PUBLIC

Popp,
FINANCE
StehwienREVIEW
/ INDIAN CASINO GAMBLING
The growth of Indian gaming has generated a debate on the effects of casino gambling on
state and local revenues. This article tests the hypothesis that casino gambling affects the
level of taxable gross receipts generated in counties in which casinos are present and in
counties that neighbor counties in which casinos are present. Data from New Mexico are
used to test the hypothesis. The results suggest that the effect on taxable gross receipts de-
pends on the number of casinos in the county and the number of casinos in neighboring
counties.

INDIAN CASINO GAMBLING

AND STATE REVENUE: SOME
FURTHER EVIDENCE

ANTHONY V. POPP
New Mexico State University

CHARLES STEHWIEN
New Mexico Department of Taxation and Revenue

The expansion of Indian casino gambling in the past decade has

generated a substantial debate with respect to benefits and costs. New
Mexico, where 11 tribes were operating casinos in 1997, is one of
many states struggling with the economic and social ambiguities of
gambling. The tribes see casinos as a way of generating large amounts
of revenue to fund economic development efforts and to provide for
the necessities of their members. They argue that the existence of
gaming will be attractive to individuals from outside the local econ-
omy and that this increase in visitation will benefit everyone. The crit-
icisms of Indian gaming come from many different sources. First there
AUTHORS’ NOTE: The authors wish to thank Richard Adkisson, Leigh Murray, and James
Peach from the Department of Economics and International Business at New Mexico State Uni-
versity; Laird Graeser, former chief economist of the New Mexico Department of Taxation and
Revenue; and an anonymous referee for comments on previous drafts of the article. The opinions
expressed in this article do not necessarily represent those of the New Mexico Department of
Taxation and Revenue, its cabinet secretary, the governor of the state of New Mexico, the Depart-
ment of Economics and International Business, or the president of New Mexico State University.
Any errors are those of the authors alone.
PUBLIC FINANCE REVIEW, Vol. 30 No. 4, July 2002 320-330
© 2002 Sage Publications
320

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 Popp, Stehwien / INDIAN CASINO GAMBLING 321

are those who oppose gambling on moral grounds. Then there are
those who think the social costs of allowing such gambling far out-
weigh the benefits generated to the tribes. These opponents argue that
the increase in economic and property crime, domestic violence, cor-
ruption, and compulsive gambling are costs that society, not the tribes,
will bear (Henriksson 1996).
And of course, there are those in government who believe that the
existence of casinos on reservations will decrease the amount of reve-
nue received by state and local governments (Anders, Siegel, and
Yacoub 1998; Madhusudhan 1996; Mason and Stranahan 1996). The
rationale behind this fear is that individuals will gamble instead of
spending their disposable income on taxable items. This will not only
reduce sales tax revenues (gross receipt tax [GRT] revenues in New
Mexico) at the state level but also at the local level. The redistribution
of expenditures may affect some businesses more than others, causing
some decrease in employment and decreasing the diversity of busi-
nesses in the local economy.
The effect of Indian casino gaming on tax receipts is an empirical
question. The existence of an Indian casino will increase employment
and income for those employed and decrease employment and income
of those individuals displaced because of a redistribution of expendi-
tures. The purpose of this article is to analyze the effect of the exis-
tence of Indian casinos on the level of taxable gross receipts generated
in local economies in New Mexico.
The organization of the article is as follows. First, a brief history of
Indian casino gaming in New Mexico is provided. The next section
presents an empirical model that will be used to estimate the effects of
these casinos on taxable gross receipts. The two subsequent sections
provide a discussion of the data used and the results of the empirical
estimation. The final section presents a discussion of the results and
the implications of the study.

