-----------------MdU Library Gopher Header Information------------------- Title : Review of Western Australian State Taxes - Betting Taxes Author : Tax Policy Elective 1993 Organisation : School of Law, Murdoch University Language : English Keywords : BETTING, TAXATION, WESTERN AUSTRALIA, : EQUITY, EFFICIENCY, SIMPLICITY, REFORM Abstract : See abstract to Preface and Introduction Contact Name : The Editors, E Law Contact Address: Murdoch University Law School, PO Box 1014, : Canning Vale, Western Australia, 6155 Contact Phone : +61 09 360 2976 Contact Email : elaw-editors@csuvax1.murdoch.edu.au Last Verified : Last Updated : Creation Date : File Size : 38K File Type : Document File Format : ASCII Publication Status: Final COPYRIGHT POLICY: Material appearing in E Law is accepted on the basis that the material is the original, uncopied work of the author or authors. 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ISSN: 1321-8247 URL: gopher://infolib.murdoch.edu.au:70/00/.ftp/pub/subj/law/jnl/ elaw/comment/watax/chap6.txt --------------------------------------------------------------- 1 INTRODUCTION Betting taxes have a long history as a source of revenue for the state governments in this country.(1) This chapter deals with a variety of taxes. These are collected from various types of betting including horseracing, greyhound racing, lotteries, soccer pools, bingo, and poker machines. The revenues are obtained through taxes on lotteries, soccer pools, the casino, and totalisators.(2) In Western Australia the betting tax system plays a relatively minor role as a source of revenue. This can be contrasted with the land tax and stamp duties collected in this State and with the gambling taxes of NSW which represent a significant share of the NSW taxes. Although there is a system of betting taxes in WA, it is a system in name only. A glance at the dates of the statutes in question indicates how ad hoc the development of the whole has been. A comprehensive response to the system is beyond the scope of this chapter. We have addressed ourselves instead to some of the more striking features of the system. Although our approach has been guided by the widely accepted criteria for good taxes and the chapter is structured around them, it has also been coloured by a scepticism, overt in places, concerning their usefulness. We have tried to look at aspects of the system which test the limits of the criteria. Therefore, in this chapter two main issues will be examined. Firstly, and this constitutes the bulk of the chapter, whether the system is able to meet the criteria for ideal tax systems. Secondly, the ways in which the State Government can raise more revenues from the system. We have placed particular attention upon the casino as it encapsulates several of the problems in this area as well as raising a few of its own right. A summary of all the recommendations will be provided at the end of the chapter. As our analysis is speculative in tone our recommendations are tentative in nature. In the light of our aims and space constraints we have assumed a general familiarity on the part of the reader with the statutes in question. 2 COMPARISON WITH THE CRITERIA FOR 'IDEAL' TAXES In this, the main part of the chapter, we will discuss whether the system, and parts of it, meets the criteria for a good tax system. These criteria are equity, efficiency, and simplicity. 2.1 Equity Viewed in isolation from the complex of social forces in which betting takes place, betting taxes might seem pain- free. This is because the activity which gives rise to them is, arguably, voluntary. In order to remain untouched by betting taxes all one need do is not gamble (or not bet in the forms that are covered by the taxes). For most gamblers this will have the added advantage of leaving them with a net monetary gain. This voluntariness is not readily reflected in the operation of the equity criteria. In addition to making some observations using the established equity criterion, we aim to look at some of the limits of this voluntariness and to consider the tax policy implications that accompany them. 2.1.1 Horizontal Equity This is the idea that those who are in the same financial position should be faced with a similar tax burden. Although it is a widely used practical tool for tax design, there are some problems with the concept.(3) It might be said that if society feels it is appropriate to impose a tax upon those who have particular occupations then the question of fairness does not arise. If the concept involves no notions of fairness then there is nothing to distinguish it from efficiency as a criterion. One might also question how one can determine if people are in similar positions.(4) Notwithstanding these problems, we shall attempt to apply the criterion. At this point we will assume that the economic burden of the taxes follows the legal burden. This is because it would be difficult to make any meaningful generalisations without data on the financial positions of those who would in reality bear the burden. These taxes clearly offend against this criterion as they only apply to bookmakers, the clubs which operate totalisators, and the owners of the casino and not to others who receive similar amounts from other sources. Furthermore, as the taxes are levied at various rates, there is inequity between those who are subject to the different taxes. However, in contrast to the other taxes, which are best understood in the context of their origins in Australian social history,(5) the casino tax is a function of the current trend towards the blurring of the distinction between the public and private spheres. The Act is a contract between the casino developers and the WA state government that has been enshrined in the form of a statute. The money might well have been secured in another form under the contract. The fact that the money WA receives is in the form of a tax is basically fortuitous. Furthermore, at some point those subject to the tax will literally have bargained for the rate in question.