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The Senate punts on regulated online casino and poker games in 2016

 

For a time, it looked like Pennsylvania was a slam dunk to legalize online gambling in 2016. Those hopes were dashed when the Senate failed to reach a consensus before the last scheduled session day.

After a strong but ultimately fruitless push in 2015, the latest legislative effort started off with more of a whimper than a bang. It wasn’t until late May that the wheels began turning, when the House of Representatives considered two gaming reform amendments, that if passed, would be added to an separate gaming bill, HB 1925.

The first, A7622, packaged online poker/casino and other reforms alongside the inclusion of video gaming terminals (VGTs) at non-casino locations. The other, A7622, was a mirror of Rep. John Payne‘s omnibus gaming reform bill (HB 649) from the year prior, and did not include VGTs.

Confusion ruled the day, and both amendments were soundly defeated — although the margin of defeat for A7622 was significantly smaller.

Momentum shifted to the side of online gambling proponents in late June, when a new, multifaceted gaming reform bill that linked online gambling, daily fantasy sports, and other gaming reforms emerged in the House.

An amendment to allow VGTs nearly derailed the bill, failing by a vote of 118-79. But a last minute amendment by Rep. Rosita Youngblood (the aptly titled Youngblood Amendment) calling for the exclusion of VGTs, turned the tide. The amendment ultimately passed 115-80.

In the week that followed, HB 2150 saw a whirlwind of activity, culminating in the bill clearing a vote in the House.

In July, Governor Tom Wolf allowed a $1.3 billion revenue package, that earmarked $100 million for gaming reform, to become law. It was indicated that licensing fees from online gambling operators would be counted on to fill the gap.

Unfortunately, the Senate signaled that it would not be addressing online gambling legislation until the fall. In the interim, the legislature raised taxes on casino table games, while online gambling advocates spoke up about the need to pass legislation sooner rather than later.

The local share fix

Complicating matters, in late September the state Supreme Court deemed a local casino tax unconstitutional, and gave lawmakers 120 days to provide a resolution.

The Senate acted quickly, approving an amendment to a responsible gaming reform bill, HB 1887, that included a temporary fix for the local share issue. However, the House had a different agenda, and tied its own permanent fix to a swatch of gaming reforms, including the legalization of online gambling. The new amendment sailed by, 108-71.

Ultimately, the 2016 legislative session ended in a standoff, with Senate Majority Leader Jake Corman citing that the House’s insistence on including iGaming as part of the local casino tax fix “basically killed” any chance of a resolution in 2016.

The next local share fund payments will be disbursed on January 15, just 11 days before the court’s 120 day grace period expires. However, because the following payment isn’t due until April 15, lawmakers are using that date as the true deadline.

So what happens now?

It is currently unknown why the Senate failed to reach a consensus on online gambling.

What is known, is that longtime state representative, and current chairman of the House Gaming Oversight Committee John Payne is stepping down from office. And with 2016 having been an election year, any online gambling bill will have to navigate the muddy waters of a new legislature in 2017.

Given the urgency to pass a local casino tax fix before April 15, the first few months of 2017 will be telling as to whether lawmakers have an appetite to tie online gambling legislation to the resolution.

Should they punt on online gambling, they’d have to seek another means by which to plug the $100 million budget shortfall — which may mean a new tax.

How much revenue will the PA online gambling industry generate?

Under the provisions of HB 2150, the licensing fee for casinos to participate in online gambling would be $8 million. There are currently 12 land-based casinos in Pennsylvania. Only one — Sands Bethlehem — will almost definitely abstain from online gambling.

The rest are likely to either be enthusiastic or reluctant participants in the industry. Some, such as Mount Airy Casino, Parx Casino, Valley Forge have already forged online gambling partnerships.

Even in a bearish scenario, where only eight casinos participate, that’s $64 million. Add this to the $2 million fee charged to each significant vendor, and it becomes easy to see the industry filling the $100 million shortfall on licensing alone.

But the real question is: Once the fees are collected, how much tax revenue will the industry generate on a recurring basis?

The best means of answering that question is to look at the performance of the regulated NJ online gambling market.

In its first full year (2014), the NJ industry generated nearly $123 million in gross gaming revenue. Using this figure as a baseline, and accounting for PA’s larger population, we arrive at an estimate of $176 million. At a 16 percent tax rate (14 percent for state coffers, and 2 percent to a local share), that’s $28.2 million in first-year tax revenue.

In reality, that figure stands to be much higher, as improvements in geolocation technologypayment processing, and other areas will provide Pennsylvania operators with luxuries that weren’t available in NJ at launch.

Accounting for this, it wouldn’t surprise if Pennsylvania’s first year in the industry was as strong as NJ’s third (2016).

By our internal estimates, NJ is projected to generate $196 million in online gambling revenue for 2016. If PA enjoys similar success in its first year, online gambling revenue will top $280 million, working out to over $39 million in tax revenue.

And if NJ revenue trends are any indicator, that figure will only grow as the industry matures.

Path to regulated online gambling in Pennsylvania

Online gambling first appeared on the legislature’s radar in April 2013, when State Rep. Tina Davis introduced HB 1235. The bill would permit both online poker and casino within the commonwealth, set operator licensing fees at $5 million, and called for a 28 percent tax rate on gross gaming revenue.

By June of this year, a general lack of interest among lawmakers resulted in then House Committee on Gaming Oversight chair Tina Pickett recommending the bill be stalled until 2015. But it wouldn’t take nearly that long for the ball to begin rolling again.

In December 2013, the Senate took a mammoth step forward when it passed SR 273. The resolution tasked Econsult Solutions with conducting a study that would measure the economic impact of online gambling.