CASINO GAMING IN NEW MEXICO

Indian gaming began in New Mexico in the mid-1980s when the

Pueblo of Acoma started high-stakes bingo and Sandia Pueblo in-

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322 PUBLIC FINANCE REVIEW

stalled slot machines. Officially, gaming was not legal until Congress
passed the Indian Gaming Regulatory Act of 1988 (IGRA 1988) al-
lowing tribes to operate casinos if such gambling was allowed in the
state and the state and tribes entered into compacts allowing such
gaming.
In the late 1980s and early 1990s, the tribes tried to force the state
into negotiating compacts. Then-Governor Bruce King (third term,
1991-1994) refused to enter into negotiations. By the mid-1990s,
tribes opened casinos in spite of not having compacts with the state. In
January 1995, Gary Johnson entered the governor’s office and imme-
diately started negotiations. By February of that year, Governor John-
son signed compacts with 14 tribes. An antigambling coalition asked
the state supreme court to rule on the validity of the compacts, and by
July 1995, the court ruled that Governor Johnson did not have the au-
thority to sign the compacts and therefore they were deemed illegal.
The tribes continued to operate the casinos under the threat of clo-
sure by the U.S. attorney general. Finally, in early 1997, the New Mex-
ico Legislature approved an Indian gaming compact bill making the
existence of casinos legal although requiring a controversial revenue-
sharing payment of 16% of net win from gaming machines but not ta-
ble games. In 1997, there were 11 pueblos and tribes operating casinos
in the state of New Mexico. Table 1 lists the pueblos and tribes operat-
ing casinos, the counties in which they are located, and the names of
the casinos. The opening dates listed are dates of extensive casino
gaming operations.1 Before these dates, some gambling was already
taking place in some of the pueblos, mostly in the form of bingo and
electronic games.

THE MODEL

In New Mexico, the GRT is imposed on sellers of goods and ser-

vices for the privilege of doing business in New Mexico. State law pre-
sumes that all receipts of a person engaging in business in the state are
subject to the tax unless specifically exempt or deductible. Accord-
ingly, New Mexico’s GRT base is more extensive than that of most
sales taxes administered in other states. The state collects the tax and

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 Popp, Stehwien / INDIAN CASINO GAMBLING 323

TABLE 1: Indian Casinos in New Mexico by County and Opening Date

Pueblo County Casino Opening Date

Sandia Sandoval Casino Sandia 1986, 1995

Santa Ana Sandoval Santa Ana Star 1993
San Felipe Sandoval Casino Hollywood 1995
Pojuaque Santa Fe Cities of Gold 1992
Tesuque Santa Fe Camel Rock 1993
Acoma Cibola Sky City 1993
San Juan Rio Arriba Ohkay 1994
Taos Taos Mountain Casino 1995
Isleta Valencia Isleta Gaming Palace 1995
& Palace West
Jicarilla Apache Rio Arriba Apache Nugget 1996
Mescalero Apache Otero Inn of the Mountain 1995
Gods

returns 37% of the revenue to counties and municipalities. GRT col-

lections represent about 43% of state government and 35% of local
government general fund revenues. Revenues collected from casino
gambling on Indian lands are not subject to New Mexico’s GRT. Any
discretionary spending diverted from otherwise taxable consumption
categories may be considered a “leakage” from the taxable economy.
These leakages adversely affect GRT collections and state and local
general funds.2
The model used is a modified version of the one used by Anders,
Siegel, and Yacoub (1998). These authors used a standard state reve-
nue forecasting model to estimate state transaction privilege tax (TPT)
revenues in Maricopa County, Arizona. These standard models are
usually log linear in form and are primarily employment driven with
some modification to take into consideration other important vari-
ables. Anders, Siegel, and Yacoub’s model was log linear in form and
used employment and retail sales as determinants of TPT revenues. To
avoid the difficulties of dealing with differences in tax rates across
counties, changing tax rates within counties, and that the tax rate is
levied on all goods and services, total taxable gross receipts generated
in a county are estimated here. Total taxable gross receipts in a county
depend on the number of individuals employed in the area, the average
weekly wage, and the general economic conditions in the county. The

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324 PUBLIC FINANCE REVIEW

general economic condition of the county is measured by the unem-

ployment rate.3 The hypothesis that the existence of a casino will af-
fect the amount of taxable gross receipts generated is tested by the use
of dummy variables.
The model to be estimated is given as

TGRit = β0 + β1Employit + β2URit + β3Wageit + β4DQit (1)

