Legalizing brothels doesn't pay, expert warns

Sex sells, but does it pay? Dalhousie University economist Marina Adshade says legalizing brothels doesn't guarantee higher tax revenues and may actually result in increased costs.

Amsterdam’s famed red-light district faces problems of its own. (Photo: Miquel Gonzalez/Redux)

In late March, Ontario’s highest court effectively legalized brothels, calling current laws governing prostitution overly broad and unconstitutional. Barring a successful appeal by the Ontario government to the Supreme Court of Canada, prostitutes will be allowed to set up bawdy houses and hire administrative and security staff as early as next year.

Certainly Ontario, with its $16-billion budget deficit, could use the added revenue of a new, properly regulated and taxed service industry. The province has already seen enough virtue in vice to announce a new casino in the Greater Toronto Area and expand lottery sales, online gambling and sports betting.

And legal or not, the sex business is substantial. Germany has an estimated 400,000 professional prostitutes, with annual revenues reportedly reaching US$18 billion. Tax revenue from prostitution has become a key source of income for some cities. Cologne boasts Europe’s biggest brothel, a 12-storey bawdy mansion where about 200 women work and 1,000 customers visit per day. The city of Bonn recently installed street meters to tax prostitutes at a rate of US$8.70 per night. Officials expect the meters to plunk US$264,000 every year into city coffers.

But the business case for brothels is far from perfect. Legalized prostitution still faces problems related to human trafficking, drugs, violence and organized crime—the very things legalization advocates aim to curb. Studies have also shown that legalization actually increases street prostitution. Those who are underage or illegal immigrants,unable to pay the cost of regulation or pass health testing tend to work outside the system.

Nevada’s heavily regulated brothels are allowed to operate in only lowly populated areas and enjoy a quaint reputation. HBO even aired a reality show called Cathouse set at the Moonlite Bunny Ranch. But these legitimate enterprises have done nothing to rein in illegal and unregulated prostitution in the urban centres of Las Vegas and Reno.

Dalhousie University economist Marina Adshade, author of an upcoming book based on her blog, Dollars and Sex, warns not to expect a windfall of tax revenue from a regulated sex industry. “The Netherlands still hasn’t figured out how to collect taxes properly from its sex workers, and it’s been legal there for 14 years,” she says.

Indeed, the Prostitution Information Centre in Amsterdam reports that only 5% to 10% of the Netherlands’ more than 8,000 prostitutes actually pay taxes on the estimated US$800 million in annual sex revenues. In 2008, the city actually moved to close half its brothels in a bid to dislodge organized crime.

Legalizing brothels in Canada would likely increase the number of prostitutes, and men buying sex services, as well as create more costs in police services and health care, with no guarantees to make it up in tax revenue. “This is not generating revenue that will go into building Canadian schools and hospitals,” Adshade says. “It’s a mistake to think that it will.