(6) The question of fairness would therefore seem not to arise. _Assuming the acceptance in practical terms of the criterion of horizontal equity, we recommend that, with the exception of the tax on casino, the taxes should be abolished or standardised._ 2.1.2 Racial/Cultural Equity In that there are different rates of tax for the various forms of betting then, assuming that the incidence is on the punter, some taxes may operate in a way that is in effect racially discriminatory. This is because there are some forms of gambling which are particularly popular with groups of particular ethnic origins.(7) It has been suggested that gambling is a significant part of the Australian cultural heritage;(8) it might be argued that it is also a significant part of what it is to be a member of a particular cultural or racial group. Certainly the obverse is true in that there are religious groups who would in part define themselves by their opposition to gambling.(9) This may also have vertical equity implications if such a racial or cultural group tends to be materially disadvantaged in society. Alternatively, it might be said that this is an isolated non-discriminatory instance in an otherwise discriminatory system. The second reading debates for the Gaming Commission Act show that Parliament is aware that social gambling is a significant activity for a variety of named cultural and ethnic groups. As the Act levies some taxes it is possible to view the decision not to attempt to tax other such activities as a tax expenditure.(10) That decision cannot be supported in terms of an equitable analysis. _We would recommend that a study be undertaken to investigate the gambling habits of the people in the State. Special attention should be given to the place of gambling in the cultural make-up of the State's ethnic minorities. Such information would be useful in planning the future of the State's gambling laws generally, as well as helping to clarify the position regarding racial equity._ 2.1.3 Vertical Equity What is it that distinguishes gambling on the result of a race from investing on the stock market?(11) Either activity can be more or less speculative. An obvious point is that `playing the stock market' has traditionally been the preserve of those with large amounts of disposable money.(12) `Having a flutter', although it might sometimes attract big money, has traditionally been a more modest affair.(13) Viewed in this light, an economic analysis of the taxes coincides with certain strands of a socially progressive analysis; such taxes are a drain upon the resources of those who want to better themselves by way of a windfall or by way of running businesses based upon those who want to gamble.(14) This explains in part why there is no Stockbrokers Betting Tax Act on the statute books. The vertical equity implications of this are self-evident. The question of incidence is as open here as under horizontal equity. It is notable that those who are in the best position to bear a tax are often also those who are best able to pass the burden of it. Regarding the casino tax, there are many services such a large commercial enterprise can provide to try to recoup the money, aside from reflecting it in the odds offered. It was envisaged that those who would frequent the resort and utilise these services would often be from out of State.(15) Such people can be presumed to have a significant amount of disposable income. To the extent that such people constitute a proportion of the casino business, the tax will conform to a baseline notion of vertical equity (ie that the proportion of the total tax burden that people should bear increases in relation as their ability to pay increase). Furthermore, the State will effectively be exporting the burden of the tax. Such an outcome is probably politically desirable as far as the State government is concerned, although it is not easy to account for in terms of the tax policy criteria. Such taxes might also be thought progressive in that they are generally borne by people who have decided that the money in question is surplus to their requirements for sustenance and investment. It might then be assumed that they will likely be those with a greater degree of disposable income than most. However, what is known of the psychology of gambling tells us that this will not always be so.(16) Of course, the services, including the gambling facilities, will also be taken up by the less well-off locals who frequent the complex.(17) There is an established literature in the field of economics regarding gambling taxes. There is evidence that they are, and in particular casino taxes are, regressive, although it might be said that each particular tax turns to an extent on its own circumstances.(18) Some of these people may seek to make up their losses, which will include a tax component, by stealing from others.