+ β5DRit + β6Dcit + β7Dncit + eit, t = 32, i = 33,

where TGRit is the taxable gross receipts generated in county i during

time period t, Employit is the amount of employment in county i during
time period t, URit is the quarterly unemployment rate in county i dur-
ing time period t, and Wageit is the average weekly wage in county i
during time period t. DQit is a vector of quarterly dummy variables, DRit
is a dummy variable indicating whether there is a reservation in county
i, and Dcit and Dncit are vectors of dummy variables controlling for the
existence and the opening of casinos in the various counties. The vari-
ables TGR, Employ, UR, and Wage will be entered in log form. The co-
efficients estimated will be the elasticities of TGR with respect to each
of the independent variables.
The vector Dcit consists of two dummy variables indicating when a
casino is open and is in operation in a particular county during quar-
terly period t. Dc1 is equal to one when there is a casino operating in
that particular county during that quarterly time period and zero other-
wise. Some of the counties have had two casinos operating, each open-
ing at a different period of time. Dummy Dc2 is intended to take this
into affect. It has a value of one when the second casino opens and op-
erates in a county and a value of zero otherwise.
The interpretation of the coefficients on these casino dummy vari-
ables may reflect two effects. The dummy variable would not only
pick up the effect of a casino in that county, it would also pick up any
effect of that county’s being different from the other counties. This
would be particularly true if counties containing casinos are in general
different from noncasino counties. There is a high probability that
these counties are different because they contain the Indian reserva-
tions that run the casinos. Therefore, to control for the existence of a
reservation in a particular county, the dummy variable DR is intro-

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 Popp, Stehwien / INDIAN CASINO GAMBLING 325

duced, which has a value of one for each of the counties which contain
a reservation and a value of zero otherwise. Each of these counties has
a proportion of the population consisting of Native Americans in ex-
cess of 2.6% in 1990. All the other counties but one had a proportion of
the population consisting of Native Americans of less than 1.4%, and
the other had a proportion of 1.8%.
Those counties that do not have a casino within their borders also
can be affected by casinos if a casino is relatively close by. Individuals
will travel from one county to another to gamble. The farther away the
casino, the less incentive there is to travel to gamble (the opportunity
cost is larger). To measure the effect of nearby casinos on the county
generation of taxable gross receipts, a dummy variable, Dnc1, is in-
cluded that has a value of one when the first casino opens in a neigh-
boring county. Because more than one casino may open in a neighbor-
ing county, a second dummy variable, Dnc2, is also introduced.
Of particular importance to this study are the coefficients of the
dummy variables associated with the existence of a casino. The sign of
the coefficient will indicate whether the existence of the casino in the
county or a neighboring county has had a positive or negative effect on
the generation of GRT revenues in the county. The value of the coeffi-
cient can be used to determine the difference in the amount of taxable
gross receipts that would have been generated if the casino did not ex-
ist. The mathematical form that is implied by the regression equation
when a casino in the county or a neighboring county is in existence is
given as
β4 D q β6D c β 7 D nc
TGR = e β 0 Employ β 1 UR β 2 Wage β 3 e eβ5R e e . (2)

When there is no casino, thee β 6 ande β 7 terms drop out (i.e., Dc is equal
β
to zero,e 6 D c equals one). For example, the ratio of TGR with a casino
in the county to the TGR without a casino is

TGRc / TGR = e β 6 . (3)

The value of the coefficient determines the percentage difference in

taxable gross receipts before and after the introduction of the casino.

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326 PUBLIC FINANCE REVIEW

THE DATA

The county quarterly data (32 quarters) cover the time period from
the first quarter of 1990 to the last quarter of 1997 for all 33 counties in
New Mexico. The dependent variable is the average monthly taxable
gross receipts in county i for each respective quarter. These data were
obtained from the New Mexico Department of Taxation and Revenue.
Although it may have been more appropriate to use gross receipt reve-
nues than taxable gross receipts, the use of taxable gross receipts elim-
inated the adjustment process that would have had to accompany any
changes in tax rates during this period of time.4
County employment, unemployment rates, and average weekly
salaries were obtained from the New Mexico Department of Labor.
All data refer to covered wage earners, those covered by unemploy-
ment compensation. This includes approximately 97% of all workers
in the state.
The quarterly time dummies use the fourth quarter as the reference
time period. Q1 has a value of one if the quarter is the first quarter of the
year, Q2 has a value of one if the quarter is the second quarter of the
year, and Q3 has a value of one if the quarter is the third quarter of the
year.

