling is illegal in the United States, little is known about the companies offering these services. However, the U.S. Department of Justice estimates that there were more than 1,800 Internet gambling sites operating around the world at the end of 2003. Industry analyst Christiansen Capital Advisors, LLC, estimates that Internet gambling generated nearly $5.7 billion of revenue in 2003. The company predicts that revenue will exceed $18 billion by 2010.
Criminals
Gambling in America has had a checkered legal history. At various times different gambling activities have been legal, illegal but tolerated, or illegal and actively prosecuted. During times when gambling opportunities have been outlawed, entrepreneurs have stepped in to offer them anyway. These entrepreneurs range from mobsters running million-dollar betting rings to grandmothers running neighborhood bingo games. Either way, the illegal nature of the activity makes these entrepreneurs criminals.
Legal gambling operations can also attract criminals because of the large amounts of cash involved. Gambling opponents use this fact to criticize the industry. Others argue that every moneymaking industry attracts criminals; for example, if there were no banks, there would be no bank robbers.
CASINOS AND CRIME. Casinos, in particular, constantly monitor against dealer fraud, skimming, money laundering, and other criminal activities using sophisticated camera and monitoring systems to watch employees and customers.
In October 2003 a Detroit man was charged with fraud for allegedly tampering with a scratch-and-win ticket purchased at the MotorCity Casino earlier that year. The man presented the ticket to claim a $1-million prize. The casino had the ticket laboratory tested for verification and discovered that it had been altered to appear to be a winning ticket. The man was charged with four felony counts and, if convicted, could face up to sixty years in prison. After the deception was discovered, the casino subjected all other winning tickets to laboratory testing and found that additional tickets had also been altered to win prizes.
HORSE RACING SCANDALS. In December 2003 the New York Racing Association (NYRA) and six of its employees were charged with conspiracy to commit tax fraud. Federal officials accused the NYRA of aiding certain employees in understating their earnings to the Internal Revenue Service. The suit alleges that clerks would remove money from their cash drawers and keep it. Managers then deducted the amounts from the employees' paychecks. This reduced the amount of personal income tax the employees ultimately owed to the government. According to federal prosecutors the scheme went on for at least twenty years with the full knowledge of senior management at the NYRA. It is believed that management participated in the fraud to improve relations with the clerks' union. The NYRA was fined $3 million and forced to undergo massive restructuring within its organization. Several top managers were fired and may face criminal prosecution.
In October 2002 the prestigious Breeders' Cup horse race was held in Arlington Heights, Illinois. A month later, three men were charged with conspiracy to commit wire fraud after winning suspicious bets on the race. One of the three worked for Autotote, a computer company handling wagering for the races. He allegedly changed losing bets to winning bets using his computer terminal. The resulting payoff was more than $3 million. Several long-shot horses won that day, and no other bettor picked all of the winners. Authorities were immediately suspicious and began checking computer records before the money was paid out. The fraud was discovered, and all three men were arrested. Two of them tested positive for cocaine use. In late November 2002 the former Autotote employee pleaded guilty to wire-fraud conspiracy and money-laundering conspiracy. On March 20, 2003, CNN reported that all three men received prison sentences ranging from one to three years.
ORGANIZED CRIME. Organized crime groups have often been associated with—and have often embraced—gambling, a cash business with high demand and good profits. Eastern crime syndicates were among the first to see the potential of Las Vegas, invest in it, and profit from it. At times they have infiltrated other segments of the legal gambling industry, such as horse racing. Strict regulations and crackdowns by law enforcement have been put into place to push them out. The federal Racketeer Influenced and Corrupt Organizations (RICO) Act enacted under the Crime Control Act in 1970 was designed to combat infiltration by organized crime into legitimate businesses, including gambling. Most analysts believe that these efforts have been largely successful at keeping mobsters from establishing or taking over legal gambling businesses.
Although they have been shut out of casino ownership and management roles, some organized crime figures have been caught infiltrating casinos in other ways, such as through labor unions and maintenance or food services. Law enforcement officials also believe that organized crime families have been involved in bribing state officials considering the extension or expansion of gambling options, particularly relating to electronic gambling machines.
