Most PA casinos argue VGTs would cannibalize revenue
Online Poker Report

PA Considers Controversial Video Gaming Terminals; Will It Impact Online Gambling?

PA VGTs
UPDATE: Read the letter from nine of Pennsylvania’s casinos opposing VGTs.

The possibility of Pennsylvania authorizing video gaming terminals throughout the state appears to have legs, after a lengthy House hearing on Monday. And that could have repercussions for the future of PA online gambling.

VGTs and the larger gambling issues in PA

The PA legislature is tasked with solving not one, but two major gaming problems in the coming weeks.

First, the legislature has a soft deadline of May 25 to fix the local share tax. The Pennsylvania Supreme Court ruled that part of the 2004 gaming act unconstitutional last year.

Second, the legislature needs to come up with about $100 million in additional gambling revenue to help fill a growing hole in the state’s current fiscal year budget. The need for gaming revenue has led to multiple hearings, including a four-hour House Gaming Oversight Committee hearing on Monday to discuss H 1010, a bill that would authorize VGTs at thousands of locations across the state.

Unlike the local share tax, VGTs are just one of several proposals the legislature is considering as a way to come up with the additional gaming revenue. And it’s by far the most controversial. Online gambling is the least controversial, and also the quickest and least disruptive when it comes to achieving the state’s goals.

Gaming Oversight Chairman Scott Petri cynically added a fourth proposal to list at the tail-end of the hearing, telling his colleagues that over the next couple weeks they’ll need to think about the four options on the table:

  • iGaming
  • VGTs
  • Satellite slot locations
  • Doing nothing

Inside Pennsylvania’s VGT bill

VGTs are essentially slot machines in non-casino locations. The VGT industry is often referred to as retail gaming or distributed gaming.

Pennsylvania is looking to authorize VGTs in thousands of bars and taverns, as well as specified off-track betting (OTB) parlors and truck stops. H 1010 would allow up to five machines in bars and up to 10 terminals at OTB parlors and truck stops.

The maximum bet would be set at $5 and the maximum payout at $1,000.

Under H 1010, the revenue breakdown for the state is as follows:

  • 34 percent goes to the state as tax revenue (dropping to 29 percent in July 2018);
  • A further four percent is earmarked for the local community; and
  • up to 1.5 percent will be used to cover regulatory costs.

The case for VGTs

The overall case for VGTs was made by Sean Higgins, senior vice president of government affairs and business development for Golden Entertainment, who played down cannibalization concerns. Gamers in VGT locations are not identical to casino customers, according to Higgins, who added, “cannibalization is more than offset by the added revenue.”

Higgins ticked off a number of VGT benefits:

  • Increased tax revenue
  • Good for local municipalities
  • Good for liquor establishments
  • Get rid of illegal machines
  • Good for amusement operators
  • Good for construction and trade
  • Increase employment

Some, like construction jobs were scoffed at by certain lawmakers, but some are undeniable.

Money, money, money

In Illinois, VGTs have a max bet of $2 with a max payout of $500 and are taxed at 30 percent. They bring in a lot revenue. VGTs sent $280 million to state and local taxes in 2016.

Illinois and Pennsylvania have near identical populations, but Pennsylvania could reap a much larger windfall from VGTs, as:

  • Pennsylvania would tax VGTs at a slightly higher rate of 39 percent;
  • Illinois municipalities had to opt in. To date Chicago — which represents 33 percent of Illinois’ liquor licenses — hasn’t opted in;
  • Pennsylvania can avoid some of the pitfalls made in Illinois.

Eliminating illegal machines

Depending on who you talk to, there are anywhere from 15,000 to 40,000 illegal VGTs in Pennsylvania. Most of these are older games, with terrible payouts, and little appeal to anyone but hardcore gamblers. Bar owners where these machines are being used will likely switch to the newer, more appealing machines, as will many bars that have shunned illegal machines.

The machines will be completely legal, in many cases brand new, and are virtually no-risk to the business since VGTs have a low barrier of entry. Most of the cost falls to the supplier.

The dismantling of the illegal VGT industry would also free up law enforcement, as countless hours and money is spent playing whack-a-mole with the suppliers and operators of illegal machines.

Because of this, VGT supporters have adopted the online gambling stance of, “it’s happening already, so we might as well legalize and tax it.”

A new opportunity for casinos?

Because of the way H 1010 is currently structured, there is also an opportunity for casinos in Pennsylvania. Under the bill, casinos are allowed to act as suppliers.

As VGT supporter Rep. Mike Sturla noted at the hearing, one casino is already a supplier: Penn National. Allowing casinos to act as supplier might lead to more entering the market, and perhaps more importantly, lessen the casino opposition to the bill.