RESULTS

The data set used in this study has observations over time and across
counties. A regression analysis using cross-sectional time-series data
may have problems of autocorrelation and heteroskedasticity. Kmenta
(1971) discussed these problems in detail and offered an algorithm to
solve existing problems. That algorithm has been implemented by the
SASc program under the TSCSREG Procedure using the Parks option.
Table 2 presents the regression results of the model with the log of
total taxable gross receipts as the dependent variable. The last column
indicates the percentage effect of the dummy variable on taxable gross
receipts generated in the county.
All the parameters but one are different from zero at the 99% level
of significance. The other is significantly different from zero at the
90% level. A word of caution must be inserted here. The reported R2 is

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 Popp, Stehwien / INDIAN CASINO GAMBLING 327

TABLE 2: Regression Results (Dependent Variable: Log of Total Taxable Gross

Receipts)

Parameter Effect of
Estimate SE T Value Prob > T Casino (%)

Intercept 6.896 .0307 224.52 .0001

UR –0.122 .0028 –42.27 .0001
Wage 0.021 .0017 12.20 .0001
Employ 1.153 .0030 376.00 .0001
Dc1 –0.006 .0032 –1.85 .0634 –0.01
Dc 2 –0.063 .0065 –9.65 .0001 –6.2
DR –0.203 .0071 –28.61 .0001 –18.4
Dnc 1 –0.017 .0041 –4.25 .0001 –1.3
Dnc 2 0.035 .0023 15.44 .0001 3.5
Q1 0.006 .0011 6.30 .0001
Q2 –0.026 .0013 –20.03 .0001
Q3 0.043 .0011 37.45 .0001
R 2 = .9940
NOTE: UR = log of the unemployment rate; Wage = log of the average weekly wage; Em-
ploy = log of the employment level; Dc1, Dc2, Dnc1, and Dnc1 = dummy variables for the
first and second casinos to open in a county and in a neighboring county, respectively;
Q1, Q2, and Q3 = time dummies for the first, second, and third quarters, using the fourth
quarter as the reference time period.

equal to .9940, an extremely high number. It is believed that this is a

high number for two reasons. This is an employment-driven analysis,
and the correlation between the log of the number of persons em-
ployed is highly correlated with the log of total taxable gross receipts.
Add to that the number of dummy variables and the R2 will be high.
The coefficients associated with the log of the employment level,
Employ, the log of the unemployment rate, UR, and the log of the aver-
age weekly wage, Wage, are of the expected sign. The higher the em-
ployment level and the higher the average weekly wage, the higher the
generation of taxable gross receipts. However, when the unemploy-
ment rate increases, an indicator of difficult times, the generation of
taxable gross receipts declines.
The value of the dummy variable, DR, is negative. This indicates
that the counties that contain reservations are different from those that
do not have reservations. The same level of employment and weekly
wage will generate 18.4% less taxable gross receipts in reservation
counties compared to nonreservation counties.

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328 PUBLIC FINANCE REVIEW

The values of the coefficients of the other two casino dummies indi-
cate the effect of the existence and operation of a casino in the county.
The dummy variable that indicates when the first casino opens in the
county, Dc1, has a small negative value, significant at the 90% level.
This indicates that individuals may be substituting casino gaming for
spending on taxable items. When the second casino opens, the value
of Dc2 indicates that individuals spend considerably more of their
money on gambling instead of taxable items. The effect of the second
casino opening is to decrease the amount of taxable gross receipts by
6.2%.
Besides the effects on the host county, the presence of casinos can
have an affect on neighboring counties. This is particularly true be-
cause most of the casinos are located on the border of the home county
and the most populated neighboring county. The casinos will draw in-
dividuals from the neighboring county as the individuals substitute
away from goods and services generating taxable gross receipts in the
residence county toward gaming in the nonresidence county. The
value of the coefficient associated with the first casino opening in a
neighboring county, Dnc1, is negative, indicating a 1.3% decrease in the
generation of taxable gross receipts. The sign of the coefficient associ-
ated with the second casino opening in a neighboring county, Dnc2, is
positive, indicating a 3.5% increase in the generation of taxable gross
receipts. This could be explained by the fact that individuals visit the
more populated county to visit and spend time in multiple casinos and
also spend on other goods and services that are taxable.