The Nevada Gaming Commission and State Gaming Control Board maintains a list of people who are prohibited from gambling in Nevada. The state's "List of Excluded Persons," is more commonly known as "Nevada's Black Book." The list primarily includes crime family bosses, mob associates, and others linked in some way to organized crime. These people are considered so dangerous to the integrity of legal gambling that they are not allowed to set foot in a Nevada casino. The Nevada Gaming Commission and State Gaming Control Board publishes photographs of the people on the list at their Web site (http://gaming.nv.gov/loep_main.htm).
The most lucrative sector of the gambling industry for organized crime has been and continues to be illegal book-making and numbers games. Bookmaking is a gambling activity in which a bookmaker takes bets on the odds of a particular event occurring. The vast majority of bookmaking revolves around sporting events—for example, college and professional football and basketball games. Such wagering is extremely popular in the United States. Because sports bookmaking is legal only in Nevada, there is a large illegal market for it across the country. In 1999 the National Gambling Impact Study Commission Final Report estimated that $80 to $380 billion per year is wagered in illegal sports gambling in the United States.
Illegal numbers games are similar to lottery games in that players wager money on particular numbers to be selected in a drawing or by other means. Illegal numbers operators thrive in low-income areas of large cities, even those where legal lotteries are offered.
Gambling with mobsters has advantages and disadvantages. Gambling opportunities abound throughout neighborhoods in local shops and bars. The payoffs are higher than for legal activities, and no taxes are taken out of winnings. Of course, losing bettors face possible physical intimidation and/or bodily harm if they fail to pay their gambling debts. Loan-sharking, or the lending of money at exorbitant interest rates with the threat of violence for nonpayment, is also widely practiced by organized crime groups, particularly in areas where legal or illegal gambling occurs. Many gamblers in debt turn to loan sharks after legitimate means of obtaining money are exhausted. Perhaps most important, people who choose to participate in illegal gambling opportunities may have criminal charges filed against them if their activities are discovered.
OFFICE POOLS. Not all bookmaking is done through mobsters. Many enterprising entrepreneurs across the country run small-time illegal gambling books, mostly related to sporting events. Office pools, in which coworkers pool together small wagers on sports or office events (like when a baby is going to be born) are also extremely common. Although society does not generally consider private wagers and small-stakes office pools to be illegal gambling, the laws in most states do.
The Society for Human Resource Management (SHRM) conducted a February 1999 survey of 504 human resources professionals regarding workplace gambling. According to these respondents, football pools were the most common form of gambling in the workplace, with 58% of human resource professionals saying Super Bowl pools occur in their companies and 55% believing regular season football pools occur. Of those respondents who knew that their employees were gambling, a majority (56%) reported no ill effects on worker productivity related to this gambling. However, 25% were not sure of the effects. Another 13% felt that these gambling activities had a positive effect on worker productivity, and only 6% felt the gambling had a negative effect on productivity.
The survey respondents were also asked if their organizations had written policies regarding gambling activities at the workplace—23% of them did and 63% did not. Another 11% did not have written policies but had unwritten or "understood" policies. Of those with gambling policies, 59% indicated that the activities taking place were in violation of those policies. Another 21% said that their policies did not specifically prohibit, but did discourage, gambling activities. Only 16% of workplaces with gambling policies permitted these activities. Punishment for violating gambling policies fell into three categories: no official punishment (38%), formal reprimands (35%), and referral for counseling (19%).
In January 2002 the SHRM Web site released the results of an informal poll of 9,764 human resource professionals around the country. The poll found that 30% of the respondents reported that their organizations did not allow betting pools. Another 14% said that their organizations did allow betting pools. More than half of the respondents (57%) reported they were not worried about whether or not betting pools were taking place at their workplaces.
In "Office Betting Can Be Costly" (Business Review, July 2002), Joshua Hurwit reported that office gambling costs companies billions of dollars per year in lost productivity. Many companies are also unsure about the legality of office pools. A spokesperson for the New York attorney general explained that office pools are technically illegal in the state but not criminal "until a player generates a profit." Still, turning a blind eye to office pools can be legally dangerous for companies. The article describes a case in which a man fired by his company for selling stolen goods at work is contesting his firing on the grounds that the company openly permits another illegal activity at work—office pools.
