Earl Warren (front center) and the rest of the U.S. Supreme Court justices, 1967

1952-1968

Soon after two new federal taxes — the tax on wagers and the wagering occupational tax — went into effect in late 1951, problems with them arose. (See Part I for a description of and impetus behind the taxes.)

First Complication To Arise

The constitutionality of the occupational tax was called into question. In May 1952 U.S. District Court Judge George A. Welsh flat out declared it federal legislators’ unconstitutional infringement on states’ power and described it as “a police measure enacted by Congress under the guise of a tax bill” (Reno Evening Gazette, May 6, 1952). This ruling came during the trial of a Philadelphia gambler charged with failure to buy the gambling tax stamp.

An editorial in Florida’s Tampa Times pointed out the gambling stamp tax was “contradictory” and “hypocritical” (March 3, 1953).

“It is a case of the federal government on one hand sanctioning gambling, while state and local law enforcement officers are expected to stamp out gambling,” it read. “Winking at gambling because it has become a federal tax revenue producer would be outright hypocritical and against the wishes of the majority of Americans.”

Other critics argued the tax violated wager-takers’ Fifth Amendment right to protection from self-incrimination. On one hand, requiring them to register forced them to provide information that could implicate them in breaking their state’s state anti-gambling law, were that in fact the case, and in doing so, invite prosecution.  Many newspapers, including The Sacramento Bee and The Indianapolis News, published the names of stamp purchasers.

On the other hand, if the wager-takers ignored the federal law, to keep their underground gambling operation secret, they risked federal prosecution for not buying the stamp and registering.

Not So Effective

A second issue was the taxes weren’t achieving the desired ends. A year in, they hadn’t significantly reduced gambling; at best, they’d slightly deterred it. They hadn’t forced gamblers out of business; instead, the operators had gone underground.

The taxes also failed to bring in anywhere near the level of revenue expected. Congress had predicted an influx of about $400 million in the first year, but the actual figure was about $9 million, not even one-third of the predicted amount.

Whereas a flurry of stamp tax buying had occurred after the Revenue Act was passed, taking total sales to over 19,000, purchases dramatically fell off in 1952.

“The professional gamblers soon wised up and developed a ‘wait and see’ attitude,” reported The Tampa Times.

The reasons for the suboptimal results, according to Frank Lohn, chief of the Internal Revenue Bureau’s intelligence division, were that the bureau lacked sufficient staff to go after unpaid gambling taxes and that the constitutionality of the special tax remained undecided.

“Many gamblers believe the high court will overturn the law, and in the meantime they are not too afraid of violating it,” reported the United Press (Reno Evening Gazette, Nov. 1, 1952).

High Court Weighs In … Twice

That was not the case, however; the U.S. Supreme Court upheld the special tax, 6 to 3, in March 1953. About a year later, it ruled that purchasing a wagering stamp tax did not make the buyer immune from possible state prosecution, thus the self-incrimination problem persisted.

Fast forward 14 years to 1967. Significantly fewer gamblers nationwide were buying a tax stamp, 5,917 in that year, for example. About 2,000 gambling tax violation cases were advancing through the courts.

Then in January 1968, in another twist, the Supreme Court, in a 7-to-1 decision, ruled that the stamp tax law violated people’s Fifth Amendment right, but the justices didn’t declare it unconstitutional. Instead, they essentially gave wage-takers a way to avoid prosecution for noncompliance: claim self-incrimination.

The sole dissenter, Chief Justice Earl Warren, said the decision made the law unenforceable and unconstitutional. Justice and treasury department officials predicted it would hamper crimefighting at the federal, state and local levels and jeopardize current prosecutions.

Fix For The Problem

In 1974, Congress passed Public Law 93-499 to replace the two wagering taxes mandated in 1951. The new statute required certain gamblers to buy a $500 (about $2,800 today) wagering tax stamp annually and pay 2 percent on all bets they take. December 1, 1974 was the effective date, and the Bureau of Alcohol, Tobacco and Firearms was tasked with enforcement.

This law avoided the Fifth Amendment issues inherent in the previous one. It did so by prohibiting the federal government from divulging, to any law enforcement agency, private group or citizen, the information gamblers gave, as required, about themselves, their partners, employees and customers.

Types of gambling exempt from the new law were casino betting, state-licensed parimutuel wagering, state lotteries and coin-operated machines on which a stamp tax was charged. 

As with the prior wagering taxes, the purpose of Public Law 93-499 was to “increase federal revenues and curtail an important source for financing criminal activities” — certain types of gambling, reported The Sun-Telegram (Jan. 19, 1975).

