Revenue Sharing and Sin City

Yglesias wrote a post on the inevitable spread of gambling throughout the country.  The logic is basically that if there is a casino near your state, you might as well legalize gambling in your state to keep the revenue.  Douthat tweeted, "This is a possibly true, profoundly depressing argument." (Douthat may also have been responding to Yglesias's observation that anti-gambling efforts are often mounted by a strange-bedfellows coalition of religious leaders and incumbent gambling interests.)

Douthat went on to argue: "Confining casino gambling to just a few states was one of those arbitrary hypocrisies that a civilized society depends on." And: "'What happens in Vegas stays in Vegas' is terrible moral theory but useful social policy." And: "Indeed, could argue that legal federalism at its best is *designed* to enable certain necessary cultural hypocrisies."

I basically agree.  I am not opposed to gambling purely in the abstract—from time to time I make small bets with my friends—but it appears to be a problem for some people, and generally there is no political equilibrium in which the state maintains the proper safeguards for its citizens.  The gambling companies have the money and the concentrated political interest to erode any protections the state might put in place, and the state itself is so hungry for revenue that it is a cheap date.

By reserving gambling for a "special occasion," and making it geographically remote from most people, you can provide a safety valve, and a space for people who can handle it responsibly, while protecting most people from the daily temptation of easily available gambling.  You can also allow a place like Las Vegas to specialize to a high degree—Las Vegas has a lot of casinos, yes, but also a lot of other entertainment, dining, etc.  It is a hedonistic kind of city that will disappear as gambling becomes more evenly distributed around the country.  (This may not be an entirely bad thing, but I think there's a good argument for concentrating hedonism into a sort of high-density agglomeration.)

But the question arises:  If the best equilibrium is for gambling to be legal in only a few locations (Las Vegas, Atlantic City, maybe a few Indian reservations), then how can this equilibrium be preserved given the dynamic identified by Yglesias?

My answer is pretty simple, if perhaps impossible in our political system.  Nevada should calculate how much of its gambling revenue comes from residents of each state and rebate a portion of that revenue to the relevant state government, but with no rebate to states that allow casino gambling.  (I suppose New Jersey would do the same thing.  And I suppose there is a question about whether only Las Vegas or all of Nevada should be on the hook.  But these are details.)

Now, you have to get the rebate right, and that might not be an easy needle to thread.  Obviously Nevada wants to keep the lion's share of revenue for itself, but the rebate would need to be substantial in order to get the attention of states that might otherwise legalize gambling.  But I think a lot of states would think twice if legalization brought all the costs of gambling and only a portion of the revenue (since legalizing gambling would entail losing the rebates from Nevada).

In any case it is too late for any of this.  States that have legalized gambling aren't going to shut down incumbent businesses, and at this point casinos have sprouted up all over the place.  But if Nevada had seen the trend coming, and had adopted my proposed policy as a preventive measure, it might have reaped large rewards.