Despite the widespread illegality of gambling, few people are actually arrested for engaging in it. According to the U.S. Department of Justice in Crime in the United States, and shown in Table 2.1, there were only 10,506 estimated arrests for gambling during 2002 out of more than 13.7 million total arrests. This is down slightly from 11,112 arrests in 2001.
Charities
REGULATION. Charitable gambling is the most widely practiced form of gambling allowed in the United States. As shown in Table 1.1 in Chapter 1, it was legal in forty-seven states as of September 2004, prohibited only in Arkansas, Hawaii, and Utah. In charitable gambling, a specified portion of the money raised (less prizes, expenses, and any state fees and taxes) goes to qualified charitable organizations. Such organizations include religious groups, fraternal organizations, veterans' groups, volunteer fire departments, parent-teacher organizations, civic and cultural groups, booster clubs, and other nonprofit organizations.
Generally, a charitable organization has to have been in existence for several years and obtain a state license for the gambling activity. Most states will only issue licenses to organizations that have been recognized by the Internal Revenue Service (IRS) as exempt from federal income tax under Tax Code section 501(c). Thousands of charitable organizations are registered to conduct gambling around the country.
In some states charitable gambling activity is unregulated or not under the control of a central regulatory authority. In most states charitable gambling is regulated by state governments, but not uniformly under the same department. Many states regulate charitable gambling under their Department of Revenue, while others use their Department of State, public safety department, state police, alcohol control board, or lottery, gaming, or racing commission. Administrative fees and taxes are levied in most states.
TABLE 2.1
| Estimated arrests, 2002 | |
| 1Does not include suspicion. | |
| 2Violent crimes are offenses of murder, forcible rape, robbery, and aggravated assault. | |
| 3Property crimes are offenses of burglary, larceny-theft, motor vehicle theft, and arson. | |
| 4Includes arson. | |
| SOURCE: "Table 29. Estimated Arrests, United States, 2002," in Crime in the United States, U.S. Department of Justice, Federal Bureau of Investigation, October 27, 2003, http://www.fbi.gov/ucr/cius_02/pdf/4sectionfour.pdf (accessed September 28, 2004) | |
| Total1 | 13,741,438 |
| Murder and nonnegligent manslaughter | 14,158 |
| Forcible rape | 28,288 |
| Robbery | 105,774 |
| Aggravated assault | 472,290 |
| Burglary | 288,291 |
| Larceny-theft | 1,160,085 |
| Motor vehicle theft | 148,943 |
| Arson | 16,635 |
| Violent crime2 | 620,510 |
| Property crime3 | 1,613,954 |
| Crime Index4 | 2,234,464 |
| Other assaults | 1,288,682 |
| Forgery and counterfeiting | 115,735 |
| Fraud | 337,404 |
| Embezzlement | 18,552 |
| Stolen property; buying, receiving, possessing | 126,422 |
| Vandalism | 276,697 |
| Weapons; carrying, possessing, etc. | 164,446 |
| Prostitution and commercialized vice | 79,733 |
| Sex offenses (except forcible rape and prostitution) | 95,066 |
| Drug abuse violations | 1,538,813 |
| Gambling | 10,506 |
| Offenses against the family and children | 140,286 |
| Driving under the influence | 1,461,746 |
| Liquor laws | 653,819 |
| Drunkenness | 572,735 |
| Disorderly conduct | 669,938 |
| Vagrancy | 27,295 |
| All other offenses | 3,662,159 |
| Suspicion | 8,899 |
| Curfew and loitering law violations | 141,252 |
| Runaways | 125,688 |
Due to inconsistencies in state oversight it is difficult to determine the complete extent of charitable gambling in the United States. The American Gaming Association estimates that $2.67 billion was wagered on charitable games in 2003.
Typical games allowed include bingo (the most common), pull tabs, raffles, paddlewheels, tipboards (which are similar to punchboards), and card games like poker or blackjack. Slot machines, roulette, craps, and baccarat are generally not permitted. There are usually limits on the value of cash prizes that can be awarded in each game. Different states differ in which gambling games they allow for charity fundraising; for example, California only allows bingo games.