(19) The nature of the neighbourhoods surrounding the complex and the ability of those living there to insulate themselves from the effects of crime then become important. One might expect poorer areas to be hit hardest. Also, the effect of economically orientated crime will be proportionately greater upon the less well- off. In this way the tax could be said to be likely to be regressive. In any event, this raise the issue of `geographical equity'. Why, it might be asked, if all other factors are equal, should any particular geographical area bear a heavier than usual part of the burden of a tax? This is another idea which fits poorly with the usual categories of vertical and horizontal equities. Admittedly, the extent of the inequity might be expected to be minimal. There are also the tangible and intangible costs to society (eg. police time, fear of crime etc) as a whole from such behaviour. Consideration must then be given then to the benefits derived from the revenue gained from the casino tax, and the effect on other Government revenues and their uses, especially the way the cost of such problems is addressed by the general tax burden in society.(20) In contrast, a tax upon bookmakers or upon totalisators will be paid in the first instance by people who have few alternative ways of off-setting the tax than by changing the odds that are offered. This will encourage punters to go elsewhere. The prospect of shifting the tax then depends upon the elasticity of demand and the availability of near substitutes. The current diversity of readily available forms of gambling suggests that costs will not be easy to pass on. Racing clubs would, presumably, fall somewhere between the casino and bookmakers in their ability to pass on costs. _We would recommend that a study be carried out to determine the extent of the regressivity, or otherwise, of the betting taxes, and particularly the Casino tax._ If they prove to be highly regressive then a tax on the Victorian model should be considered. In the first instance this should be by negotiation in the light of s.5 and s.29 of the Casino Act (although there may be some doubt as to whether this constitutes a valid manner-and- form provision or whether it is a substantive fetter). This would be aimed at benefiting those who do not fit what we take to be the general picture regarding those who bear the costs of the taxes (ie. compulsive gamblers, less prosperous locals in the casino vicinity). The public profile of the tax should be high so as to raise awareness of the problems that gambling can cause. A similar earmarked portion should be considered for the other taxes. 2.2 Efficiency The criterion of efficiency is rooted in economics. A tax is economically efficient if it causes the least interference in producer or consumer choices.(21) In other words it should be `neutral'.(22) The Tax Task Force recognised that a neutral tax should have two components. Firstly, there should be broad tax bases with a minimum of concessions or exemptions. The advantage of having broad tax bases is that they minimise the opportunities to reduce tax liabilities by adjusting economic behaviour.(23) Secondly, tax rates should be uniform, since single tax rates will eliminate the possibility of exploitation of differential rates by individuals and firms changing their economic behaviour.(24) Given these characteristics, it is submitted that the system fails to satisfy this criterion. To illustrate this point, we propose to rely on the method of Johnson.(25) The reason we favour this is that it is a strongly empirical method and thus well suited to a criterion founded in economics. This is in contrast to the vague and general nature of the arguments that arise once we move away from any thoroughgoing statistical analysis. Johnson examined this issue by calculating the effective tax rates on betting expenditures. He suggested three bases which can be used: the gross expenditure(26), net expenditure(27) and gross expenditure less government revenue.(28) Based on the annual reports of the TAB, the Lotteries Commission and the Office of Racing and Gaming, the effective tax rates for racing, lotteries and casino are shown as below: Gross Expenditure(29) Racing 6.00% Lotteries 23.00% Casino 15.00% Notes: (a) Owing to the unavailability of some data, only the gross expenditure can be collected. (b) The gross revenue received is not deflated. Sources: Totalisator Agency Board, *Annual Report 1991-92*, Lotteries Commission, *Annual Report 1991-92*, Office of Racing and Gaming, *Annual Report 1991-92*. Johnson concluded that if the effective tax rates among each type of betting are equal, the whole system would be economically efficient since it would not be an important factor in an individual taxpayer deciding which type of betting he/she is going to play. The rate of lotteries is the highest whilst that of racing is the lowest. In other words, it can be said that lotteries are overtaxed whereas racing is undertaxed. As a result, _it is recommended that in order to eliminate the differences among the effective tax rates in order to gain neutrality, it is necessary to reduce the rate for lotteries and/or increase the rate for racing._ An additional source of inefficiency arises from s.15 (5) of the Betting Control Act. This requires the Commissioner for State Taxation to remit to the racing clubs 50% of moneys received under s.2 of the Bookmakers Betting Tax Act. The Tax Task Force criticised the automatic allocation of racing tax funds to racing clubs.(30) This was on the basis that it removed the decision on fund allocation from the scrutiny of the budget process; the expenditures are no longer the subject of an appropriate process of comparative evaluation in that there is no competition for government funds. In addition, the provision can be criticised in that it is an intervention into the market. There may also be equity implications to the provision. _We would recommend the provision be abolished._ 2.3 Simplicity A tax is simple when it can be administered in such a way that it will minimise the cost of assessment and collection, not only for the State Taxation but also for individual taxpayers.