Pennsylvania Is Wise To Push The Online Gambling Envelope Early In The Session

February 3, 2017
Pennsylvania Is Wise To Push The Online Gambling Envelope Early In The Session

Following a 2016 push to legalize online gambling that stalled in the Senate, Pennsylvania has wasted little time getting the ball rolling this legislative session.

On Wednesday, Reps. George Dunbar and Rosita Youngblood released a co-sponsorship memoranda stating their intention to introduce “omnibus gaming legislation that will protect consumers, maintain and improve the competitiveness of Pennsylvania’s casino industry and generate needed revenues for the Commonwealth.”

This comes on the heels of a similar memoranda by Sen. Jay Costa, in which he highlights the significant revenue Pennsylvania stands to gain from upfront online gambling licensing fees.

Economically speaking, Pennsylvania’s willingness to entertain alternate revenue generators this early in the session is a prudent move. Currently, the state is facing a mammoth deficit that’s only getting worse.

Online gambling won’t fill the entire shortfall, but does offer both immediate relief, and a reliable long-term source of income.

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Under the hood of the House memoranda

Given recent history, it comes as little surprise that Dunbar and Youngblood would push a bill so early in the session. In 2016, the House passed legislation that would legalize online gambling not once, but twice.

The language of the 2017 House bill will mostly run parallel to last year’s HB 1887 (which passed in October).

Namely, it will combine a fix for the local share assessment issue with online gambling regulation and other gaming reforms into one omnibus package.

In addition to online gambling, the following expanded gambling reforms would go live:

  • Gaming tablets at international airports.
  • Tax on online daily fantasy sports operations.
  • “Multi-state linkage” of progressive slot machines, allowing for increased jackpots.
  • Allows the Pennsylvania Gaming Control Board to implement new regulations for slot machine variants. This paves the way for skill-based slot machines, which already inhabit select Atlantic City casinos.

Other objectives include:

  • Setting up private laboratories for game testing.
  • Streamlining non-gaming vendor registration requirements.
  • Sitching the casino amenity requirement for Category 3 casinos.

A tale of two tax rates

The House co-sponsorship memoranda makes no mention of tax rates or license fees. However, because it stands to be a close cousin of HB 1887, something along the lines of the following can be expected:

  • $8 million operator licensing fee, with a five-year term
  • $2 million supplier licensing fee, also with a five-year term
  • 14 percent tax on online gambling, with an additional 2 percent local host community tax

These figures mark a significant divergence from Costa’s proposal. That calls for a $10 million operator licensing fee, $5 million from suppliers, and a 25 percent tax rate on online gambling.

Costa’s assumption that ten Pennsylvania land-based casinos and five suppliers will plunk down eight-figure fees appears out-of-touch with reality.

But the larger problem may be the tax rate, which will almost certainty force online poker providers out of the market.

That being said, Costa’s initial position is somewhat understandable in context. Pennsylvania’s land-based casinos pay an exorbitantly high 55 percent tax rate on slot revenue, and 16 percent on table games.

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Highlighting the economic opportunity

We will assume a compromise point of 20 percent is reached on the tax rate. If so, Pennsylvania stands to generate significant tax revenue from online gambling, beginning in year one.

Based on the NJ online gambling model, and tweaking for variables unique to the Pennsylvania market, out internal projections show first year revenue coming in somewhere along the lines of $225 to $230 million, spiking to over $360 million at maturity.

That results in roughly $45 million in year one tax revenue for state coffers, and over $70 million from year five going forward.

As far as upfront licensing fees, a reasonable assumption is that eight of the state’s 12 land-based casinos will latch on at launch. That would result in $64 million in immediate revenue (assuming an $8 million licensing fee). Significant vendor fees would yield another $10 to $20 million, for a total of $74 to $84 million.

Presumably, the industry could see two to four initial holdouts eventual apply for a license. That would result in another $16 to $32 million in license fees.

Taken together, that’s nearly enough on its own to account for the $100 million Gov. Tom Wolf earmarked for expanded gambling revenue last July.

Given these figures, and the often lengthy turnaround time between the passage of an online gambling bill and the first real-money wager, it is in the best interest of the state to act now rather than later.

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