The bill, H 271, will now move on to the House of Representatives, where further amendments are expected to be made in the coming weeks.
How the House forced the Senate’s hand on online gambling
For the better part of the past three years, the PA House has been the driving force behind the gaming provisions included in H 271.
However, after the Senate failed to act on not one but two gaming packages sent over from the House in 2016, the lower chamber decided to let the Senate put forth its own proposal this year.
The House did this by passing an innocuous bill, H 271, which addressed just one of the smaller pieces of last year’s gaming reform package: the authorization of tablet gaming at specified airports.
As Rep. George Dunbar stated in early May, the decoupling of tablet gaming at airports from the larger gaming reform package was a strategic decision:
“We put in one thing, tablets in airports, and basically said, ‘You load it up with what you want in it.’ It puts the ball in their court.
We sent up the bill for them to load up along with the budget for them to figure out this is what we need to do to get this done. It’s up to them to change the budget or send the bill back to us with everything on it.”
In effect, instead of spending more time and energy passing another gaming package the Senate is likely to dismiss, the House is letting the Senate make its own case. By doing so, the conversation can continue to progress, and the House can revise what the Senate sends over.
A look inside the Senate package
What the Senate passed can best be described as a Frankenstein bill.
There are two central components to H 271: the legalization and regulation of online gambling and the reinstatement of the local share tax that was ruled unconstitutional last year.
Beyond that, the bill would also:
- Legalize and regulate daily fantasy sports;
- Authorize the Pennsylvania lottery to sell products online;
- Authorize tablet gaming at certain Pennsylvania airports;
- Remove the Category 3 amenity requirement for a one-time fee;
- Improve compulsive and problem gambling programs.
Can the two chambers reconcile their differences?
The two chambers are in agreement on most components of the bill.
The one significant point of disagreement is the tax rates and licensing fees for online gambling. The Senate’s proposal is restrictive on both fronts, a burden the House will try to ease.
As Dunbar stated in a more recent interview:
“I don’t think that’s the final product at all. 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, and I don’t know who is going to buy a non-peer-to-peer license with that tax rate.”
As Dunbar notes, both of these issues are problematic.
The key for the House is to find a sweet spot that will maximize revenue for the state and work for operators, as well as the naysayers, in the Senate who pushed for the high tax rates and licensing fees. Considering the bill passed the Senate by a 38-12 margin, the gaming package the House sends back could lose some supporters and still be able to pass.
The problem and potential solution to licensing fees
For reasons known only to its members, the Senate wants licensing fees to be broken up into two categories:
- $5 million for an online poker license
- $5 million for an online casino license
One option on the table for the House is to change the licensing fee structure. Whether it changes the tax rate or not, the House could make online gambling more appealing to operators by lowering the initial cost or by counting the licensing fee against future taxes owed.
It’s possible that in addition to adjusting the cost, the House will eliminate the bifurcated licensing structure the Senate created and combine the two licenses.[i15-table tableid=20717][i15-table tableid=20704]
The problem and potential solution to tax rates
More problematic than the licensing fees is the tax rate, as it has a longer lasting impact.
To put it bluntly, the tax rate imposed by the Senate will negatively impact the size and prosperity of the prospective PA online gambling industry. The Senate decided to set the tax rate at 16 percent for peer-to-peer games (poker) and 54 percent for slot machines and house-banked table games.
The House is going to change this part of the bill, but at this point it’s unclear what those changes will look like.
On the tax rate side, the House could:
- Lower the tax rate and make it apply to all games. The House has previously called for a 16 percent across-the-board rate.
- Mirror the land-based tax rates by lowering the tax rate on table games to 16 percent, but leave the rates on poker and slots untouched.
Without a significant reduction, the tax and licensing burdens placed on operators would:
- Damage the brands of Pennsylvania’s land-based casinos.
- Deny the profitable synergy between land-based and online enjoyed by New Jersey casinos.
- Remove critical consumer protections by emboldening black market competition.
- Bolster the criminal activity supported by black market online gambling sites.
The addition of iLottery shouldn’t be a problem
Most of the individual components of the bill have already been discussed and explored, save one. The authorization of online lottery is something the House has never included in one of its bills, so it’s not entirely clear where it stands on this issue.
Online lottery was ostensibly added to bring Democrats on board in the Senate, and it may serve the same purpose in the House.