Gambling industry ; Tobacco industry ; Illinois

Michael R. Pakko

Thomas A. Garrett

English

Research Papers in Economics

I
n January 2008, the state of Illinois 
implemented the Smoke-Free Illinois Act, 
prohibiting smoking in all public places and 
places of employment, including privately 
owned bars, restaurants and casinos.
1  Many 
states and communities have enacted simi-
lar legislation in recent years, but the Illinois 
smoking ban was the first to include a 
smoking prohibition on the gambling floors 
of commercial casinos.
2, 3  During debate 
leading up to the act’s passage, the casino 
industry and many other industries argued 
for an exemption from the statewide smok-
ing ban.  They were unsuccessful.
In the first year after the smoking ban 
took effect, revenue at Illinois casinos fell 
sharply from the previous year.
4  As shown 
in the figure, the decline in revenue stands in 
sharp contrast both to the growth of recent 
years and to the performance of casinos in 
nearby states.
According to the Illinois Casino Gaming 
Association (an industry organization), the 
smoking ban was responsible for a 19 percent 
decline in revenue during its first year.  
Critics of this claim have suggested that the 
general economic downturn is more to blame 
than is the smoke-free law.
5
Raising the Stakes
Smoke-free laws have been controversial, 
facing opposition from the owners of bars 
and restaurants, as well as from the own-
ers of casinos.  The policy discussion on 
prohibiting smoking in casinos has gener-
ated sharper debate than smoking bans in 
bars and restaurants for several reasons.  
First, the marginal contribution of one or 
two casinos to local employment and tax 
revenue, most notably in the Midwest and 
South, is much greater than from a  bar or 
restaurant; in many small communities, one 
or two casinos employ a large percentage of 
the population and provide a large percent-
age of tax revenue to local communities.  
Second, many state and local governments 
earmark casino revenue to specific programs 
like infrastructure and education.  Third, 
a casino-smoking ban is likely to have a 
greater negative revenue impact on the gam-
bling industry than a smoking ban would 
have on the restaurant industry because 
customers patronize casinos for longer time 
periods than they do restaurants.  Finally, 
the view by some that casino gambling is 
a sinful activity increases attention to any 
public policy affecting casino gambling.
One key factor in the potential revenue 
loss from a ban on smoking in casinos is the 
percentage of gamblers who smoke.  Those 
in the casino industry argue that a smoking 
ban unfairly hurts their industry because 
casino customers have a higher smoking 
rate than the general population does.  Some 
evidence also suggests that casino custom-
ers who smoke spend more on gambling 
than nonsmoking customers.
6  Regardless 
of the specific underlying reasons, a general 
observation seems to be that smoking and 
gambling constitute what economists call 
“complementary goods,” meaning that they 
tend to be consumed together.
Smoking Ban or Recession?
Although the Illinois Casino Gaming 
Association has claimed that the smoking 
ban was largely responsible for the declining 
revenue of casinos, others have suggested 
that the downturn in general economic  
conditions was the culprit.  In its 2008 
annual report, the Illinois Gaming Board 
acknowledges the potential role of these  
two factors, leaving their relative impor-
tance as an open question:
There are two factors underlying the 
reductions in this year’s gaming revenues. 
The first is the smoking ban.  ... According 
to the casino industry, implementation of 
this act has caused the AGR [revenues] per 
admission to fall.  This is because habitual 
smokers take smoking breaks, during which 
time they do not engage in gaming activity.  
The second factor is the downturn in the 
Illinois and national economies.  As a dis-
cretionary form of spending, gaming expen-
ditures are especially prone to reductions 
during hard economic times.  The relative 
importance of the above two factors has not 
yet been quantified with certainty.
                
                —2008 Annual Report,  
             Illinois Gaming Board, p. 12
In a newly released working paper, we take 
on this question.
7  Using monthly data for 
adjusted gross receipts and total admissions 
at each of Illinois’ nine casinos, we estimate 
statistical models to explain the pattern of 
By Thomas A. Garrett and Michael R. Pakko
No Ifs, Ands or Butts:  
Illinois Casinos Lost Revenue  
after Smoking Banned
   
