What’s the best way for a city to handle a projected $300 million budget deficit? Detroit Mayor Kwame Kilpatrick has a controversial solution to his city’s budget woes: a tax on gambling winnings at the city’s casinos.
Earlier this month, the Detroit Free Press reported that Kilpatrick, after abandoning his fast-food tax proposal, intends to ask the legislature to approve the application of Detroit’s income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to gambling winnings, with a rate of 2.5% for residents and 1.25% for nonresidents.
Kilpatrick ‘s plan will face some hurdles. First, even though the city can tax residents’ winnings, forcing casinos to collect the tax would require changes in state law.
Second, Detroit would have a hard time justifying a gambling tax on nonresidents. Although the city taxes income earned by professional athletes and others who travel to Detroit for business, gambling is not a profession for most casino patrons. Applying local or state income taxes to nonresident workers is also poor tax policy for a number of reasons, including increased tax complexity and compliance costs.
This is not the first time Detroit and Michigan have turned to gambling to solve their budget crises. When Michigan voters approved legislation authorizing casinos, they did so in part for tax relief, hoping casinos would generate tax revenue and shift some of the burden away from individuals.
Detroit’s three casinos, which comprise the nation’s sixth-largest casino market in terms of gross revenue, collect Michigan income taxes and pay a 24-percent tax on adjusted gross receipts, which is shared by the city and state—$279.4 million in 2004. The rate was originally 18 percent, but legislators raised it last year to help balance the budget.
Using gambling taxes of any type—whether on casinos, slot machines at state racetracks, or state-run lotteries—to provide relief from other taxes or compensate for budget shortfalls is never good tax policy, but cash-strapped states and cities increasingly do so.
Singling out gambling for relatively high tax rates results in detrimental economic distortions when consumers choose to gamble in other locations or pursue other, lower-taxed types of recreation, or when gambling establishments lose investors.
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