(31) The cost of compliance refers to the cost of record-keeping by taxpayers on the one hand, and the cost of assessment and collection by the government on the other hand.(32) A study by Johnson(33) showed that because most of the administration of the betting system was done by the State government, the cost of administration amounted to approximately 25% of the government revenues. This greatly exceeded what the costs to government would have been if the betting administration were privately operated.(34) It is however found that for taxpayers the compliance costs were convenient to pay.(35) As self-assessment plays a significant part in the system it can be argued that simplicity is achieved. For example, in the racing industry bookmakers have to keep books of accounts and must record and file these with the Commissioner of State Taxation. As far as the bookmakers are concerned this is doing little more than one might expect them to do anyway for business purposes. This leaves the Commissioner with the cost of ensuring compliance; keeping track of the records filed and, where no records are filed, seeing to enforcement. It was suggested to us that there are no figures relating to the costs of ensuring compliance. It is difficult to make any concrete recommendations in this area without some figures on which to base them. It is to be hoped that in future data are available to reveal these costs. _We would recommend that they be produced, if only for purposes internal to the Commissioner's office._ It is submitted that the system also fails to satisfy this criterion as there is more than one statute in the existing system. Despite the fact that the State Tax is contemplating the creation of a Racing Act to consolidate the taxes relating to the racing industry this would only partly resolve the problem. The system also imposes different rates of taxation upon different forms of betting. It is not clear that there is any reason for these different rates to counter the advantages there are in terms of simplicity through harmonising them. We would therefore recommend that a single piece of legislation be enacted to cover all areas covered by betting taxes (with the exception of the casino tax for the reasons set out above). Further, we would recommend that the rates of taxation be harmonised. 3 POTENTIAL FOR RAISING ADDITIONAL REVENUE One thing that is immediately noticeable when tax revenue figures are compared between the States is that WA betting taxes account for quite a small proportion of the State's revenues.This raises the possibility that the State government might look to betting taxes should it want to make good a shortfall in other taxation areas. It might be doubted whether the racing industry is in a fit enough state to shoulder any extra burden. It is noted in Hansard that the reasons for reducing the tax rates relating to the industry and abolishing stamp duty on betting tickets were that they were in a disastrous financial position.(37) At this stage, it is not possible to assess the possibility of doing so due to lack of information. We would recommend that this area be examined in future. Perhaps the most obvious alternative would be the establishment and taxation of another casino. There have long been suggestions that the State should have casinos; a Royal Commission has examined the possibility of opening casinos in Kalgoorlie, Eucla and Exmouth.(38) Notwithstanding the fact that the Commission did not reach any conclusions, it did suggest that Exmouth has many advantages in that it has many natural tourist attractions. In tax policy terms, the fact that Exmouth has less of an urban catchment area than does Perth suggests that it will be less likely to render regressive any tax imposed upon it. Thus, if there is a shortfall in tax revenue in other areas, _we would recommended that the government consider the possibility of opening or encouraging the development of a casino in Exmouth, Kalgoorlie or Eucla._ 4 CONCLUSION In summary, we have made no attempt to conduct a systematic analysis of WA betting tax law. This is in part because we do not have the facilities to calculate the revenue implications of changing rates and dropping taxes. It is also due to base constraint; considered thoroughly a small part of the system can acquire a lot of space. Instead we have tried to approach the system with open minds, a questioning spirit and with a view to the room for future contributions by the Tax Policy Elective. In this sense, this is a conclusion only in compositional terms. It is rather read as a starting call for discussion and debates. 5 SUMMARY OF RECOMMENDATIONS We recommend: that, with the exception of the casino tax, the rates of taxation across the various Acts be standardised; that, with the exception of the casino tax, the various taxing Acts be consolidated; that a study be conducted to investigate the gambling habits of the people in this State with a view to helping to plan for future developments in gambling taxation, as well as more generally. that the current system of fund distribution to the racing clubs be reviewed; that a survey be carried out to ascertain the incidence of the various betting taxes with a view to enacting provisions to earmark a proportion of the various taxes to meeting the indirect and social costs of gambling, that if a shortfall of tax revenue is foreseen the State government considers encouraging the development of a casino at Exmouth (or Kalgoorlie or Eucla). 