The tax rate on PA online gambling will make it difficult to attract gamblers away from the black market

Will PA Online Casinos And Poker Rooms Be Able To Compete With Offshore Sites?

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There are a lot of unanswered questions about what the market will be like for legal Pennsylvania online casinos, now that a new law is on the books.

One of the biggest questions? How effectively will they be able to compete with offshore online casinos and sportsbooks?

Just opening up the doors won’t be enough to own the market for PA’s legally operating casinos.

PA online casinos vs. offshore

Let’s start here: People would rather play at legal and regulated online gambling sites. People will gravitate to legal sites if they are at least competitive with offshore sites. This has no doubt happened for NJ online casinos in the years since launch.

But PA online casinos are not going to come from a similar starting point. While online table games (blackjack, roulette, etc.) will be taxed at a reasonable rate of 16 percent, the state is undoubtedly putting online slots on unstable footing out of the gate, with a 54 percent tax on revenue.

A graphic from an Online Poker Report white paper on the revenue potential for PA online gambling illustrates the problem quite nicely:

PA online gambling revenue

An effective rate of 42 percent across both types of iGaming shows that the amount of money spent on 1. advertising and 2. player retention is halved in the PA model.

That means that it will be more difficult for PA online casinos to attract users in general, and to compete with offshore sites that are doing more on both fronts.

Obviously offshore sites don’t have to deal with paying more than two-fifths of their revenue to PA. They operate outside of the government’s reach and without a license.

Examples in other regulated markets

That all sets up Pennsylvania possibly to underperform in trying to attract people who are used to playing at offshore sites. European markets show exactly how tax rates affect people moving from unregulated to regulated sites. Suffice it to say, high tax rates aren’t conducive for creating that momentum.

We also see the difference just between Delaware (high tax rate) and New Jersey (reasonable tax rate). While the former has struggled to gain traction, New Jersey has flourished.

PA will argue that it has made the 54-percent rate work for its land-based slots. But that ignores the reality that online gambling is a different business. While the options for land-based casinos are fairly limited by geography, there is no such limitation or barrier for offshore sites in attracting customers.

PA online poker vs. offshore

Online poker sites in PA will have some advantages that online casinos won’t enjoy:

  • The prospect for PA pooling players with New Jersey, Nevada and Delaware — and perhaps more states down the road — means more cash-game traffic and bigger tournament guarantees. While not as big as the market for offshore poker sites and the guarantees they can offer, a market of four-plus states does start looking pretty attractive.
  • The lower effective tax rate on just poker could mean operators will deploy more money for advertising and promos than it would for online casino (although this isn’t a guarantee).
  • At least at the start, there will be a “land rush,” or a push to acquire customers ahead of the competition at the start. Creating a viable online poker network will at least partially depend on being an early mover. (However, PokerStars came into New Jersey late and immediately led that market. Also, competition is also something that could theoretically benefit online casinos early on.)

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PA sports betting vs. offshore

Legal PA sports betting faces similar challenges, should it also become legal with a change in federal law.

The tax rate for PA sports betting revenue would be a hefty 36 percent. That’s easily the highest rate in the world. Keep in mind that sports betting is already a pretty low-margin product.

It will be difficult if not impossible for operators to turn a profit at that rate. And, in fact, sports betting might just face the reality of operating as a loss leader. (There’s also the sense that the state legislature will go back into the law to change the tax rate, should New Jersey win its sports betting case in front of the US Supreme Court.)

Regardless, sports betting in PA might have trouble getting players away from entrenched offshore books.

The bottom line: It’s going to be tough for PA to compete

PA online casinos will exist, and they will make money.

But they won’t succeed in converting everyone from offshore gambling sites. A lower tax rate would mean more conversion, and ultimately more money for both the state and online gambling operators.

For now, however, the reality is that the black market for online gambling will still exist and remain major competition for PA’s future online casinos, poker rooms and sportsbooks.

- Dustin Gouker has been a sports journalist for more than 15 years, working as a reporter, editor and designer -- including stops at The Washington Post and the D.C. Examiner. He has played poker recreationally for his entire adult life and has written about poker since 2008.
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