International evidence is clear on the impact of tax rates for online gambling

The Wrong Tax Rate For PA Online Gambling Would Mean Black Market Sites Would Still Dominate

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The hot issue in Pennsylvania’s long running debate about whether to introduce regulated online gambling is what rate of gambling tax should be levied on online operators.

The state taxes slot revenue at 54 percent. Lawmakers have suggested a similar rate for online gambling, both in the 2015 Senate bill and in current proposals.

At last month’s joint hearing of the Senate Community, Economic & Recreational Development Committee and the House Gaming Oversight Committee, the issue was the subject of much debate.

But the debate and comments by Sens. Lisa Boscola and Robert Tomlinson suggested that they were working in the dark. They have little understanding of the importance of the gambling tax rate in consumer protection or in the ultimate revenues the state will receive.

The European experience shows that the capture rate is critical

The lesson learned from over ten years of regulated online gambling in Europe is that the most important factor in successful regulation is the rate at which players are channelled from the unregulated to the regulated sector — the capture rate.

There are two primary issues that affect the proportion of online gambling that takes place in the regulated market:

  • The range of games allowed under the licensing system
  • The proportion of players that choose to play in the regulated market.

Players the system does not capture obviously do not get the benefit from the protection of state regulation. The state receives no taxes on their play.

Good online gambling laws can maximize state revenue at the same time as protecting the vast majority of players.

The evidence is overwhelming

The most comprehensive independent report into gambling taxes came in September 2016.

It was commissioned by an official investigator appointed by the Swedish government. The task: Propose a complete overhaul of online gambling regulation.

The report was conducted by Copenhagen Economics and is titled: “Licensing system for online gambling Which tax-rate yields both high channelization and high tax revenues?”

  • The full report text in English is available here.

The report studied all 14 European markets which had introduced online gambling laws and confirmed earlier research that the gambling tax rate is critical in bringing players into the safety of the regulated operators.

The report summarizes the evidence effectively in a single table:

The capture rate is the amount of online gambling that will move from unlicensed sites to the regulated sector. European regulators generally prefer to use the uglier phrase “channelization.”

Reliable estimates about the capture rate and tax revenue

The evidence was sufficiently statistically significant for the authors to create a graph showing what capture rate can be expected from any particular tax rate.

The graph also shows how higher tax rates result in less tax revenue. Combining this graph with the graph in Figure 6 of the report allows a first estimate of both the capture rate and the tax revenue rate.

At a tax rate 54 percent, Pennsylvania can expect to capture less than 40 percent of online gambling activity.

And that assumes that any operators are prepared to enter the market with such a high tax rate.

At the same time, the state will collect less than a third as much tax than if the tax rate was set at 20 percent.

The Copenhagen report conclusions are not alone

Other research backs up the Copenhagen report conclusions.

A previous report on Sweden’s gambling tax rate published by PwC in 2012 found that the optimal tax rate was as low as 10 percent.

Spanish gambling industry association JDigital commissioned Deloittes to prepare a report on the regulated Spanish market.

The “Informe Anual Juego Online en España 2012” recommended that the ideal tax rate was around 10 percent of gross gaming revenues.

For politicians to ignore the international evidence would be negligent in the extreme. A 54 percent tax rate for PA online gambling would be more than three times as high as the rate in New Jersey. It would be more than five times as high as the rate in Nevada.

The range of regulated gambling games is an additional factor

If the state doesn’t offer a full range of online gambling, then unauthorized gambling will continue to take place in the black market.

US states have a particular problem here because around 40 percent of online gambling revenues come from sports betting. That is illegal under the Professional and Amateur Sports Protection Act of 1992 (PASPA).

Nevada and a few other states have an exemption, but for the states currently considering legalizing online gambling such as Pennsylvania, New York and California, federal law prevents them from offering sports betting.

When licensed operators cannot offer sports betting or casino, they suffer a double whammy.

They are unable to offer a full range of betting services. Many of their potential customers are already betting on offshore sites. As a result, it becomes extremely difficult to attract them to the regulated offer.

If the state only offers online poker, then customers who want to play poker are more likely to do so with the same black market operator where they already play casino games and lay sports bets.

The upshot is that the capture rate remains low. Large amount of play goes to the offshore unregulated sites.

Black market sites benefit from bad regulation

These sites also get the benefit of regulation. When a jurisdiction first licenses online gambling, players are often unaware that the site where they sign up is illegal.

A study published in 2015 by the French Observatoire des Jeux, showed that only four percent of online poker players said they played on unlicensed sites. But 24 percent said that they did not have to verify their identity when they opened their accounts. That’s a condition all regulated sites impose.

The Observatoire des Jeux study took place five years after the introduction of online gambling.

The fifth annual study on the “Social Perception on Gambling in Spain” issued in 2014 by the Codere Foundation discovered that 27 percent of respondents said they did not know whether the sites they played at were regulated or not.

Even more disturbingly, 44 percent of players on “gray” market sites believed incorrectly that Spain regulated them.

New Jersey quickly took steps to correct this problem. That happened after its first year of regulation was the subject of an academic report (paywall) in 2014.

The New Jersey Division of Gaming Enforcement responded to the recommendations of the Rutgers Center for Gambling Studies report. The state regulator insisted that every licensed operator must clearly display the DGE logo on its web pages.

Pennsylvania politicians need to act on the evidence, not gut feel

Pennsylvania’s proposals for legalizing iGaming go as far as one can sensibly expect in capturing the range of online gambling games, given that sports betting is out of their hands.

But take the reduction in capture rate that the absence of a sports betting offer implies, and add to that a high gambling tax rate, and the consequences for the capture rate and potential state revenues will be disastrous.

Only last month New Jersey casinos passed the half a billion dollar mark in revenue generation. Of that, 17.5 percent went to the state in taxes.

The 54 percent tax rate must go if Pennsylvania is to have any chance of replicating New Jersey’s success in generating tax revenues and protecting consumers.

- A former founder of Poker Industry Pro and Head of Content at PokerNews publisher iBus Media, Joss Wood is a graduate in English from the University of Birmingham. Joss also holds a master’s degree in Organisational Development from the University of Manchester. His career path has taken him from the British Army, through business and finance to seven years as a successful professional poker player.
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