Money  /  Explainer

Sports Gambling Could Be the Pandemic’s Biggest Winner

But it probably won’t be the savior some expect.

Over the past 11 months, the coronavirus pandemic has wreaked havoc on state budgets. From massive losses in tax revenue to the substantial costs of fighting the virus and supporting those struggling with unemployment, states may need years to recover financially. A Wall Street Journal headline in October offered a dire warning: “U.S. States Face Biggest Cash Crisis Since the Great Depression.”

In multiple states, one option has emerged to address this fiscal crisis: legalized gambling. In 2017, the Supreme Court ruled that states have the right to decide the status of sports betting for themselves. Over the past four years, more than two dozen states — from New Hampshire to New Mexico — have legalized sports betting, either online, at casinos or both.

The economic fallout of the coronavirus has sped up momentum for sports gambling. Voters in Louisiana, Maryland and South Dakota approved sports-betting ballot measures in November, while legislators in Virginia and Washington state enacted bills earlier last year. New York Gov. Andrew M. Cuomo (D) recently reversed his opposition to online sports gambling due to the projected multibillion-dollar shortfall in his state’s budget, and the pandemic has generated enthusiasm for legislation in California, Connecticut, Missouri and numerous other states. The Super Bowl is the country’s largest sports-betting event of the year, and Sunday’s big game may provide another impetus for states to try to cash in on gambling revenue.

The recent spread of sports betting is not surprising, as state governments have long turned to legalized gambling to address financial problems during economic crises. During the Great Depression and then again in the 1970s and 1990s, states went to the gambling well to address budget issues.

But the history of gambling offers a note of caution for legislators. While gambling revenue has obvious appeal, it can provide only a fraction of state income and should not stand in the way of more fundamental measures to address state fiscal problems.

At the turn of the 20th century, legalized gambling was on the run in the United States. Amid a surge of progressive moralism, many believed that betting harmed the poor, degraded the national work ethic and undermined Christian values. In the 1890s, Congress cracked down on the last state-chartered lottery — the notoriously corrupt Louisiana State Lottery Company — and a number of states banned betting on horse racing, one of the only forms of wagering that remained legal. Even Nevada, which had permitted gambling since 1869, banned it in 1909.

However, anti-gambling values were no match for the promise of tax-free government revenue, and the Great Depression led to a massive wave of gambling legalization. With the advent of pari-mutuel betting — which allowed players to bet against one another without the involvement of a bookkeeper — numerous states reauthorized horse-race betting, including 10 states in 1933 alone. Budget problems reached the point that four states even legalized slot machines, which one Kansas judge had only a few years earlier dubbed “the most vicious form of gambling.” Nevada lifted its ban on legalized commercial gambling in 1931, setting the state on a path to becoming the nation’s postwar oasis of legal vice.

After the Depression ended, the spread of legalized gambling — except for charitable bingo — slowed. Gambling fell out of favor in the aftermath of the 1950-1951 Kefauver Committee investigation that revealed the mob’s ties to illegal betting. According to Sen. Estes Kefauver (D-Tenn.), who led the committee, gambling was not just an activity that corrupted individual participants — as the progressives of the early 1900s had alleged — it was also the source of organized crime’s influence across American society.

Yet, as postwar economic growth began to slow in the 1960s, states once again turned to gambling, this time hoping to finance the combination of generous public services and low taxes that citizens had come to expect. By the 1970s, population growth, coupled with rising inflation and competition from rebuilt overseas economies, led to budget problems for state governments. Deficits rose and surpluses shrank or disappeared. Lawmakers were forced to reckon with enacting unpopular tax increases or even less popular cuts to government programs. Massachusetts state legislator Anthony Scibelli declared in 1972 that the commonwealth was “on the brink of financial disaster.”

That year, rather than address citizens’ unrealistic expectations for the state budget, the Bay State began selling tickets for the nation’s fourth state-run lottery. Lotteries embodied legislators’ and taxpayers’ hopes that the postwar low-tax/big government arrangement could continue despite shifting economic conditions. Expectations were high. A “lottery operated by the state could raise enough revenue to permit reducing taxes,” a West Belmar, N.J., resident wrote to the local newspaper in 1964. “New Jersey could have larger and better schools, better hospitals, and provide senior housing and medical care for the senior citizens.”

Unsurprisingly, lotteries could not come close to meeting these lofty goals. Few proponents had considered that actual net profits for the state represented only a fraction of gross sales, at the time around 45 percent, and today about 27 percent.

In most states, lotteries accounted for about 2 percent of total revenue, a significant sum, to be sure, but hardly enough to offset a tax reduction and meaningfully bolster government expenditures. New Jersey’s lottery commissioner confessed in 1971: “I don’t think lotteries will solve the financial woes of the states, nor are they the salvation of the taxpayers. They simply don’t generate enough money.”

The lottery disappointment did not dampen public enthusiasm for legalized gambling as a quick solution to budget problems. In the 1980s and 1990s, high poverty rates and rampant unemployment on tribal lands led to the construction of casinos on Native American reservations. For select residents of certain tribes and for specific tribal governments, reservation casinos provide perhaps the only example of gambling revenue actually meeting expectations as a tool of economic development.

Starting in the 1990s, states sought to replicate the tribal model, gradually enabling nonreservation casinos to promote stagnant economies. Rather than invest in job-training programs or provide aid to communities hurt by deindustrialization, cities like Detroit, Gary, Ind., and Bethlehem, Pa., became the sites of new casinos and riverboats. While gambling created jobs and raised state revenue, a federal commission wrote in 1999 that the expansion of gambling had created “walled-off oases of prosperity surrounded by blighted communities.”

Gambling is not a panacea, and, as history reveals, it never has been. The profits are small relative to states’ overall income, and while many bettors play casually, the improved access that comes with state approval can also lead to an increase in problem gambling. Some games — especially lotteries — appeal disproportionately to less educated, lower-income and non-White players.

While legalized gambling has seen ebbs and flows over the course of American history, no state has enacted a major gambling prohibition in more than a century. The coronavirus pandemic — and the inevitable headlines about the total amount bet on Sunday’s Super Bowl — probably will prompt even more legislators to take a close look at sports betting.

But while the possibility of new, creative sources of revenue is appealing, fixing budget deficits also requires addressing underlying issues, such as ensuring the wealthy pay their fair share in taxes. After all, states have bet big on betting and, in most cases, are still waiting for the long-shot wager to pay off.