CONCLUSIONS

Some researchers have argued that the existence of Indian casino

gaming will have a negative economic effect on the rest of the local
county and neighboring county economies, whereas others have said
it would be a boon to the local economy. The results presented here in-
dicate that, at least with respect to taxable gross receipts in New Mex-
ico, the answer depends on the number of casinos in the county and the
number of casinos in neighboring counties.

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 Popp, Stehwien / INDIAN CASINO GAMBLING 329

The opening of the first casino in a county imparts a negative, if

small, effect on the total taxable gross receipts generated in that
county. At the same time, it affects the neighboring counties by lower-
ing the total taxable gross receipts generated in that county by 1.3%.
The second casino opening in a county significantly impacts taxable
gross receipts, decreasing them by 6.2%. The second casino opening
affects the neighboring county, but in a positive way. Because most ca-
sinos are located close to the county line with a county of higher pop-
ulation, this may suggest that individuals spend more time and
money in the higher population county while spending some time at
the casinos.
The existence of a reservation in the county decreases the amount
of taxable gross receipts generated in the county and, therefore, de-
creases the amount of revenue available for the state, county, and mu-
nicipalities. As more casinos open, the amount of revenue available to
these entities will decrease further. These decreases in revenue should
be considered when the state enters into gaming compacts with the
tribes.
Ideally, the model should include other explanatory variables such
as number of slot machines and tables and the net win. These types of
data were not available for the time frame of the study. Since then,
some of these data have become available and, as a sufficient time pe-
riod passes to obtain a sizable data set, should be included in an ex-
panded model.

NOTES

1. The data for the opening of the casinos were obtained from the records of the United States
District Court for the District of New Mexico. In the case of the Pueblo of Santa Ana, et al. v.
John J. Kelly, et al. (Civil No. 96-002 MV/WWD), each of the pueblos answered in the “Defen-
dant’s First Set of Interrogatories” the question of when they started casino-style gambling.
2. The effect on taxable revenues is very complex. Sales of tangible personal property to
tribal entities by nontribal entities are deductible, sales of services on reservations are deduct-
ible, and wages paid to Indian workers and casino “profits” are not subject to the state income
tax. The existence of casinos can have an effect on other state revenues other than taxable gross
receipts, and the estimation of these effects would require a more elaborate model.

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330 PUBLIC FINANCE REVIEW

3. Although including both the level of employment and the unemployment rate in the same
equation may suggest multicolinearity, these variables measure different aspects of the labor
market. Employment reflects the number of persons employed, whereas the unemployment vari-
able is a rate. There is no a priori reason to suggest that these variables are highly correlated, and
simple correlation coefficients confirm this conclusion.
4. The authors are aware that the ratio of tax collections to taxable gross receipts does vary
somewhat. There have also been changes in the tax code that would have some effect on the tax
base. The variations and changes were considered minor and assumed not to have any effects on
the results of the study.

REFERENCES

Anders, Gary C., Donald Siegel, and Munther Yacoub. 1998. Does Indian casino gambling re-
duce state revenues? Evidence from Arizona. Contempory Economic Policy 16 (July): 347-
55.
Henriksson, Lennart E. 1996. Hardly a quick fix: Casino gambling in Canada. Canadian Public
Policy–Analyse de Politiques 22 (2): 116-28.
Indian Gaming Regulatory Act (IGRA), 25 U.S.C. §§2701, et seq.; 18 U.S.C. §§1166, et seq.
(1988).
Kmenta, Jan. 1971. Elements of econometrics. New York: Macmillan.
Madhusudhan, Ranjana G. 1996. Betting on casino revenues: Lessons from state experiences.
National Tax Journal 49 (3): 401-12.
Mason, Paul M., and Harriet Stranahan. 1996. The effects of casino gambling on state tax reve-
nue. Atlantic Economic Journal 24 (4): 336-48.

Anthony V. Popp is an associate professor of economics at New Mexico State University.

His research interests are in the areas of state and local government taxation and spend-
ing policy.

Charles Stehwien is a senior fiscal economist in the Tax Research and Statistics Office of
the New Mexico Department of Taxation and Revenue.

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