1 In Western Australia, this has been the main reason given for the taxes. See, for example, the second reading debates for the *Totalisator Duty Act* 1905, Western Australia: *Parliamentary Debates*, 1905, Vol.2 at 220. 2 The tax rates currently enforced are contained in the various statutes shown below: *Bookmakers Betting Tax Act 1924* (2.25%) *Totalisator Agency Board Betting Tax Act 1960* (6%) *Totalisator Duty Act 1905*(6.5%) *Gaming Commission Act 1987*(32.5-35%) *Casino (Burswood Island) Agreement Act 1985* (15%) 3 See L. Kaplow, "Horizontal Equity: Measures in Search of a Principle", (1989) 42 *National Tax Journal* 139. 4 See J. Waincymer, *Australian Income Tax - Principles and Policy* (2nd Eds), Butterworths, Sydney, 1991, pp.24-6. 5 For an account of the social and economic background to Australian gambling laws see J. McMillan and E. Eadington, "The Evolution of Gambling Laws in Australia" 8 (1986) *New York Law School Journal of International and Comparative Law*, 167. 6 During background briefings we received whilst researching this work the view was expressed to us, by members of government agencies, that the deal secured by the casino developers is very favourable in comparison with developments in other States. 7 McMillan and Eadington, pp.185-7. See also the reference to Mahjong in Schedule A of the *Casino (Burswood Island) Agreement Act 1985*. 8 McMillan and Eadington, pp.167-9. 9 For example, gambling is a serious sin in Islam. 10 See Western Australia: *Parliamentary Debates*, 1987, Vol. 3 at 3399. 11 For a possible answer, see R. Brennan, *Gaming and Speculation: a Theory, a History and a Future of Some Human Decisions*, Cambridge University Press, 1990. 12 See, for example, "Stock Exchange: Share Ownership", *National Australia Bank Monthly Summary*, November 1986, pp.6-16. 13 Concerns similar to this may be discerned in the second reading debates for the *Totalisator Duty Act* where it was observed that the goldfields would bear two thirds of the brunt of the tax; Western Australia: *Parliamentary Debates*, 1905, Vol.2, passim. See further below. 14 McMillan and Eadington, pp.170, 171 and 173. 15 See Western Australia: *Parliamentary Debates*, 1985, Vol.1 at 701. 16 This knowledge has spread to the legal sphere; see, for example, R. Nelson, "Compulsive Gambling and the Law: From Sin to Vice to Disease", 41(4) (1988) *Journal of Gambling Behaviour* 240. 17 McMillan and Eadington at p.189 note the tendency to position casinos in urban areas to ensure a stable catchment area for patronage. 18 For comments on the literature and conclusions from a recent case study see M. Borg, P. Mason, and S. Shapiro, "The Incidence of Taxes on Casino Gambling: Exploiting the Tired and Poor", 50(3) (1991) *American Journal of Economics and Sociology* 323. 19 See J. Friedman, L. Hakim, and J. Weinblatt, "Casino Gambling as a "Growth-Pole" Strategy and Its Effect on Crime" 29 (4) (1989) *Journal of Regional Science* 615. This was considered by the Government Casino Advisory Commission prior to the casino deal, see *Reports of the Chairman and Members to the Cabinet Subcommittee*, WA Government Printing House, Perth 1983. The Police Commissioner placed considerable emphasis on anecdotal evidence to this effect and recommended against setting up a casino. 20 It is notable that in Victoria relevant legislation imposes a tax which is directed in part to the social costs associated with gambling; *Casino Control Act 1991*, ss.114, 115. 21 NSW Tax Task Force, *Tax Reform and NSW Economic Development: A Review of the State Tax System*, NSW Government Printer, Sydney, 1988, p.151. Cited hereinafter as the Tax Task Force. 22 Ibid. 23 Ibid., at 153. 24 Ibid. 25 J. Johnson, "Gambling as a Source of Government Revenue in Australia", in G. Caldwell, M. Dickerson, B. Haig and L. Sylvan, *Gambling in Australia*, Croom Helm Australia, Sydney, 1985, Chapter 7, The Australian National University, Canberra, 1985. 26 The gross expenditure refers to the gross turnover or sales made in a certain period of time. 27 The net expenditure refers to the gross turnover minus any winnings or prizes paid in a certain period of time. 28 The rationale underlying this concept is discussed by Johnson, who said that "individuals when gambling, are both making an investment which would improve their wealth position or standard of living if successful, and purchasing recreation in the form of heightened interest in a race or drawing of winning numbers, participating in a game while socialising with others, etc...The price paid for this joint product is gross expenditure less the portion taken by government in the form of taxes and corresponds to the price paid for common stocks...works of art, etc." 29 Because of the limited information provided in the annual reports, only the concept of gross expenditure can be used for calculation. 30 See supra n.21 at 291. 31 P. Groenewegen, *Public Finance in Australia: Theory & Practice* (3rd Eds), Prentice Hall of Australia Pty. Ltd., Sydney, 1990, pp.120-1. 32 Ibid., p.121. 33 Supra n.25. 34 Ibid.at 89. 35 Ibid. The author goes on to say that some economists referred to these gambling levies as 'voluntary taxes'. 36 See appendix. 37 Western Australia: *Parliamentary Debates*, 1990, Vol.3 at 6075 and Vol.10 at 7054. 38 *Report of the Royal Commission into Gambling*, WA Government Printing House, Perth, 1974.