Legal vs. Illegal Gambling In The US - How Prohibition Affects the Economy

In the presence of sustained demand, the prohibition of a commodity or service can never really be effective. More often than not, it creates new problems, both economic and social.

All nations in the world have experienced this first hand, probably none more so than the United States. The 1920s era prohibition of liquor is credited with everything from crippling losses in tax income, to unemployment, economic downturn, corruption, and the creation of the modern mafia.

Since 1992, the Americans had been under the grip of a prohibition of another kind - this time on gambling or rather, sports betting. The creation of the federal law called PASPA outlawed all betting on sports anywhere in the US, with the exception of Nevada.

The Impact of PASPA on the US Economy

The original intent of the law was to protect the integrity of professional and amateur sports leagues in the US. When massive gambling is involved, there is always the chance of corruption and match-fixing creeping in.

While this was a valid concern, a blanket ban on sports betting only had the effect of creating a thriving black market. Back in 1992, when the law passed, an estimated $40 billion was being spent by Americans on sports betting.

According to Deloitte, this figure had risen to a whopping $169 billion in 2018. An estimated 40% of Americans bet on sports each year. The law just managed to ensure that all that cash went into the black market, or to off-shore sportsbooks.

One of the troubles with a prohibited commodity is the absence of reliable data. We can only make rough estimates of the potential economic impacts since nobody is keeping the books or submitting records to the IRS.

At least in the initial years, a considerable fraction of the money bet each year did stay in the US. For many Americans, there was always the option to have bets placed in their name in the casinos of Nevada.

Although illegal according to the law, this was ‘an established custom ever since the casinos in Las Vegas opened sportsbooks in the 1960s and ‘70s. With the arrival of PASPA, this trend only gained momentum.

But it was the rise of the internet and online sportsbooks that truly started hurting the US economy. Offshore sportsbooks exploded in popularity, becoming one of the main sources of sports bets for Americans over the last few decades.

Many of these sportsbooks were based in the Caribbean, successfully evading paying any taxes to the US, even as American dollars were being pumped into their coffers by millions of sports enthusiasts in the US.

The economic losses due to the prohibition of sports betting can be divided into the following broad categories:

1. Direct loss of taxes at the state level
2. Loss of economic growth potential through the casino, hospitality, and entertainment sectors
3. Loss of employment opportunities to Americans

The lack of consumer protection also meant that illegal sportsbooks could fleece customers of their winnings with relative impunity, leading to further economic losses.

The Economic outlook post-legalization of sports betting

Thanks to the US Supreme Court ruling against PASPA in 2018, the US is currently experiencing a sea of change in the sports betting market. The onus has shifted from the Federal Government to the states to create legal sports betting markets.

Dozens of states have already passed laws permitting legal sportsbooks within their jurisdictions, and more are planning to do so in the immediate future, an overview of which can be found here.

This could potentially lead to a total reversal of the losses sustained due to illegal sports betting as highlighted in the previous section. It could have wide-ranging positive impacts across the US economy.

Perhaps the most direct impact would be in the form of total economic output from legal sports betting, which could amount to $41 billion. This would translate into more tax income at both state and federal level, to the tune of $8.4 billion in total.

It could generate hundreds of thousands of new employment opportunities in the US, with 86,000 estimated jobs being created directly within the industry. Another 130,000 could be created indirectly, in related sectors like hospitality and entertainment.

These jobs would generate income for Americans amounting to $11 billion in total. The final contribution to the US economy is expected to be around $22 billion, which is more than the total GDP of a small country!

Even the sports leagues like NFL, NBA, and MLB, who have been historically wary of gambling, could benefit from participating in a legal industry. They all have vast troves of player performance data, which can be monetized in partnership with legal sportsbooks, generating further revenues.

The cash generated through these partnerships, as well as the creation of an integrity fee, could actually be used to protect the integrity of sports. In a black market scenario, this would be simply impossible.

In short, the economic projects all indicate an overwhelmingly positive outcome from the legalization of sports betting in the US within the next five years. While the social impact of this activity is still debatable, there is no doubt that prohibition in the form it existed in was simply not the answer.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.