In 2004 Tennessee became the latest state to permit charitable gambling. During the 1970s and 1980s charitable gambling took place in the state as lawmakers argued about whether it violated the state's constitutional ban on lotteries. In 1987 The Tennessean newspaper and other media outlets reported widespread scandal and fraud in the industry. They alleged that professional gamblers were setting up phony charities and bribing legislators to look the other way. The so-called Rocky Top Scandal resulted in federal investigations of bingo operators in 1989 and 1990. Several people were indicted, and two public officials committed suicide. In 1989 the state's supreme court ruled that bingo was a lottery and outlawed it. In 2002 Tennessee voters approved a state lottery and reauthorized gambling for charitable purposes. Legislation regulating charitable gambling activities became final in early 2004.
This leaves only three states that prohibit charitable gambling—Hawaii, Utah, and Arkansas. Hawaii and Utah prohibit all types of gambling. Although charitable gambling is illegal in Arkansas, some conservative ministers have complained that bingo parlors operate openly in the state. Law enforcement officials have stated publicly that enforcement of the bingo ban is low on their priority list.
The National Association of Fundraising Ticket Manufacturers (NAFTM) is a trade association representing companies that manufacture bingo paper, pull tabs, and other supplies used in the charitable gambling industry. In 2003 NAFTM published Charity Gaming in North America: 2002 Annual Report, which included statistics on charitable gambling in twenty-nine states. The report stated that $2.8 billion was wagered on charitable gaming in these twenty-nine states during 2002. The top five states were Minnesota ($1.4 billion), Washington ($888 million), Kentucky ($607 million), Indiana ($583 million), and Texas ($556 million). On average prize payouts accounted for 71% of gross receipts. Another 16% went to expenses and 3% to taxes and fees. This left 10% as net profit to charitable organizations.
According to the NAFTM nearly all states charge organizations licensing fees to conduct charitable gambling events. For example, South Carolina charges a onetime fee of $1,000. Some states charge a fee per event, while others charge a set weekly, monthly, or yearly fee. These fees generally run from $10 to $100. A handful of states base the licensing fee on the amount of gross receipts, so these fees can be thousands of dollars. Most states also impose a gaming tax on the proceeds from charitable gambling and/or collect administrative fees. Most states allocate all or a portion of these revenues to their general fund or the agency overseeing charitable gambling. A few states split the money with local law enforcement agencies.
MINNESOTA. It is widely believed that Minnesota has the highest gross receipts from charitable gambling of any state and probably accounts for around half of all money wagered in the United States for this purpose. The activity is regulated by the Minnesota Gambling Control Board. According to the Annual Report of the Minnesota Gambling Control Board: Fiscal Year 2003, charity gambling raised $1.4 billion during fiscal year 2003, down slightly from $1.435 billion in 2002. The amount wagered increased by 12% between 1994 and 2003. Total prizes paid out amounted to $1.164 billion in 2003, making up 82% of gross receipts. Another 9% went to expenses, while 4% went to pay state taxes. This left 5% ($67 million) for the charities.
In January 2004 Joon Kyu Kim, the former president of a Minnesota charitable gambling organization, was arrested for using nearly half a million dollars of the organization's gambling funds to finance personal investments. Minnesota law requires that all proceeds from charitable gambling go to charitable causes, taxes, and operating expenses. Kim faces up to twenty-five years in prison if convicted of the charges.
The Government
The government includes federal, tribal, state, and local agencies that collect money from gambling operations. This happens primarily through the collection of taxes and fees and, in some cases, through the supply of gambling opportunities. Because the money raised is spent on public projects, many Americans are ultimately affected by the government's involvement in gambling.
THE FEDERAL GOVERNMENT. The primary means by which the federal government makes money from the gambling industry is by taxing winning gamblers and gambling operators. Gamblers must declare their gambling winnings when they file their personal income taxes. They get to subtract their gambling losses, but they must keep thorough records and have receipts (if possible) to prove their losses. For racetrack gamblers, this means saving losing betting slips and keeping a gambling diary of dates, events, and amounts. Casino gamblers who use electronic "slot club" cards can get a detailed printout of their playing history from the casino.