Another VGT supporter, Rep. Mark Mustio, went so far as to say, “I think it’s good we didn’t pass the bill last time.” The failure of VGTs in 2016 gave Mustio and others the chance to fine-tune the bill and pull in more support.

The case against VGTs

For all its potential benefits, VGTs are controversial for a reason. Several reasons actually.

Cannibalization

Unlike online gambling, which is almost universally seen as beneficial to the land-based casino industry, VGTs are known to be cannibalistic.

Estimates on how much the introduction of VGTs would cannibalize the state’s land-based casinos varies.

The bill’s supporters expect to see five to six percent cannibalization. Opponents of VGTs put the number as high as 18 percent. But the best estimate likely comes from Penn National, which said it saw its land-based properties in Illinois cannibalized by eight to 10 percent.

Penn National is the only casino operator in Pennsylvania expressly supporting VGTs. That makes perfect sense since Penn National is now a supplier of VGTs in Illinois.

After watching its land-based properties in Illinois victimized by the introduction of VGTs, the company made a choice and bought a supply company. Penn National now operates a regional route that boasts 1,500 VGTs in Illinois, and would like to become a supplier in Pennsylvania.

Lottery not on board either

The Pennsylvania Lottery also has concerns about VGT expansion. A representative of the state lottery testified at the hearing that the lottery anticipates VGTs would cost them $14 million in year one, and as much as $100 million by year five.

Of course, the dance in PA is also complicated by a proposal that the lottery run online gambling, instead of the casinos, which would also be a bad idea.

Parx calls VGTs “a bad bet”

The state’s 11 other casinos oppose VGT expansion, including Philadelphia’s Parx Casino.

At the hearing, representatives of Parx testified that the potential cannibalization would be harmful to their business. Because of the way the bill is structured, it could also be a net revenue loss for the state.

Per Parx, the bill and VGTs would:

  • Cannibalize land-based casino revenue, which at 10 percent amounts to over $300 million;
  • Cannibalize the state lottery;
  • Decrease casino slot tax rate by five percent in July 2018, a reduction of $123 million to the state; and
  • Push off a proposed Category 1 and Category 3 casinos, costing the state $90 million in licensing fees.

As currently proposed, even if VGTs are a billion-dollar business, it’s hard to see where VGTs will add revenue. That becomes even more true in the short term.

Speaking on behalf of Parx, Mark Stewart Eckert of Seamans Attorneys at Law called VGTs a case of “robbing Peter to pay Paul.” He also put the expansion into context, explaining that a machine here and a few machines there adds up. In the end it would be the equivalent of adding 18 casinos.

Parx Chairman Bob Green didn’t mince words when he said, “On the basis that the commonwealth is looking for additional revenue this is a bad bet.”

PGCB has concerns

Doug Sherman, the chief counsel for the Pennsylvania Gaming Control Board, also testified at the hearing. According to Sherman’s testimony, the PGCB can regulate VGTs, but he raised a number of potential concerns.

Chief among the PGCB’s concerns was staffing. VGTs would overwhelm the regulatory body with thousands of applicants. Sherman made several suggestions that would help alleviate the man-hours required. That included extending licensing renewals from one to three years to five.

Even with the change, Sherman said the PGCB will have to hire more people to handle background investigations. Until applications start rolling in, it won’t know how many are needed.

When asked when the first facility could open, Sherman said he “couldn’t even hazard a guess.” Sherman went on to say that accepting applications within 60 days is “problematic. The PGCB has to draft regulations, put them in place, and formulate regulatory strategies.

“It’s not that it can’t be done, but I think it would be a Herculean task,” Sherman told the committee.

Sherman also raised the issue of controlling underage and problem gambling access, considering thousands of potential locations. He raised the possibility of handheld ID scanners currently used in casinos, something the VGT bill doesn’t require facilities to have at this time. These scanners can detect underage players and fake ID’s. They also can interact with the state’s exclusion list.

During his testimony, Golden Entertainment’s Higgins told the committee that VGTs have more direct oversight. The handful of machines are directly watched by an employee who is typically no more than five to ten feet away at any time.

The takeaway on PA VGTs

The situation in Pennsylvania is very fluid and lawmakers are staring down a number of difficult choices.

And what PA chooses to do with VGTs could have a very real impact on whether the state also acts on iGaming. If lawmakers believe VGTs are a net moneymaker for the state, then they might deem iGaming superfluous, even if casinos and the facts say differently.

Letter from casino operators

Here’s a letter signed by a majority of Pennsylvania’s casinos opposing VGTs:

VGT Letter From PA Casinos
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Steve Ruddock
- Steve covers nearly every angle of online poker in his job as a full-time freelance poker writer. His primary focus for OPR is the developing legal and legislative picture for regulated US online poker and gambling.