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Tax revenue to be gained from internet gambling isn't worth social costs

Tax revenue to be gained from internet gambling isn't worth social costs

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June 6 Daily News editorial

Budget concerns are driving a new congressional push to legalize and tax Internet gambling. Rep. Barney Frank, D-Mass., is promoting legislation that would license and regulate online betting. Rep. Jim McDermott, D-Wash., has offered a bill to provide for federal and state taxes on Internet gambling.

McDermott likens the federal ban on Internet gambling to prohibition of alcohol, according to The Associated Press. "Regulation and taxation have proven to be better policy for our country when it comes to alcohol," the Washington Democrat reportedly said during a recent hearing on his bill. "The same is true for online gambling."

It's a seductive argument, at first blush. Despite the federal ban on Internet gambling, Americans wager tens of billions of dollars annually online in games run by offshore operators. And McDermott says his bill would bring in some $42 billion in new tax revenue over the next 10 years. But we're not convinced. Refusing to license domestic online gambling sites does not equate to the nation's ill-fated experiment with prohibition of alcohol. And the promise of $42 billion more in federal coffers over the next decade is not nearly enough to cause us to set aside our misgivings over this revenue source.

Gambling may be an increasingly tempting source of revenue for federal budget writers, as it has been for state legislatures, but it's poor public policy and poor tax policy. This has become apparent in Washington, Oregon and so many other states that have become addicted to gambling revenue over the past 20 or more years.

Gambling revenue is tax revenue, notwithstanding the efforts of its proponents to portray it as "profits." It tends to be a regressive tax, falling heaviest on those less able to afford it. In 2006, a National Gambling Impact Study Commission found that, while people of all income levels played state lottery games, those with incomes under $10,000 a year spent almost three times as much on the games than those with incomes upwards of $50,000 a year.

The lottery tax violates two basic principles of sound tax policy, according to the Washington, D.C.-based Tax Foundation. It is neither transparent nor neutral. There is no real transparency when lottery taxes are called "profits" and the source of the tax revenue is promoted as recreation. And neutral taxes do not encourage the consumption of one good over another and tax that favored good at higher rates, as do lotteries. The end result, according to the Tax Foundation, is a lower payout rate - the amount a gambler wins as a percentage of the money wagered.

Lottery is a poor source of revenue for state government. It's a tax with unwelcome consequences, as we are reminded each time our state lawmakers announce how much is being set aside to treat problem gamblers. A federal tax on Internet gambling invites still more social problems. Tech-savvy adolescents probably would have little difficulty getting around any safeguards against minors participating in online betting. And studies have shown that adolescents and young adults are particularly susceptible to problem gambling.

Most observers predict that this effort to legalize and tax Internet gambling will go nowhere. Significantly, Senate Majority Leader Harry Reid, D-Nev., has said he opposes Internet gambling. That's encouraging - for now. Unfortunately, we can be pretty sure that this push for the quick budget fix is not going away.

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