10
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P
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Average 2005-2007
2008
Illinois
Indiana Iowa Missouri
SOURCE: State gaming boards of Illinois, Indiana, Iowa and Missouri.
Casino Revenue Growth
l e g i s l a t i o n
14   The Regional Economist  |  July 2009E N DNO T E S
 1  Full text of the Smoke-Free Illinois Act 
(SB0500, Public Act 095-0017) as well as the 
voting history, can be found at www.ilga.gov/
search/iga_search.asp?scope=sentran95.
 2  One closely related case is a 2002 smoking ban 
in Delaware that applied to state-sponsored 
electronic gambling machines at racetracks 
(so-called racinos).  Research on this case  
study is summarized in a previous article in  
The Regional Economist (Pakko, January 2008).
 3  At the same time the Illinois law took effect, 
Colorado implemented a smoking prohibition 
that applied to commercial casinos.  In this 
study, we consider only the experience of the 
Illinois gambling industry. 
 4  Our measure of casino revenue is adjusted 
gross receipts (AGR), defined as gross receipts 
less winnings paid out to gamblers.
 5  See, for example, Long, Ford and Slife.
 6  Petry and Oncken conducted a survey of 
gamblers who smoke and those who do not 
and found that smokers gambled on more 
days and spent more money gambling than 
did nonsmoking gamblers.
 7  See Garrett and Pakko.
 8  In only one case, the Par-A-Dice Casino in 
East Peoria, was this pattern different.  For 
that casino, the change in revenue was nega-
tive and significant, but the estimate for atten-
dance showed a small but significant increase.  
This might be attributable to the fact that the 
Par-A-Dice faces no nearby competition, or 
it may be due to some other factor that is not 
explicitly included in our analysis.
  9  The point estimate for the statewide total 
is 22.1 percent.  For the sum of individual 
casinos’ revenue, the figure is 21.8 percent. 
R E F E R E NC E S
American Nonsmokers’ Rights Foundation. 
“Smokefree Gaming Laws.”  See www.no-
smoke.org/pdf/100smokefreecasinos.pdf.
Long, Jeff; Ford, Liam; and Slife, Erica.   
“Illinois’ Gambling Problem,” Chicago 
Tribune, Dec. 4, 2008, p. 1. 
Garrett, Thomas A.; and Pakko, Michael R.  “The 
Illinois Smoking Ban and Casino Revenues,” 
Federal Reserve Bank of St. Louis Working 
Paper 2009-027A, June 2009. 
Pakko, Michael R.  “Clearing the Haze?  New 
Evidence on the Economic Impact of Smoking 
Bans,” Federal Reserve Bank of St. Louis  
The Regional Economist, Vol. 16, No. 1, 
January 2008, pp. 10-11.
Petry, Nancy; and Oncken, Cheryl.  “Cigarette 
Smoking Is Associated with Increased  
Severity of Gambling Problems in  
Treatment-Seeking Gamblers.”  Addiction, 
Vol. 97, No. 6, May 2002, pp. 745-53.
revenue over the period 1997 through 2008.  
The models include controls for trends, 
seasonal patterns, regulatory changes and 
the general pace of economic activity.  After 
controlling for all these factors, we evalu-
ate the remaining change in revenue that is 
attributable to the Smoke-Free Illinois Act, 
identifying the effects of the smoking ban by 
the timing of its implementation.
Our estimate for the effect on total revenue 
for all nine casinos is representative of our 
general findings:  We estimate that the smok-
ing ban is associated with a 20 to 22 percent 
revenue decline, amounting to a total loss in 
casino revenue of more than $400 million.  
This estimate implies that casino revenue in 
Illinois would have been approximately flat  
in the absence of the smoking ban (+/– 1 
percent), rather than experiencing the 21 
percent decline shown in the chart.  
The presence of riverboat gambling in 
three states adjacent to Illinois provides 
an opportunity for comparing this finding 
with the experience of similar casinos that 
were not subject to the Illinois smoking ban.  
Using data for gambling revenue at casinos  
in Indiana, Iowa and Missouri, we find no 
significant change associated with the adop-
tion of the Illinois smoking ban.  The same 
calculation that leads to our finding of a  
22 percent decline in Illinois revenue yields 
very small increases in Iowa (2.2) and Mis-
souri (1.9) and literally zero percent change  
in Indiana.  Statistically, these estimates are 
all consistent with no change in revenue.  
This observation confirms—at least at the 
statewide level—that the effect we identify  
for Illinois is unique.  Casinos in each of 
these states suffered roughly the same 
downturn in economic activity, but only the 
Illinois casinos suffered the losses that our 
model associates with the implementation  
of the smoking ban.
Analyzing total attendance, rather than 
revenue, yielded further insights into the 
impact of the smoking ban.  Again, after 
taking account of other factors, we found 
that the smoking ban was associated with a 
statistically significant decline in admissions 
of 12.3 percent.  Estimates for surrounding 
states showed small declines in each state,  
but in none of the cases was the decline 
statistically significant.  So, not only did 
customers tend to gamble less and, therefore, 
generate lower revenue for the Illinois casinos 
(as indicated in the Illinois Gaming Board’s 
annual report), they also attended the casinos 
less often.
Our full research report also compares 
attendance and revenue of individual casinos 
in Illinois with their nearby competitors.  
Our findings for these regional markets 
around the state further refine our estimates, 
but do not change the nature of the results:  
Riverboat casinos in Illinois as a group expe-
rienced significant downturns in attendance 
and revenue after the implementation of 
the Smoke-Free Illinois Act.
8  In fact, after 
summing our estimated revenue losses for 
the individual casinos, we find the same out-
come, an aggregate decline of approximately 
22 percent.
9
The Bottom Line
One of the reasons that the smoking ban 
has been more contentious for casinos than 
for other types of businesses is the contribu-
tion that gambling taxes make to state and 
local tax revenue.  In Illinois, casinos are 
subject to a per-capita admissions tax, as  
well as a progressive tax on gambling rev-
enue.  Revenue from these taxes is divided 
between the state government and the gov-
ernments of the communities in which the 
casinos are located.
Using our estimates of revenue losses and 
declining attendance at each of the casinos 
in Illinois, we find that the tax loss was more 
than $200 million in 2008.  For the local 
communities, the total loss in tax revenue 
amounted to over $12 million.
The economic effects of the Smoke-Free 
Illinois Act—specifically with regard to  
casino revenue and government tax receipts 
—represent only part of the act’s overall 
impact.  In a full analysis, these costs need 
to be considered alongside other costs and 
benefits, including the public health benefits 
of the legislation.  But as policymakers in 
Illinois and elsewhere ponder the implica-
tions of the Illinois smoking ban, the impact 
on revenue, attendance and taxes should not 
be ignored. 
Thomas A. Garrett and Michael R. Pakko are 
economists at the Federal Reserve Bank of  
St. Louis.  For more on their work, see http://
research.stlouisfed.org/econ/garrett/ and http://
research.stlouisfed.org/econ/pakko/.
The Regional Economist  |  www.stlouisfed.org   15

No ifs, ands or butts: Illinois casinos lost revenue after smoking banned

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No ifs, ands or butts: Illinois casinos lost revenue after smoking banned

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