New PA Online Gambling Bill Has Proposed 25 Percent Tax Rate; Would Hamstring Industry

Steve Ruddock January 6, 2017 1525 Reads
PA online gambling tax

On Wednesday, Pennsylvania State Sen. Jay Costa formally announced his plans to introduce a gaming reform bill in the near future.

Costa’s bill would use HB 1887 and PN 4145 from last session as a framework.

Under the hood of Costa’s bill

Costa, the Senate Minority Leader, estimates his reforms — most notably, online gambling and daily fantasy sports legalization — would produce $137 million for Pennsylvania during the 2016-17 fiscal year. It would also solve the state’s critical local share tax issue, which is supposed to be settled by spring.

Costa’s bill would:

  • Reinstate the local share provisions that the Pennsylvania Supreme Court declared unconstitutional by instituting a yearly $10 million slot renewal fee on all Category 1 and Category 2 casinos in the state.
  • Legalize online gambling and daily fantasy sports.
  • Authorize the state lottery to sell tickets online.
  • Waive membership fees at Category 3 casinos at a cost of $1 million per year for five years.
  • Authorize tablet gaming at select airports for a one-time licensing fee of $2.5 million.

The $137 million Costa expects to generate through these reforms breaks down this way:

  • Ten of the 12 casinos will receive an internet gaming license at a price of $10 million per license: $100 million
  • Five online gaming companies will receive internet gaming vendor fees at a price of $5 million per license: $25 million
  • $2.5 million airport tablet gaming fee x2: $5 million
  • Two DFS companies will receive daily fantasy sports license feeds at a cost of $2.5 million: $5 million
  • Both Category 3 casinos will pay $1 million per year for the patron of amenities waiver: $2 million

The problem is, Costa’s final revenue tally is reliant on a lot of assumptions, particularly when it comes to the number of online gambling and DFS licenses that will be handed out.

DFS numbers are out of touch with reality

You can lop off $5 million from Costa’s estimates right away because no DFS company is likely to pay a $2.5 million license fee, never mind 25 percent in taxes.

As GamblingCompliance’s Chris Krafcik tweeted out:

Costa’s online gambling tax rate = a burden few will bear

Costa’s estimates for online gambling licenses are also out of whack.

A 25 percent tax rate will make it impossible for an online poker room to turn a profit. If the tax rate remains at 25 percent, I would be surprised if a single online poker operator launched in Pennsylvania.

One potential solution is for the legislature to tax poker and casino at different rates. Even if it does, the rate might also be too high for online casinos to operate in the black, although it’s not as unreasonable as it is for online poker sites.

According to Krafcik, the Senate Democrats are resolute when it comes to the high fees:

Even if casinos are able to overcome the burdensome rate, it will likely cause several potential operators to reconsider launching online gambling websites in Pennsylvania.

Those numbers don’t add up

Costa estimates 10 of the state’s 12 casinos will pay a $10 million licensing fee and agree to a 25 percent tax. But the real number of casinos that would apply for an online gambling license under these parameters is significantly lower. That means significantly less money via up-front licensing fees.

Instead of 10 casinos involved in online gambling, I’d estimate the number of casinos that entered the online gambling market under Costa’s plan at five or six due to the overly burdensome tax rate. At $10 million per license, that’s a $40 to $50 million hit for Pennsylvania.

My own assumption is that casinos with presences in multiple iGaming states — Harrah’s, Penn National, and Mohegan Sun — would likely still pull the trigger, as would Parx and SugarHouse/Rivers.

Furthermore, with fewer casino operators and razor thin margins (in the best case scenario), it’s unlikely five online gaming companies would pay the $5 million vendor fee to partner with a Pennsylvania casino and launch an online gambling website. If Costa’s bill were to be passed, perhaps two or three vendor licenses would be handed out, with those vendors partnering with multiple casinos to mitigate costs, costing the state another $10 to $15 million.

The onerous tax rate would see far fewer Pennsylvania casinos and online companies interested in online gambling. Costa would likely fall short of his $137 million target by $50 to $70 million, solely because of the poor operator climate his bill will have created.

Cost would be passed on to the players

With such an onerous tax, operators would be forced to pass costs on to players. That would likely drive them to offshore, black-market sites unburdened by taxes and licensing fees.

Also:

  • Hold percentages on slot machines would drop
  • Online poker (if anyone was brave enough to launch a site) would have astronomical rake and tournament fees
  • Promotions and rewards would be threadbare

Reinvestment and marketing spend would be minimal

In addition to alienating players, the high tax rate would almost certainly lead to less reinvestment in online gambling products by the casinos. It would limit their marketing reach to the low-hanging fruit.

Basically, cost-cutting would be a top priority for the casinos involved in online gambling.

Costa’s plan not only creates a poor climate for casinos and online gambling companies, it will also lead to poor customer experiences. Costs will be passed on to the players, and operators would spend scant resources on improving their products.

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