If passed into law, either as a standalone measure or as part of the state’s 2016 budget, legalized gambling in Pennsylvania would fulfill a significant portion of the state’s estimated $1.85 billion budget deficit, and provide state coffers with a sizable and sustainable source of income for years to come.
Although it’s becoming increasingly unlikely that legalized online gambling in PA will generate significant revenue by way of virtual casino games and paid poker rake in 2016, the particulars of HB 649 permit license applicants to begin filing applications within 90 days of the bill’s passage.
Licensees under HB 649 will pay an $8 million licensing fee (this is a change from the initial bill, which called for a $5 million fee), while significant vendors pay $2 million (also up from the original bill, from $1 million).
On balance, we assume that between eight and eleven of the state’s 12 casinos will apply for licenses, resulting in $64-$88 million in revenue, and possibly more than $100 million depending on how much of the $2 million significant vendor fee goes to the state.
Already, some casinos have forged iGaming partnerships, while for others (Harrah’s Philadelphia, Mohegan Sun at Pocono Downs) it seems an inevitability.
The only casino that will definitely not participate in online gambling is the Sheldon Adelson owned Sands Bethlehem. Smaller casinos, such as Lady Luck Casino Nemacolin and Presque Isle Downs and Casino, may also choose to sit out, although representatives of both casinos have expressed keen interest in online gambling.
Based on a composite of revenue estimates, including my own analysis, we project that on average, PA online casinos will generate between $121 – $129 million in total first year revenue, while online poker stands to generate between $39 – $45 million.
However, since the last of these projections were published, a couple of variables have been altered:
Taking these factors into account, I’m inclined to believe that first-year revenues will reside closer to my bullish estimates of $145 million in first year online casino revenue, and $53 million in online poker revenue, for a grand total of just under $200 million.
At the 14% tax rate outlined in HB 649, this equates to $28 million for state coffers.
At the five-year marker, it’s plausible that Pennsylvania’s iGaming industry will meet or exceed my earlier bull case estimate of $270 million in annual revenue.
Using accumulated New Jersey data as a baseline, our simple NJ model tells us that Pennsylvania iGaming stands to generate $202 million in its second year. However, by year five this number should be pumped up by:
The latter point warrants further consideration. At a resident pool of nearly 22 million, the top poker operators should be afforded options that the population restrictions of each individual state do not easily permit. Namely:
In the presence of a shared liquidity compact, and pending the online poker industry as a whole begins to recover from its multi-year decline, it’s conceivable that PA online poker will generate upwards $60 million annually at maturity, with casino accounting for $210 million, for a total of $270 million.
At the HB 649 tax rate, this equals $37.8 million in annual revenue.
Note that this figure excludes additional revenue brick and mortar casino may generate as a direct result of cross-promoting with online properties.
HB 649’s companion bill in the Senate — the Senator Kim Ward sponsored SB 900 – calls for a 54% tax rate on interactive gaming revenue and a $10 million licensing fee.
On paper, SB 900 would result in more upfront and sustained iGaming income for state coffers. However, the drawbacks of imposing such a high tax rate outweigh the benefits, as poker operators will be forced to charge higher rake and tournament entry fees, reduce rakeback and cut down on promotional and marketing spend.
Likewise, a 54% tax rate may force online casino operators to lower payback percentages on slot machines, institute unfavorable blackjack rules and offer more high house edge game variants. All of which could have a serious negative impact on player retention rates. More here.
Not to mention, casinos may be dissuaded from paying a hefty $10 million licensing fee if the path to profit depends on their ability to overcome both an insufferable tax rate and PA’s limited population.