Report May Provide Green Light for Regulated Online Gambling in Pennsylvania

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A critical report released today on the future of Pennsylvania’s gambling industry should give proponents of regulated online gambling cause for optimism.

The report – entitled “The Current Condition and Future Viability of Casino Gaming in Pennsylvania” – was presented this morning to Pennsylvania Legislative Budget and Finance Committee.

Pennsylvania lawmakers mandated the creation of the report, produced by Econsult Solutions, back in December 2013.

Read the full report here. A single-page overview is available here.

So what exactly about the report augurs well for regulated online poker and casino coming to the Keystone State?

Online gambling would complement, not cannibalize, land-based gambling

After surveying industry experts, casino owners, existing research and comparable markets to gauge the impact of online gambling regulation on current casino revenue, the Econsult report concluded that “[t]he balance of the evidence suggests that the impact would be on the positive side.”

This particular aspect of the study may end up being the most critical for the future of online gambling in Pennsylvania, as Chris Krafcik of noted on Twitter:

The Econsult report cited a number of factors suggesting online gambling caters to a “separate market” from land-based gambling, meaning online revenue will complement, not cannibalize, current casino revenue:

  • The average amounts able to be wagered online are smaller than the average wagers at land-based casinos.
  • The typical advantages cited by online gambling consumers and their patterns of play suggest that online gambling “is a substitute for other forms of home entertainment rather than a substitute for traditional offline casino gaming.”
  • The demographics of the online gambler differ materially from land-based casino customers.

Online gambling offers highest revenue potential of available expansion options

The report contained analysis not only of the revenue potential for online poker and casino, but also for myriad other wagering options, including fantasy sports and slots at Pennsylvania’s airports.

Of the six options surveyed, online gambling offered far and away the greatest upside in terms of tax revenue, as shown by the table from the Econsult report below:

Potential revenue sources for PA

Interestingly, the $110mm Pennsylvania is projected to take in annually from regulated online gambling is quite close to the amount of revenue lawmakers will need to replace come budget time due to the failure of tavern gaming to produce any meaningful revenue for the state.

Such gaming was projected to generate $102mm in tax revenue but has fallen far short of expectations.

Competition will soon have a significant impact on PA gambling revenue

The backdrop for the report is the ever-escalating regional competition for gambling dollars, a battle Pennsylvania fights on nearly every border. Two primary threats to current levels of gambling revenue are highlighted by the report:

  1. “Phase 1 competition” – Casinos in New York, Maryland and Ohio will draw 4-5% from Pennsylvania revenues by 2020.
  2. “Phase 2 competition” – New Jersey strengthens Atlantic City and adds casinos to Camden and Meadowlands. PA takes a 6-7% reduction in revenue potential under this scenario.

Taken together, that’s a possible hit of up to 12% before the decade’s out – more than a flesh wound. Revenue from online gambling would stitch the gouge nicely.

But the report also contains a pair of conclusions that may decrease the urgency to offset those losses.

First, the report argues that the revenue declines recently experienced by Pennsylvania “do not foretell a significant secular downturn in the industry’s future performance.”

Second, the report asserts that the addition of new land-based gambling in Philadelphia and Lawrence County will result in “a significant net increase in gaming revenues and gaming tax revenues to the state.”

Tax rates could prove to be a sticking point

A final point worth noting: The Econsult report assumes that tax rates for regulated online gambling in Pennsylvania are set at a blended rate of 20% for poker and 60% for slot-style games.

That’s quite a bit higher than other jurisdictions like New Jersey and Nevada. It’s also quite a bit higher than what experts have been suggesting for Pennsylvania, a point not lost on GamblingCompliance’s Sr. Legal Analyst Kevin Cochran:

One of the primary justifications voiced by advocates of a lower tax rate is that Pennsylvania’s regulated sites will be in competition with illegal sites that pay low – or no – tax. If handicapped by a substantial tax rate, the argument goes, regulated sites will lose traffic to illegal sites that can afford to offer more generous promotions and bonuses to players.

The report acknowledges this reality, noting that:

[G]iven the importance of network effects and the competition with illegal offshore sites, as the industry begins, lower rates may be optimal in the short-run. To account for this, legislation could set a lower rate initially that increases to 20% and 60% respectively over time.

Full text of report here. Highlights here.

- Chris is the publisher of Grove also serves as a consultant to various stakeholders in the regulated market for online gambling in the United States.
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