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	Murdoch University Electronic Journal of Law

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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
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elaw/comment/watax/chap6.txt
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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.