Pennsylvania Budget Stalemate Cripples 2017 Online Gambling Hopes

Online Gambling Bill Approved by Pennsylvania Senate

Well that didn’t take long. Just one day after sailing through two committee votes, H 271, an omnibus gambling bill that, among other things, would legalize and regulate online gambling in Pennsylvania, easily passed a vote of the full state Senate. Wednesday’s 38-12 vote marked the first time an online gambling bill had ever made it through Pennsylvania’s Senate.

On Tuesday, the bill whizzed through the Senate Community, Economic & Recreational Development Committee by an 11-3 vote and the Senate Appropriations Committee, 24-2.

Most of what the bill includes when it comes to online gambling, which includes online poker, is fairly run-of-the-mill. Players must be under 21 and within state borders, operators must have protections in place to make sure unauthorized people don’t play, so on and so forth. But “most” doesn’t mean all. The taxes and fees assessed are nauseating and risk sinking the whole deal.

The bill sets taxes on internet poker revenue at 16 percent, which isn’t bad. The problem is the tax rate for online casino game revenue (slots, blackjack, etc.), which make up the vast majority of online gaming revenue in New Jersey, is a sky-high 54 percent.

When I saw this, I had two conflicting thoughts and I wouldn’t be surprised of readers were the same way: 1) having to hand over more than half of a site’s online casino revenue is insane and 2) aren’t casinos ATM’s, anyway, so why does it matter?

To illustrate why this high tax rate matters, I will defer to Steve Ruddock, who did a fantastic job of breaking it down for Online Poker Report in April. According to Ruddock’s research, nearly half (44 percent) of every dollar a New Jersey online casino earns goes to attracting and retaining customers.* Another 30 cents per dollar go to various operating costs, including payment processing, employee salaries, geolocation services, and more. 17.5 cents go to taxes.

In the end, when all the expenses are added up, New Jersey online casinos profit just five cents for every dollar of revenue. Now look at the difference between New Jersey’s tax rate above and the proposed 54 percent tax rate for Pennsylvania. I think you see where this is going. Even if online casinos could shave off a few percent in expenses (and that’s assuming it doesn’t hurt revenue), the astronomical taxes would essentially be a non-starter. There is a good chance that the tax rate would kill the online gambling industry in Pennsylvania before it even starts.

Here’s where I will tell you that New Jersey’s tax rate for land-based slot machine revenue is also 54 percent and you raise an eyebrow and wonder why the Atlantic City casinos can handle that, but Pennsylvania online casinos won’t be able to. That’s a reasonable reaction, but when you realize that casinos like the Borgata have other revenue streams like dining, shopping, and hotels, you’ll see why they can manage such a tax rate.

Industry analysts see a 20 percent tax rate as the line in the sand for online casinos. At 54 percent, we might as well just stop talking about it.

Oh, and let’s not forget that the licensing fee for an online casino is $5 million. That doesn’t even include online poker rooms. The bill actually stipulates that operators must obtain separate licenses for online casino games and online poker, each of which comes with a $5 million fee. I KNOW.

The Commonwealth of Pennsylvania has a dozen brick-and-mortar casinos; the bill permits for a dozen online casino game licenses and a dozen online poker licenses. The math works out quite nicely! Should one of Pennsylvania’s casinos not get a license, operators from elsewhere could step in and apply.

Realistically, not all of the online poker licenses will be issued. There is just no way that Pennsylvania – a large state with a population of 12.8 million people – could sustain twelve online poker rooms. New Jersey can barely keep three networks (PokerStars, Party Borgata, and WSOP/888) going. With about four million more residents, Pennsylvania might be able to manage one or two more, but twelve would be impossible. So if the Pennsylvania legislature is counting on those licensing fees to fill a hole in the state budget, good luck to them.

In addition to online poker and casino games, the bill would legalize daily fantasy sports and online lottery sales. The local host fee issue (money land-based casinos must pay to their local counties and cities) has supposedly been fixed after the state Supreme Court deemed them illegal last year. Gaming tablets in airports are also authorized in the bill, but expansion of video gaming terminals in non-casino locations, such as taverns, is not.

The bill now goes back to the House, so we’ll see what sort of amendments are made. One would assume that the tax rate will come down, but it needs to come down A LOT. Of course, any amendments must be ok’d by the Senate. The tug of war isn’t over yet.

*New Jersey is by far the best comp because it has legal online poker and casino games, is next door to Pennsylvania, and is much closer in size in terms of population than are Delaware and Nevada.  

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