Gambling operators, like all companies, are subject to corporate taxes. They are required to report winnings that meet certain criteria to the IRS. (See Table 2.2.) The gambling operator must withhold income tax from winnings of more than $5,000 if the winnings are at least three hundred times the amount of the bet. This applies to sweepstakes, wagering pools, lotteries, and any other wager where the proceeds are at least three hundred times the amount of the bet. The withholding rate is generally 25%. However, 28% is withheld from the winnings of gamblers who do not provide the payer with their social security numbers. Gamblers who win noncash prizes (like cars or other merchandise) have to pay tax on the fair market value of the item.
The federal government is itself in the gambling business. The U.S. Department of Defense (DOD) operates
TABLE 2.2
| Gambling winnings that must be reported to the Internal Revenue Service, 2004 | |
| Type of game | Amount of prize paid is equal to or greater than: |
| SOURCE: Adapted from 2003 Instructions for Forms W-2G and 5754, Internal Revenue Service, 2004 | |
| Lotteries, sweepstakes, horse races, dog races, instant bingo game prizes/pull-tabs, jai alai and other wagering transactions | $600 and prize is at least 300 times wager |
| Bingo | $1,200 |
| Slot machines | $1,200 |
| Keno | $1,500 |
approximately eight thousand slot machines at U.S. military bases overseas. According to Jeremy Kirk in "Slot Machines Pay MWR Bills, but Some Worry about Effects on Servicemembers" (Stars and Stripes, March 18, 2001), 6,200 slot machines were operated in 2001 by the U.S. Army, Navy, and Marines in South Korea, Europe, Okinawa, and mainland Japan that brought in revenues of nearly $91 million a year. In "Base Habit? Air Force Runs 24 'Casinos'" (Deseret News, September 23, 2001), Lee Davidson reported that the Air Force operated another 1,580 slot machines in 2001 that made about $29 million per year. Thus, military-operated slot machines bring in revenues of about $120 million per year. Based on an average payout figure of 92.5% (as reported by the DOD), this means the gross amount wagered on the military slot machines is around $1.6 billion per year.
As part of the Fiscal Year 2001 National Defense Authorization Act, Congress required the DOD to prepare a report on the effects of slot machine operations on those who use them. The result was Report on the Effect of the Ready Availability of Slot Machines on Members of the Armed Forces, Their Dependents, and Others (November 5, 2001). The DOD report states that slot machines are offered at certain overseas bases unless prohibited by the laws of the host nation. The games are restricted to nickel and quarter denominations. Revenues from the machines fund activity centers, clubs, golf courses, bowling alleys, and other recreational and entertainment projects on overseas and U.S. bases. The report contains no data on the number of machines operated, the amount of revenue they generate, or the number of customers who use them. However, it concludes that the machines are beneficial to the armed services by building morale and providing recreation and have no detrimental effects.
In May 2002 Mark Mazzetti criticized the DOD report in "Uncle Sam's One-Armed Bandits" (U.S. News & World Report, May 20, 2002), asserting the report was prepared by the military's Morale, Welfare, and Recreation Department—the very department that receives the revenues from slot machine operations. The article tells the story of an Air Force sergeant stationed at Osan Air Base in South Korea who wrote $14,000 worth of bad checks to finance her gambling habit at the base's slot machines. The woman said she began gambling to ease her depression and loneliness at being so far from home.
In 2003 military-operated slot machines were criticized by John Kindt, a professor of business and legal policy at the University of Illinois at Urbana-Champaign ("Gambling with Terrorism and U.S. Military Readiness: Time to Ban Video Gambling Devices on U. S. Military Bases and Facilities," Northern Illinois Law Review, 2003). Kindt noted that a 2001 DOD survey found that approximately 30,000 military personnel had potentially serious gambling problems. He questioned the wisdom of the U.S. military providing gambling opportunities on bases, even though they are intended for recreational purposes.
