Latest PA Plan Makes Little Sense For Any Stakeholder

Latest Plan From Pennsylvania Senate For Regulated Online Gambling Is Easily Worst To Date

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There have been numerous plans floated for regulating online gambling in Pennsylvania, including many reasonable ones, some requiring significant work, and others that are deeply flawed.

The latest, as reported by Chris Krafcik of Gambling Compliance, is so fundamentally misguided as to almost seem purposefully designed to fail.

Once again, it is likely to be Pennsylvania consumers and taxpayers who end up bearing the brunt of the head-scratching decisions from Harrisburg.

The latest proposal circulating in the PA Senate

Here are the key points of the the approach Krafcik reports the Senate is “leaning toward”:

  • Separate licenses for online poker and online casino.
  • License fee of $5mm for online poker, $5mm for online casino.
  • Category 3 casinos excluded from eligibility for either license.
  • Tax rate of 16 percent for poker.
  • Tax rate of 54 percent for casino (including slots and table games). This rate is higher than the land-based tax rate for casinos (54 percent on slots, 16 percent on table games).

The problems with this approach

It will raise tens of millions less in license fees than other proposals

Existing proposals have set license fees between $8mm and $10mm for operators, with suppliers looking at a fee closer to $2mm.

Assuming participation from 11 of Pennsylvania’s 12 casinos (and all 12 should MGM purchase Sands Bethlehem), that leaves you with a license fee haul somewhere in the $110mm to $130mm range.

The new Senate proposal would likely generate closer to to $50mm-$60mm in license fees. Why?

  • They will not sell 10 poker licenses. Pennsylvania can realistically only support two or three poker networks. On a good day, PA might sell four licenses for poker ($20mm).
  • They will not sell 10 casino licenses. Some casinos will balk at an online license with the tax rate set at 54 percent for all casino games. Let’s be generous and say only two drop out and that MGM does buy Sands, netting eight sales ($40mm).

So the state loses half of the license fee revenue it would otherwise expect right off the bat.

It will kneecap online casinos, reducing their revenue and tax receipts to the state

Set a reasonable tax rate (closer to 20 percent) and we believe Pennsylvania online gambling operators could generate about $364mm industry-wide from online gambling at maturity, throwing off about $72mm a year in tax revenue for the state:

PA tax revenue from online gambling

Set the tax rate at 54 percent – which would be the highest rate for online gambling anywhere in the world – and operators will cut back on player returns, marketing, game libraries, promotions, and just about everything else.

To appreciate why, consider this chart of where a dollar of revenue goes at a New Jersey online casino:

NJ revenue chart

Even in the absence of competition, such cuts would naturally reduce revenue.

But Pennsylvania’s regulated online casinos won’t lack competition. They’ll be competing against black market sites that aren’t hampered by a staggering tax burden. The international experience has proven again and again that black market sites usually win under those conditions, creating an additional drag on revenue and tax receipts.

It will harm consumers and Pennsylvania’s casino brands

For the sake of concision, here’s a list of links to the key arguments on this score:

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. VGTs are an option, but would take a year to produce any revenue. It’s unclear how much revenue they would ultimately produce, and even the most favorable estimates don’t give VGTs a shot of closing the budget gap.
  • 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, Sen. 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.

- 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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