Part I

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Pat McCarran, U.S. Senator for Nevada, 1947

1933-1954

His unfavorable personal opinion about gambling notwithstanding, Patrick “Pat” A. McCarran (D-Nev.) — U.S. Senator between 1933 and 1954 — acted repeatedly on the industry’s behalf. Had he not, it’s likely gaming wouldn’t have emerged as The Silver State’s greatest revenue-producing economic sector — a positive or negative, depending on one’s view.

Because gambling had become vital to Nevada — or “woven … in its various forms into the warp and woof of the state’s economic structure,” in the words of McCarran — he believed he had no choice but to do what he could to keep it thriving. But he felt like a “whore,” he said, defending gamblers (casino owners and operators), whom he considered “tinhorns.”

“In the climactic decision of his long and turbulent career, [McCarran] characteristically chose to justify and defend his beloved Nevada rather than take it into one more battle with poverty and want,” wrote the authors of The Money and The Power.

Inside His Bag Of Tricks

Here are 7 of McCarran’s pro-gambling efforts:

1) He intervened to get underworld denizens gambling licenses.

When Moe Dalitz, Cleveland mobster, applied for a gambling permit for the Desert Inn casino in Las Vegas in 1949, the Nevada Tax Commission said no based on his criminal background — bootlegging and illegal gambling. McCarran discussed the matter in person with one of his powerful friends, Salvatore “Sam” Maceo, Texas organized crime boss who previously had partnered with Dalitz in illegal liquor distribution.

After the McCarran-Maceo tète-a tète and supposed intervention by Maceo subsequently, state gambling regulators granted Dalitz a license.

2) He helped gamblers surpass other obstacles.

When mobster Benjamin “Bugsy” Siegel and the Nevada Projects Corporation, the cadre of mobsters financing the new hotel-casino, were having the Flamingo constructed in Las Vegas immediately following World War II, in 1946, construction materials were in shortage. As such, the Nevada office of the federal Civilian Production Administration allocated scarce materials on a project priority basis.

McCarran jumped the Flamingo to the top of the list so it could, and it did, receive construction materials without delay.

3) He got the scope of the Kefauver inquiry broadened.

In 1950, when Senator Estes Kefauver (D-Tenn.) pursued launching a congressional investigation into gambling nationwide, McCarran got the target expanded to encompass all types of organized crime — prostitution, narcotics, loan sharking, murder, extortion and labor racketeering — to lessen the resulting consequences to Nevada’s gambling.

The probing body became the United States Senate Special Committee to Investigate Crime in Interstate Commerce, or in short, the Kefauver Committee.

4) He delayed Congress’ approving the Kefauver inquiry.

Among his efforts there, he begged for additional time for the Judiciary Committee, which he headed, to consider the proposal, raised potentially related legal issues and suggested the matter be sent to the Senate Commerce Committee for its review as well.

Kefauver, however, received a green light, and his team conducted hearings in 14 major U.S. cities during 1950 and 1951.

5) He fought Congress’ agreement to levy contempt citations against Kefauver witnesses in general.

When subpoenaed to testify during the hearings, numerous gamblers either failed to appear or when they did appear, they refused to answer questions. Kefauver wanted them slapped with a congressional contempt charge* for obstructing the investigation. McCarran fervently argued against the idea but lost that battle. Once Congress approved one contempt charge, a slew followed.

6) He got contempt charges against multiple gamblers quashed individually.

7) He helped thwart passage of a bill to tax all gamblers.

Growing out of the Kefauver Committee’s findings, the House Ways and Means Committee, in May 1951, voted to impose a “10 percent gross receipts tax on bookies, numbers rackets operators and others who operate gambling pools” (Nevada State Journal, May 17, 1951). Kefauver urged that the tax bill from the House must be amended to incorporate all forms of gambling.

McCarran called on some Nevada gamblers to lobby against the bill while he fought it at the Senate Finance Committee level. He pleaded his case, that the “cumulative result would spell tragedy for the State of Nevada” and gambling, as a major economic component, needed protecting.

What eventually passed were a 10 percent tax on all wagers concerning sporting events or lotteries and a $50 annual occupational stamp excise for bookmakers and lottery operators. These mandates comprised a small portion of the much larger Revenue Act of 1951.

For these and his other interventions in support of gaming, McCarran was lauded by some and criticized by others.

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* Contempt of Congress is the criminal act of obstructing the work of the U.S. Congress or one of its committees, a misdemeanor punishable by a $100 to $1,000 fine or one-month to one-year imprisonment.

Sources