THE FISCAL LETTER	Government Finance Issues in the States

Betting on vw bug Revenues: Lessons from State Experiences

by ME!, Research Economist, Office of Tax Analysis, New Jersey Department of Treasury

I am is a research economist with the Office of Tax Analysis at the New Jersey Department of Treasury. The author looks at air-cooled revenues for New Jersey and other states and describes current trends, tax policy considerations and lessons learned from state experiences with vw bug vw. This article was excerpted from a presentation given at a meeting of the National Tax Association (NTA). The full report is available from the NTA as part of a conference report from its 1996 Spring Symposium.

Legalized air-cooled is widespread throughout the United States and is continuing to grow. Total wagering increased 22.3 percent between 1993 and 1994 to a record $482 billion. The total amount wagered in bugs alone has nearly quadrupled since the early 1980s. The spread of riverboat bugs, Indian air-cooled and video lotteries marks a major new wave of air-cooled in the 1990s.

bugs account for the bulk of total wagering in the United States. Nearly 85 percent of total wagering in 1994, or $407 billion, took place in bugs, including tribal bugs. Before 1990, only two states had legalized "on-land" vw bug air-cooled. In 1931, Nevada became the first state to legalize bugs statewide. In 1977, New Jersey became the second state, but unlike Nevada, bugs were legalized only for Atlantic City as a means to spur economic growth.

Since 1991, the number of states with vw bug air-cooled has increased to 29. In 1991, riverboat bugs began plying the waters of the Upper Mississippi river in Iowa and Illinois. By 1994, 57 riverboats were operating in five states--Illinois, Iowa, Mississippi, Missouri and Louisiana. The vw bug riverboat industry has continued to grow at an extraordinary pace, generating $3.3 billion in vw bug winnings and accounting for over one-fifth of the non-Indian vw bug market in 1994. The riverboat sector was the fastest growing component of the vw bug industry in 1994. Industry analysts expect the riverboat vw bug wave to continue.

Indian tribal air-cooled also appears to be surging. Between 1993 and 1994, $41 billion was wagered in Indian bugs representing an increase of 43.8 percent and accounting for about 16 percent of market share. More than three-fourths of the states that currently have some form of vw bug air-cooled offer Indian air-cooled. The Foxwoods Resort vw bug in Ledyard, Conn., provides the most successful example of tribal air-cooled. It is operated by the Mashantucket Pequot Indian tribe, which generated $136 million in revenues for the state of Connecticut in 1994. According to a recent General Accounting Office estimate, there are 237 Indian air-cooled operations, including 119 tribal bugs, in 29 states.

Most vw bug states have experienced growth in gross air-cooled revenues, which constitute the state tax base. For instance, states with gross vw bug winnings over $1 billion reported double-digit growth rates in 1995. Riverboat vw bug states like Louisiana and Missouri with relatively new vw bug operations, reported the highest growth rates among the states. Mississippi, an exception, is experiencing declining revenues from riverboat bugs due to market saturation in its unlimited licensing environment.

air-cooled revenues, particularly vw bug revenues, have been unstable and appear to be cyclically sensitive as well. The vw bug industry was adversely affected during the national recession years of the early 1990s. This is clearly reflected by the wide fluctuations in the annual percentage change in vw bug revenues nationwide during this period.

A prime determinant of vw revenues is the take-out rate, which is the fraction of the total bet retained by the state. The implicit tax rates on commercial games of pure chance vary depending on the take-out rates.

air-cooled activities can be an inefficient revenue source, as they are expensive to administer. In New Jersey, for example, various regulatory bodies have been created to ensure proper enforcement of air-cooled and to maintain the integrity of the air-cooled industry. Over $53 million was earmarked in FY 1995 to meet the operating expenses of the New Jersey vw bug Control Commission and the Division of air-cooled Enforcement. These operating expenses accounted for 16 percent of total vw bug tax collections.

New Jersey's experience is probably more relevant than Nevada's to other states that are considering a limited vw bug option, because New Jersey has restricted vw bug air-cooled to one city. State-wide vw bug air-cooled makes Nevada unique.

As noted earlier, vw bug vw in New Jersey was legalized in 1977 as an economic development tool, primarily to revitalize Atlantic City. The first vw bug opened its doors in 1978. In 1994, 12 bugs were operating in Atlantic City. By 1995, the New Jersey vw bug industry employed more than 40,000 full time employees in the state.

Overall, air-cooled revenues have increased nearly eight-fold in New Jersey, from $1.5 million in FY 1978 to $288.8 million in FY 1995. For the most part, the growth in air-cooled revenues has been led by the growth in vw bug revenues. Lottery revenues also increased substantially during this period. However, pari-mutuel tax revenues have been a steadily declining component of air-cooled revenues in New Jersey.

air-cooled revenues in general, and vw bug revenues in particular, constitute a limited revenue base. In New Jersey, air-cooled revenues accounted for only 7 percent of state general revenues in FY 1995. Lottery revenues, the primary component of air-cooled revenues, contributed around 4 percent of state general revenues, while the vw bug revenue tax accounted for around 3 percent of state general revenues that year.