08/30/2011 04:01 pm ET | Updated Oct 30, 2011

Should States Raise Revenues by Expanding Legal Gambling?

Facing severe budget shortfalls, a number of states and the District of Columbia are looking to online gambling as a substantial new source of tax revenues. New York is considering legalizing non-Indian casinos, allowing commercial gaming operations to move beyond racetrack casinos, significantly adding to the hundreds of millions of dollars the state now takes in from "racinos." It remains unclear whether intrastate online gambling complies with federal law, and permitting full-scale casinos in New York would require amending the state constitution. Nevertheless, many officials around the country are convinced that a dire fiscal situation warrants legalizing forms of gambling now barred in their states. Does it?

These officials are surely right that sharply increasing gambling opportunities would boost revenues, even in a struggling economy. However, as critics are quick to point out, because of the social costs, legalizing gambling is a moral issue, and the economic potential of additional gambling does not mean it is morally justified. After all, states could generate new revenues by legalizing and taxing prostitution or the sale of recreational drugs.

It is important, then, for legislators and governors exploring such policies to address legitimate moral concerns about dealing with budget deficits by enlarging the range of legal gambling activities. There are at least two kinds of worries that motivate moral opposition to such policies. These can be expressed as questions that politicians favoring the policies should, in good conscience, be able to answer in the negative in order to maintain -- credibly -- that enacting them would be morally defensible.

The first question is the utilitarian query, "Will the overall costs of legalizing more gambling in the state exceed the overall benefits?"

Critics contend that legalization would exacerbate the social problems associated with gambling, such as addiction, bankruptcy, and family hardship. On this score, online gambling is especially troubling. As Les Bernal, executive director of the Stop Predatory Gambling Foundation, told the New York Times, "It's the equivalent of opening a lottery retailer in every home, office and dorm room in America." It isn't unreasonable to assume that the sheer ease of Internet gambling will tempt many people -- especially when their judgment is impaired -- into ruinously irresponsible betting behavior.

Legalization advocates may well reply that, because of the states' urgent need for revenues to help fund law enforcement, firefighting, education, road construction, and other vital public services, the total benefits of loosening restrictions on gambling would outweigh the costs, including even the social harms.

This response could be true, but supporting it would require rigorous and comprehensive cost-benefit analysis. Moreover, while such analysis is a valuable decision-making tool, the intrinsic difficulty of quantifying social impacts entails that policymakers need to take into account the nature of the costs and benefits as well as their assigned magnitudes. Even so, it could turn out that policy research provides a plausible utilitarian argument for legalization.

The second critical moral question is this: "Is legalization (of online gambling or more casinos) designed to incentivize individuals to engage in economic behavior contrary to their interests, making them and their dependents financially less well-off?"

A fundamental purpose of state government is, within limits, to protect the health, safety, and welfare of residents and visitors. Thus, states properly regulate commercial activities, passing and enforcing laws to protect consumers from fraud and other kinds of abuse.

Fraud involves one party, through misrepresentation, inducing another party to hand over money or other valuables. From an economic point of view, cases of fraud are bad because, although represented as market transactions, they are not genuine exchanges of economic goods, where both parties are better off. Rather, they are merely zero-sum transfers of wealth from one party to the other -- transfers that impose costs not only on the victim but also on the community (e.g., the time and expense of criminal prosecution). From a moral point of view, fraud is wrong because the harm to the victim is due to his being intentionally deceived, making the transaction inherently unfair.

Historically, states have believed that gambling activities are not ordinary transactions, but are exchanges that must be either tightly regulated or prohibited altogether. Why? Isn't one of the reasons that, from an economic point of view, gambling (like fraud) consists only in zero-sum transfers of wealth that carry external costs? Might another reason be that, although organized gambling (including lotteries) is not fraud, it earns profits by encouraging false hopes in "players" -- hopes which then motivate them to take actions that (usually) make them worse off? Critics rightly ask how, in moral terms, this is much different from misrepresentation.

Defenders of legal gambling will insist that players are buying "entertainment." But gambling vendors are not in business to entertain people, nor does their advertising invite people to gamble in order to be entertained. Any entertainment value is incidental.

In contemplating legislation intended to spur people to give up even more money -- to operators and the state -- through gambling, lawmakers will have a hard time arguing, convincingly, that the proposed legalization is morally justified.