The results were published in May 2014, and were cause for optimism. Econsult estimated that online gambling would yield $68 million in first year tax revenue, and $110 million annually going forward. It also concluded that online gambling would have a complementary impact on land-based casino revenue.

Granted, the revenue estimates were to be taken with a massive grain of salt, as they presumed a blended 20 percent tax rate on online poker and 60 percent on slots.

In either case, the results proved favorable enough for State Sen. Edwin Erickson to introduce a new online gambling bill (SB 1386) in June 2014. Little action was seen on that particular bill, but it set the stage for what would prove a very active 2015 session.

The 2015 push: Rep. John Payne and HB 649

Rep. John Payne introduced HB 649 in February 2015. Payne viewed online gambling as part of the solution to the state’s “projected $2 billion budget shortfall,” and backed his beliefs by championing online gambling legislation efforts for the next two years.

In the spring of 2015, two competing bills emerged in the House. One, HB 920, was from Tina Davis, and a near replica of her 2013 bill. The other, Nick Miccarelli‘s HB 695, was a online poker only bill. Of the three, Payne’s was thought the most likely candidate for serious consideration.

Ahead of the June 30 budget deadline, a fourth bill — this one from the State Sen. Kim Ward — was introduced. SB 900 was significant in that it marked the Senate’s official entry into the conversation. Unfortunately, SB 900 was radically different than HB 649, calling for a 54 percent tax rate, a $10 million operator licensing fee, in-person registration, and the exclusion of Category 3 casinos.

Suffice it to say, the rigid nature of SB 900 would make it so license holders would have trouble operating profitably.

The Senate held two hearings on online gambling in June 2015, after which, little was heard on the topic until the fall. In October, Pennsylvania was still in the midst of a budget stalemate. When Gov. Tom Wolf’s tax plan was defeated in the House, he became willing to discuss new revenue sources, online gambling among them.

The following month, the GO committee passed HB 649 by a margin of 18-8, marking the first time an online gambling bill passed a vote in Pennsylvania. But by then, an omnibus package was attached to the bill, calling for slot machines at non-casino venues and airports, Category 3 casino expansion, and a report on daily fantasy sports, among other reforms.

It is believed that the controversial elements of the bill, namely allowing video gaming terminals at non-casino locations, was one of the reasons efforts stalled in 2015.

Pennsylvania’s land-based casino industry

Pennsylvania is currently home to 12 land-based casinos, which together create the second largest gambling economy in the United States. Hard to believe, that just over a decade ago, the industry was non-existent.

The ball got rolling in 2004, when lawmakers authorized 61,000 slot machines at existing horse tracks, resorts and slot parlors. Concurrently, the Pennsylvania Gaming Control Board was founded to issue up to 14 licenses, and provide regulatory oversight for the nascent industry.

On December 20, 2006, six licenses for existing horse racing venues and five more for standalone casino were awarded. Of the 11 licensed operators, 10 opened or expanded their facilities by 2010. And by 2011, two Category 3 casinos — Valley Force Casino Resort and Lady Luck Casino Nemacolin — had also flipped over the open sign.

The industry took a monumental step forward in early 2010, when table games — including poker — were legalized at slots casinos. By July 2010, top earners Sands Bethlehem, Parx Casino, and Harrah’s Chester (later rebranded as Harrah’s Philadelphia) had all instituted table games.

It was then that land-based casino revenue really began to take off, growing from $1.62 billion in 2008, to $2.49 billion in 2010, and $3.16 billion in 2012. Since, the industry has mostly stabilized, but still remains on a slight upward trajectory.

For fiscal 2015-16, PA recorded $3.2 billion in revenue — a record high.

Pennsylvania online poker FAQ

Why is Pennsylvania pushing for online poker and online casino games?

Pennsylvania has a booming land-based casino economy, but rising competition from neighboring states threatens to put a dent in the industry’s margins. The state is trying to remain competitive.

  • Just on licensing fees alone, online gambling would fulfill a $100 million shortfall that exists in the Governor’s current spending plan.
  • Pennsylvania residents already play at unregulated offshore sites. By legalizing online gambling, the state would safeguard its citizens while creating a sustainable source of tax revenue.
  • It’s already been proven that online gambling has a complementary impact on land-based revenue.
  • Online gambling would create jobs in the state.

What are the chances that an online poker bill in Pennsylvania passes?

Any online poker bill that makes its way to the Governor’s desk is likely to be paired with online casino games, and other reforms. Although the presence of multiple reforms complicates the equation, there’s still a fair chance Pennsylvania players will be playing on legal online poker sites within the next 12 – 18 months.

Would Pennsylvania also legalize online casino games?

Presumably, yes. The current bill up for consideration, HB 2150, calls for the legalization of online poker, casino, daily fantasy sports, and other non-interactive reforms.

It’s worth noting that online casino is a much bigger revenue generator in NJ than online poker games, accounting for over 85 percent of annual industry revenue.

Who will operate the online sites?

Under the provisions of HB 2150, land-based casinos would operate online poker and casino sites. License holders would be required to pay a $8 million fee, and significant vendors a $2 million fee.

Would Pennsylvania network with other states for online poker?

The possibility is there. Certainly, New Jersey would likely be interested in forging an interstate online poker network with Pennsylvania, as PA is roughly 1.5 times the size of its east coast neighbor, and will presumably make use of some of the same operators.

Would I have to live in Pennsylvania to play at state sites?

You won’t have to hold residence in Pennsylvania to play at the state’s regulated sites, but you will have to be physically located within its borders.