STATE GOVERNMENTS. State governments make money from the legal gambling enterprises operated within their borders. These enterprises include lotteries, commercial casinos, horse and dog races, jai alai games, card rooms, charitable gambling, and video machine gambling. Only lotteries are operated by state governments. All other gambling options are operated by other parties.
Forty states operate lotteries. On average, they keep half of all money spent on lottery tickets. This leaves only ten states without lotteries as of mid-2004: Alabama, Alaska, Arkansas, Hawaii, Mississippi, Nevada, North Carolina, Oklahoma, Utah, and Wyoming.
As of August 2004 there were no state-owned casinos in the United States. However, several states have expressed interest in such ventures. In May 2001 Minnesota Senate Minority Leader Dick Day proposed that the state open its own casino to compete with the profitable casinos operated on Native American reservations. Day's proposed legislation called for hiring a private entity to manage the casino, but the state's constitution would first have to be changed. The proposal was opposed by conservative and religious groups and by Native American tribes and was ultimately vetoed. In 2003 the Minnesota legislature declined to pass a plan that would have placed a state-owned casino at one of the state's existing horse race tracks. Native American tribes engaged in gaming in Minnesota argued against the proposal claiming it would take money and jobs away from tribal casinos.
In April 2003 Governor Rod Blagojevich of Illinois proposed that the state take over ownership of the casinos operating commercially in Illinois and hire private firms to manage them. The idea was vigorously opposed by the state's gambling industry. At the time Illinois was facing a $5 billion budget deficit and desperately needed to raise funds.
In January 2004 Governor Kathleen Sebelius of Kansas announced an initiative for five state-owned casinos to be run by a private management firm operating
TABLE 2.3
| State gambling legislative developments, January–August 23, 2004 | |
| State | 2004 gambling developments |
| SOURCE: Adapted from "Gambling Developments in the States—2004," in Gambling Developments in the States—2004, National Conference of State Legislatures, August 23, 2004, http://www.ncsl.org/programs/econ/gamblingdev04.htm (accessed August 26, 2004) | |
| Alabama | Failed: Constitutional amendment to repeal state's ban on lotteries and full-fledged casinos. |
| Failed: Electronic bingo at the state's four racetracks. | |
| Alaska | Failed: Single casino in Anchorage. |
| Failed: Taxation of gambling on cruise ships. | |
| California | Enacted: A bill creating new state compacts with five Indian Tribes in California. Agreeing to pay into two state revenue streams, the tribes may now operate an unlimited amount of slot machines and are guaranteed exclusive rights to slots operations in the state. |
| District of Columbia | Failed: Petition drive to include a question on the legalization of slot machines on the November ballot. |
| Florida | Failed: Regulation of gambling arcades. |
| Failed: Allow charities, religious and veteran's groups to sell lottery-style bingo tickets. | |
| Georgia | Failed: Online lottery. |
| Indiana | Failed: House Bill 1188 would have allowed 1,000 electronic pull-tab machines at each of the state's horse tracks and 1,500 at betting parlors. |
| Iowa | Enacted: Comprehensive gambling bill that allows the introduction of table games at racinos, ends cruise requirements for riverboat casinos, and allows the gaming commission to issue an unlimited number of casino licenses. This bill also prohibits a riverboat casino in downtown Des Moines. |
| Kansas | Failed: At least three different proposals with various combinations of casinos, slots at tracks, slots at fraternal organizations and slots at other locations such as bowling alleys and driving ranges. |
| Kentucky | Failed: A bill providing for a statewide vote on a constitutional amendment allowing expanded gambling at existing racetracks. |
| Maine | Enacted: A bill that provides for the implementation and regulation of slots at racetracks. A ballot initiative allowing slots at racetracks was passed by voters in November, 2003. This bill creates the Gambling Control Board and Advisory Council, and establishes a casino revenue distribution formula. |
| Maryland | Failed: 11,500 video lottery machines at four horse racing tracks, 4,000 at two stand-alone facilities along the Interstate 95 corridor. |
| Michigan | Enacted: House Bill 4612, increases the state wagering tax on Detroit Casinos from 18 to 24 percent. |
| Failed: Video Lottery Terminals at racetracks. | |
| Minnesota | Failed: Allow racetrack to add casino. |
