The Social Impact Of Legalized Online Gambling: Balancing Revenue Growth With Responsible Policy

The 2018 Supreme Court decision that allowed states to legalize sports betting has expanded online gambling markets significantly—recent data show that online gaming reached a record 29.3% of total commercial gaming revenue in the first quarter of this year.

Activity increased on popular gaming platforms like DraftKings and FanDuel with the 2024 Olympics in Paris, as 16 states launched legal sports betting since the 2021 Tokyo games.

In a first-of-its-kind study from the University of California San Diego Rady School of Management, researchers have identified comprehensive insights into the positive and negative impacts of online gambling legalization on tax revenue and gambling behaviors in the U.S. They find it enhances state revenues, but increases irresponsible gambling, especially among lower-income consumers.

“Our data show that online gambling legalization leads to more irresponsible gambling spending among lower-income consumers than among higher-income gamblers,” said Kenneth C. Wilbur, professor of marketing and analytics at the Rady School and co-author of the study. “We define gambling irresponsibly as spending a high proportion of their income —for example, 10%—on gambling.”

Currently, 30 states permit online sports betting with seven of those states also allowing online casino gaming. The authors of the working paper analyzed five years of data from a total of 32 states. They compared 18 states that changed online gambling policies to 14 states that did not have gambling policy changes using a generalized synthetic control framework, a method used by economists and data scientists to evaluate government policy changes as natural experiments.

Authors applied the framework to data from four sources, including comprehensive state revenue and tax data, national gambler helpline calls, Center for Disease Control suicide records, and digital payment records for a balanced panel of 717,724 online gamblers.

“Of the more than 700,000 gamblers that we studied, 96% percent appeared to lose money to online gambling,” Wilbur said. “Only 4% made money from online betting. That is by design. Online gambling platforms often ban or throttle frequent winners’ accounts. There is no right to gamble.”

Low-income gamblers are most likely to increase irresponsible gambling after state policy changes

For around 250,000 participants, researchers could analyze gambling expenditure as a percentage of income, thanks to direct deposit data. In Canada, responsible gambling guidelines advise gamblers to spend less than 1% of monthly income on gambling. However, the direct deposit dataset revealed that 43% of panel gamblers exceeded 1% of income in gambling months, with 5.3% spending more than 10% of their income on gambling and 3.2% spending more than 15% of their monthly pay.

“Our analysis shows that online gambling legalization leads to far more problematic gambling among lower-income gamblers than among higher-income gamblers,” Wilbur said. “These findings emphasize the high financial risk associated with online gambling.”

How the patterns and consequences of online gambling can inform policy

The research study goal is to provide credible evidence to help inform policymakers as they evaluate new rules or refine recent rules. Currently, some states are considering bills to legalize and others, like New York and Illinois, are also considering expanding legalized betting.

Study authors found gambling helpline calls did increase as gambling became legal in the 14 states analyzed, most notably in New York; however, suicides did not increase. The authors note that suicide data from the Center for Disease Control, while informative, has limitations in measuring gambling-related suicides. State coroners generally do not document gambling as a contributing factor in suicide records, likely because they do not observe decedents’ gambling activity.  

“We tried to collect as many relevant and comprehensive data sets as we could to help inform policy makers,” Wilbur said. “Given our results, a concern of legislators could be that while they see tax revenue rolling in and much of that spending is coming from the wealthier individuals i.e. ‘whales.’ But, if you look more closely, the people experiencing the most gambling problems are likely to be the smaller-scale, lower-income gamblers, i.e., ‘minnows.’ This might justify more spending on assistance for problem gamblers.”

The research analyzed online casino gaming and online sports betting. Online sports betting revenue mostly follows football and basketball seasons, without a strong upward trend. However, all states that legalized online casino gaming show sustained upward trends in betting activity over the five-year time period.

The authors conclude that legalized gambling has both pros and cons. “On the positive side, states can generate revenue, potentially reduce illegal gambling and make it easier for individuals to seek help for gambling problems,” they write. “On the downside, increased accessibility and participation can lead to higher rates of problematic gambling behavior.”

Coauthors of the paper include Wayne J. Taylor of Southern Methodist University and Daniel M. McCarthy of the University of Maryland.

Read the full “Online Gambling Policy Effects on Tax Revenue and Irresponsible Gambling” study.

 

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