The good news is that for the first time, the Pennsylvania Senate passed a gaming package that included the legalization and regulation of online gambling.
The bad news is the Senate bill would handicap the industry with burdensome licensing fees and tax rates.
By all accounts, the Pennsylvania House of Representatives will try to right the ship and ease the burden created by the Senate.
It’s unlikely the House will be able to completely take the restrictor plates off and get the Senate to agree to the 16 percent across-the-board rate the House has proposed in the past. The House can only work to mitigate the bill’s flaws.
The House could accomplish this by doing one or more of the following:
But what happens if an online gambling bill with a restrictive tax rate passes?
First, it depends on how restrictive the rate is. A 25 percent tax rate may not be ideal, but it’s nowhere near as bad as the Senate’s 54 percent rate. One is less than optimal. The other is downright foolish and will have a trickle-down effect, beginning with the operators.
A market isn’t a market without anyone willing to open up shop.
As Penn National SVP of Public Affairs Eric Schippers said, “We are trying to knock down some sort of silly notion that you could have tax parity between iGaming and the slot machines and that it could be a successful industry, and we’re trying to convince them that if they do this, no one will sign up for it.”
The casinos that do (and some will) are likely to resemble a ghost ship, with minimal staff and marketing. This approach will only serve to damage the brands of Pennsylvania’s land-based casinos. If that happens, it would be the legislature’s fault, as it caved to special interests rather than doing what was economically sound for the state and its casinos.
“Tax rates and licensing fees should be established on sound economic principles,” Spectrum Gaming Group Managing Director Michael Pollock told Online Poker Report.
Pollock went on to say the question the state of Pennsylvania should be asking is: “What is the rate that would allow land-based operators to most effectively market to new demographic groups, and to profit from online wagering?”
Pollock went on:
“Just as important, the projections for tax revenue from online gaming need to focus on more than the online wagers themselves. If structured properly, online wagering in Pennsylvania will be an enormous marketing opportunity for land-based casinos to reach new customers and encourage them through promotions to visit the physical properties.
This will generate land-based casino revenue, and over time, will encourage capital investment and new hiring, as well as sales of non-gaming items, such as food and beverage.”
As OPR has noted in the past, failure to provide the right economic incentives will deny Pennsylvania’s land-based casinos the profitable synergy between land-based and online enjoyed by New Jersey casinos.
This will also impact the state.
Far from increasing the state’s cut, the barriers created by the inflated tax rate would heavily erode it.
If most operators are hesitant to enter the market, and the ones that do run bare-bones operations, the state’s coffers will look more like Al Capone’s vault than Scrooge McDuck’s favorite swimming hole.
As Rep. George Dunbar told Online Poker Report, “The $5 million license fee for peer-to-peer games isn’t going to fly because no one is going to pay $5 million just for poker, as they’d never be able to recoup that money. I don’t know who is going to buy a non-peer-to-peer license with that tax rate.”
The state will collect less money upfront in the way of licensing fees as a result. And with marketing and operation budgets running on fumes, Pennsylvania’s online gambling industry would consequently struggle to reach its full potential.
For this reason, the state should be trying to settle on a number that focuses on the needs of online gambling operators. In turn, that would increase the tax revenue that flows into the state’s coffers, even if it’s at a much reduced rate. After all, 16 percent of anything is better than 54 percent of nothing.
“We encourage the Commonwealth to take a broad approach, and to recognize that such legislation amounts to writing on a clean sheet of paper with indelible ink,” Pollock said. “They must get it right from the outset, and have their land-based operators on board from day one.”