| Failed: Allow existing card club to increase the maximum number of tables from 50 to 100. | |
| Missouri | Failed: August ballot proposal expanding legal riverboat casino locations beyond the Missouri and Mississippi rivers. |
| Nebraska | Enacted: Bill allowing ballot measure question on constitutional amendments to allow two casinos in the state. The question will appear as on the November ballot as Amendment 3. |
| New Jersey | Enacted: A bill gradually rolling back an existing 4.25 percent tax on complimentary benefits given by casinos to high wagering guests. |
| New York | Implemented: Video lottery machines in at least two racetracks. |
| Failed: Video lottery machines on ferries between Rochester and Toronto. | |
| Failed: Proposal to expand the availability of the video numbers game "Quick Draw" to more restaurants and taverns by removing food sale percentage requirements in current legislation. | |
| North Dakota | Implemented: State joins Powerball. |
| Ohio | Failed: Bill that would put ballot question of a constitutional amendment allowing 2,150 video lottery machines at each of Ohio's seven racetracks to voters. |
| Oklahoma | Enacted: Senate Bill 553 allows electronic bingo terminals at three racetracks. |
| Pennsylvania | Enacted: Legislation allowing up to 61,000 slot machines at seven racetracks, five slots casinos and two resorts. |
| Rhode Island | Failed: A bill for a state-wide referendum on allowing Indian Casino for Narragansett tribe in greater Providence area. After a legislative override of the Governor's veto of the bill, the state Supreme Court ruled that the proposed ballot question violated the state constitution. |
| Tennessee | Implemented: Tennessee Lottery began operations in January 2004. State also became 26th lottery nationwide to join Powerball. |
| Enacted: Limited charitable gaming now allowed. | |
| Failed: Warning labels of gambling addiction possibility on lotto tickets and at distribution points of gambling addiction. | |
| Texas | Failed: Up to 40,000 video lottery terminals at seven existing tracks. |
under the direction of the state's lottery commission. The plan calls for voters to make the final decisions about allowing state-owned casinos in their communities. Legislative leaders expressed concerns over the governor's plan with some indicating their opposition to expanding gambling in the state.
The National Conference of State Legislatures (NCSL) is a bipartisan organization that conducts research for state legislators and policymakers. The NCSL publishes at its Web site (www.ncsl.org) updates on gambling legislation at the state level. Table 2.3 summarizes gambling legislation that failed or was enacted and implemented in 2004. The list was current as of August 23, 2004.
TRIBAL GOVERNMENTS. Native American tribes that have been officially recognized by the U.S. government are considered sovereign nations, or free from external control. Tribal sovereignty means that to a certain extent tribes govern themselves. In 1988 the U.S. Congress passed the Indian Gaming Regulatory Act, which allows federally recognized tribes to open gambling establishments if the state in which they are located already permits certain types of legalized gambling.
Casinos operated by more than two hundred Native American tribes made $16.7 billion during 2003, accounting for 38% of the U.S. casino market. The Indian Gaming Regulatory Act requires that net revenues from tribal gaming be used in five specific areas:
- To fund tribal government operations or programs
- To provide for the general welfare of the tribe and its members
- To promote tribal economic development
- To donate to charitable organizations
- To help fund operations of local government agencies
According to statistics provided on the Web site of the National Indian Gaming Association (www.indiangaming.org), during 2003 three-fourths of the tribes operating casinos allocated all gambling revenue to tribal governmental services, economic and community development, neighboring communities, and charitable purposes. Tribal governments have used gambling revenues to build health clinics, schools, houses, and community centers, and to provide educational scholarships and social services for their members.
LOCAL GOVERNMENTS. Local governments in some states collect taxes and fees from gambling activities operated within their jurisdictions. This is particularly true for casinos and racetracks.
New York City is a particularly active player in the gambling industry. In 1970 the New York City Off-Track Betting (NYCOTB) Corporation was founded as the first legal offtrack pari-mutuel wagering operation in the country. Although the NYCOTB is a government entity, it operates as a private enterprise that turns over profits to the taxpayers.
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