Increasing Revenue Likely To Hold Key To Pennsylvania Online Gambling Compromise

June 9, 2015
Increasing Revenue Likely To Hold Key To Pennsylvania Online Gambling Compromise

On Wednesday the Pennsylvania Community, Economic and Recreational Development Committee will host a hearing aimed at tackling the topic of comprehensive gaming reform (SB 700) to help balance the state’s budget and avoid Governor Tom Wolf’s proposed tax increases.

Part of the Senate’s plan for gaming reform includes online gaming expansion. In fact, online gaming could be the starting point for a larger compromise between the governor and the state legislature.

Where will the revenue come from?

Pennsylvania needs to increase the amount of revenue the state is bringing in to help fund the state’s public education system. Finding this revenue will ease the burden on property owners in Pennsylvania who have found their property tax bills on the rise as the state’s portion of educational funding continues to plummet.

The question is, where is that money going to come from?

Newly-elected Governor Tom Wolf ran on a platform that included a complete overhaul of the state’s income tax code as well as new taxes on natural gas producers. And since Wolf won, it would seem this is a pretty popular plan.

However, the Republican controlled legislature would rather see revenue raised in other ways, with proposals ranging from gaming reform, to cutting the state’s pension plans, to radical changes to the state’s liquor laws.

In the end it will likely require some give and take on both sides to get an agreeable, well-designed budget deal done.

One area where a compromise seems possible is online gambling.

The Internet gambling olive branch

Governor Wolf has indicated he is open to online poker expansion. However, the governor has also indicated he will not trade one of his tax proposals for online gambling, as Wolf doesn’t believe the industry is capable of generating enough revenue to compensate for scrapping one of his tax increases.

“There is no revenue estimate that we have seen that would cause us to replace anything in the governor’s budget with it,” Wolf spokesman Jeff Sheridan told the Washington Times.

So, while Wolf is willing to talk online gambling, it’s an “in addition to” and not an “instead of” issue, as Pennsylvania Senate President pro tempore Joe Scarnati told the Washington Times in the same column:

“It’s troubling to me to read where the administration says, ‘You folks in the Legislature can embark upon looking for revenues from gaming. I still want my tax increases.’

What the governor is essentially saying (is), ‘I don’t care what you do, even if you erase the structural deficit, I want a tax increase.’ That’s bad economics.”

Whose numbers should we use?

Robert DellaFave recently presented a comprehensive breakdown of potential online gaming revenue in Pennsylvania should the state legalize online gambling.

According to DellaFave’s analysis, which draws upon several other analysts’ predictions as well as the actual revenue from the New Jersey legal online gaming industry, the Pennsylvania market will generate $165 million in gross gaming revenue in its first year.

This is well below predictions by Penn National Gaming ($250 million), and below the $184 million Econsult Solutions predicted in a detailed report for the Pennsylvania state legislature last year.

DellaFave’s analysis is, however, in line with the highly respected Eilers Research estimate of $164.6 million in Year 1.

How much revenue is possible in PA

If DellaFave is correct, Pennsylvania’s share of that revenue, based on a 14% tax rate on GGR in Assemblyman John Payne’s HB 649, will amount to just over $23 million.

Additionally, Pennsylvania will benefit from an immediate windfall, thanks to the proposed $5 million licensing fee operators will have to part with. There will also be lesser, but still substantial, licensing fees imposed on “significant vendors” involved in the online gaming space.

These upfront licensing fees could tally as much as $50 million to $75 million.

Online gambling expansion could become a reality in Pennsylvania if the legislature can convince Governor Wolf that online gambling can:

  1. Generate over $20 million in tax revenue in Year 1.
  2. Provide a one-time infusion of at least $50 million in licensing fees.

$75 to $100 million in revenue may be enough for the governor to consider eliminating or postponing one of his planned tax increases, which would make Pennsylvania’s Republican representatives and senators extremely happy.

Even if online gambling doesn’t replace one of Wolf’s tax reforms, the measure may find its way into the budget as potential revenue is hard to pass up.

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