Europe's Online Gambling Tax Rates Demonstrate Model That PA Should Avoid

High Taxation Would be a Deathblow for Pennsylvania’s Online Poker Industry

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One of the leading candidates to regulate online gaming in Pennsylvania SB 900 – calls for an exorbitant 54% tax rate.

The proposed tax rate has been the primary point of discord at two recent hearings held by the Community, Economic & Recreational Development Committee, with opponents reasoning that there’s no way they could operate profitably if the rate was instituted.

Given the struggles faced by ring-fenced online poker operations in Europe, they may be on to something.

High taxation on online poker hasn’t worked in Europe, and it won’t in Pennsylvania

If SB 900 were to be passed into law untouched, Pennsylvania would own one of the highest tax rates on Internet gambling gross gambling revenue in the world.

This is clearly depicted by a chart recently shared on Twitter by Chris Krafcik of GamblingCompliance:

Online gambling tax rates

Even at rates that are less than half of what SB 900 is selling, European countries that have regulated online poker are struggling to remain afloat:

  • Italy’s online poker industry has been mired in a steep decline since 2012. As per Poker Industry Pro, in 2014 “gross gaming revenue for cash games fell by 21%.” More here.
  • The outlook for Spain’s regulated online poker market isn’t much brighter. Last year, poker revenue fell 3.5% and cash game revenue 20%.
  • France, which isn’t listed on the GC chart, institutes a 46% tax on gross gaming product. Cash game liquidity in France is currently at its all-time low, prompting regulator ARJEL to call for tax reform and international pooling.

Pennsylvania’s online poker operation will hold a key similarity to those outlined above in that it will be ring-fenced, at least at inception. Only Pennsylvania’s population (12.8 million) is significantly smaller than any of the aforementioned nations.

What that means is that until Pennsylvania forges an interstate iGaming compact with another state or network of states, operators will be severely restricted in their ability to grow. To partially offset this built-in disadvantage, legislators must facilitate growth via other means.

The most obvious way to do this is to follow the example set by New Jersey, where Internet gaming taxes were set at a reasonable 17.5%.

Senator Tomlinson’s fears misguided

SB 900 cosponsor Senator Robert Tomlinson has communicated fears that lower iGaming tax rates will compel casinos to redirect traffic from their brick and mortar venues to their online properties.

Nothing could be further from the truth:

  • Experts have illustrated that online gaming has a complementary impact on land-based casino growth.
  • Reports from New Jersey suggest that online gaming drives increased visitation and play to affiliated brick and mortar casinos.
  • What casino owners in their right mind would divert traffic from an industry that in fiscal 2013/14 generated $3.045 billion in gross revenue to one that is projected to earn somewhere in the vicinity of $200 – $300 million at maturity.

If anything, high taxation will result in online operators instituting a series of cost-cutting measures, which will likely include:

  • Increased rake and decreased rakeback for online poker
  • Fewer promotions that reward online players with incentives to visit land-based properties
  • Lackluster first time deposit bonuses
  • Decreased marketing spend

What results is that fewer Pennsylvania residents will be aware of regulated online gaming, and of the ones that are, many will be turned off by the lack of player incentives.

For each online player lost, it’s one less opportunity for land-based casinos to inexpensively add a player to their database. Multiply that by several hundred thousand signups and it becomes apparent how much Pennsylvania’s online gambling industry has to lose due to misguided fears.

Is there room for compromise?

Most certainly. One of the most appalling arguments in favor of SB 900’s proposed tax rate is that it would match the rate imposed on land-based casinos.

Not exactly. Only Pennsylvania’s slot terminals are subject to a 54% tax rate. The tax rate on table games, including poker, is a more digestible 16%.

A strong starting point would be for legislators to acknowledge that land-based casinos actually pay closer to 45%* in taxes, and to amend SB 900 accordingly.

At least then, legislators are one step closer to bridging the gap between the tax rate proposed by SB 900 and that offered by Representative John Payne’s HB 649 (14%).

When the dust settles, the hope is that the tax rate on Internet gaming revenue will be under 25% – which in my estimation, is the highest rate the industry can reasonably sustain.

*This assumes that slot terminals account for 75% of annual casino revenue, which based on recent statistics, appears accurate.

Photo by GotCredit used under license CC BY 2.0.

- Robert DellaFave is a game designer and avid poker player. He writes for several publications centered on legal US online poker and the regulated online gambling industries in New Jersey and Pennsylvania.
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