PA Politicians Risking Budget, Tax Hikes By Bungling Online

Pennsylvania Lawmakers Putting Budget At Risk, Tax Hikes Back On Table By Playing Politics With Online Gambling

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A small but powerful group in the Pennsylvania State Senate is reportedly setting the state’s push for regulated online gambling up for certain failure by demanding impossibly high tax rates be applied to any online gambling activity.

That failure will cost the state over $100 million in license fees that are effectively already baked into the current budget. Pennsylvania would lose another $300 million in additional tax revenue over the next five years.

A high tax rate will kill online gambling in PA

Sources tell OPR that a group headed by Sen. Tommy Tomlinson is insisting that tax rates for online gambling mirror the rates set for the state’s land-based casinos.

Sources further assert that Tomlinson’s advocacy is gaining significant momentum among his colleagues.

Currently, Pennsylvania taxes land-based slots at 54 percent and table games at 16 percent.

Proposals for regulating online gambling in Pennsylvania have offered tax rates of anywhere from 15-25 percent.

It’s all about margins

At first glance, a parallel tax rate might seem reasonable.

But the fact is that the margin picture for an online casino is radically different than the margin picture for land-based casino.

OPR polled multiple operators in New Jersey to construct this generic snapshot of where a dollar of online gambling revenue goes:

  • 24 cents to advertising
  • 20 cents to player reinvestment (player promotions and retention costs)
  • 18.5 cents to payment processing, KYC, geolocation costs, and platform and content royalties
  • 17.5 cents to taxes
  • 12.5 cents to general and administrative needs, including staff
  • 2.5 cents to other regulatory fees

That leaves five cents of profit from each dollar of revenue.

No profit, no license fees

A tax rate of 54 percent – compared the effective rate of 17.5 percent in New Jersey – would create an obviously untenable situation in Pennsylvania.

Even with dramatic reductions in advertising and bonusing, operators would still be unable to achieve a profit.

“We wouldn’t apply for a license under those conditions,” a representative from one of Pennsylvania’s land-based casinos, who requested anonymity to discuss company matters, told OPR. “Frankly, I can’t imagine a single casino in the state that would.”

Those and related license fees are expected to generate anywhere from $100 to $130 million day one for Pennsylvania’s budget once a bill to regulate online gambling passes.

But if Tomlinson gets his tax rate, the state can expect exactly $0 instead. No operator will pay for a license to lose money.

If the money doesn’t come from online gambling, it will come from tax increases

Pennsylvania is already decidedly short of solutions to close a reported $3 billion budget hole.

The state cannot make or print money. It can only save or raise it.

  • The thought that $3 billion in savings is waiting around to be discovered is ludicrous on face.
  • Lawmakers have proposed no other new state-regulated industry that would match the immediate revenue generated by online gambling.
  • The only option remaining, then, is to raise taxes. It’s simply a question of whether those tax increases will hit businesses, property, or income.

The tax rate debate is a red herring

What should be incredibly frustrating for Pennsylvanians is that the tax rate debate is an absolute sham.

In public hearings on the issue, Tomlinson has repeatedly parroted a disproven claim. A lower tax rate for online play, argues Tomlinson, will motivate casinos to shift play away from their land-based casinos toward online sites, ultimately costing the state tax revenue.

There are a number of reasons why this will not be so:

  • Online casino products have a lower margin than land-based products. Casinos would lose money by shifting players from one to the other, even if the tax rate was lower.
  • Online patrons do not generate any of the ancillary revenue (shopping, drinking, eating, entertainment, hotel stays) for casinos. These items are often the highest-margin items on a casino operator’s books. Again, casinos would lose money – and risk hundreds of millions in capital investment – by attempting to shift live players to online games.
  • Online players are not the same as land-based players. New Jersey has made it clear that the online patron is younger and otherwise demographically distinct from the land-based customer. Executives from the Borgata, Caesars, and the Golden Nugget have all stated that over 80 percent of their online customers were new customers.
  • There’s no evidence that casinos have the ability to do this even if they wanted to. Customers play where and what they want to play.

There is simply no rational case to be made that regulating online at a differential tax rate will do anything but increase revenue for the state’s operators, and total tax take for the state along with it.

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- 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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