Recipe: start with low taxes, move players to licensed games, then raise taxes.

Pay Attention, America; UK Raises Gambling Taxes to 21 Percent

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The UK is raising its point-of-consumption (POC) gambling tax from 15 percent to 21 percent. The news came in the form of a recent adjustment to the annual UK Government budget.

Here’s an excerpt from the overview:

“A behavioural adjustment has been made to take into account changes in spending on remote gaming in response to this policy, and to account for changes in operator behaviour.”

The UK expects to generate an extra £1.23 billion ($1.56 billion) from the increase over the next five years.

US states with legalized online gambling  — and those looking to regulate the industry — should pay close attention to this change. According to the document, “this measure will impact on individuals or households through a change in odds” if operators pass the tax increase on to players.

UK has the experience to get tax rates right

The last 10 years have seen the proliferation of gambling regulation in EU member states, which has been accompanied by studies that explore the impact of taxes. They show a clear correlation between tax rates and the proportion of players drawn into the regulated market.

After four years of operation under the POC system, the UK Gambling Commission (UKGC) believes that the overwhelming majority of online poker, sports betting and casino traffic flows through regulated sites.

With an established industry, the UK is now confident it can raise taxes without pushing players into the black market. Some continental peers, by comparison, see as much as 40 percent of their players sticking to offshore, unregulated poker rooms.

Studies also link the amount of gambling revenue directly to the rate, showing that taxes over 20 percent don’t generally result in gains.

Should US states shoot for similar taxes?

In a presentation to two subcommittees of the Illinois legislature, Rep. Lou Lang tackled the issue head-on. “It’s important to do it right, rather than quick,” he said, speaking about the possibility of Illinois gambling expansion. Otherwise;

“You make a real mess as Pennsylvania did.”

Lang went on to explain that the 36 percent tax on sports betting was a big mistake in Pennsylvania. “If this industry is taxed too high,” he said, “illegal betting continues.”

New Jersey has a tax rate of 17.5 percent for NJ online poker and casinos, while online sports betting is taxed at a rate of 14.25 percent. Both numbers include mandatory additional taxes for redevelopment and other state industries. Nevada has even lower rates of 6.75 percent for both online poker and sports betting.

If the UK has analyzed the situation correctly, both states should have the freedom to raise taxes to a similar level.

New Jersey and Nevada are distinct markets, of course, and what applies to the UK doesn’t necessarily apply to them. But all three markets have followed a similar path. They began with rates well below 20 percent, a sweet spot that attracts players away from the black market. And they already have high rates of channeling to the regulated market.

It’s entirely possible raising tax rates might not drive players back to the offshore sites in these established markets, either.

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Raising taxes is easier than reducing them

Pennsylvania faces the opposite problem. It is poised to open interactive gaming with tax rates that are already an impediment to converting offshore players.

Italy offers a correlating example there, having launched its regulated online sports betting industry under an untenable tax. The rates were calculated as a percentage of the total amount wagered, rather than on the revenue operators received. In 2015, the system was changed to a flat rate of 22 percent of gross gaming revenue — a rare example of tax rates being reduced.

The online gaming industry in France has failed to gain support for a similar change, though.

French regulators calculate taxes for poker games as a percentage of each pot — whether or not there’s a flop. This has resulted in online poker operators paying the equivalent of 37 percent of their gross gaming revenue.

Sure enough, online poker began to decline soon after it was first regulated in France. Revenues have increased only in the period since shared liquidity linked France and Spain.

What’s the bottom line?

In short, there are three European lessons to follow for Pennsylvania and other states that want to get gambling tax and regulation right:

  • Start with tax rates that will channel the highest percentage of the market to regulated sites.
  • Don’t increase taxes until the market is stable.
  • Don’t increase taxes much above 20 percent.
- 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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