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