Debate over Pa.’s online slot tax rate has familiar ring

Pennsylvania’s plan for a hefty tax on online slots echoes a line of reasoning familiar to gamblers.

“This bet paid off big before,” the logic goes. “Let’s do it again!”

A proposal to allow iGaming, several additional casinos, and various other wagering expansions passed the state Legislature last week. Gov. Tom Wolf has until Nov. 5 to sign it, veto it or let it become law without his signature.

The wide-ranging bill, intended to help the state generate $100 million or so in licensing fees this year and increase annual gambling tax revenue in the future, has something for everyone to like and hate.

In addition to making Pennsylvania, which is second only to Nevada in commercial casino revenue, the fourth state to allow online gambling, the bill would:
• Pave the way for up to 10 “satellite” casinos throughout the state.
• Permit tablet gaming for passengers at publicly owned airports.
• Allow video gaming terminals at truck stops.
• License betting on Daily Fantasy Sports.
• Establish online sales of lottery tickets.
• Loosen ownership limits on casinos.
• Offer the state’s two “resort” casinos a way to eliminate a requirement that visitors spend at least $10 at the resort before entering the casino floor.
• Allow sports-betting if the existing federal ban is changed or overturned.
• Authorize multi-state progressive slot jackpots as well as skill-based or hybrid machines.
• Reinstate a requirement that each of the state’s 10 large casinos pay $10 million a year to their host municipality. A court ruling deemed the previous method for determining the payment was unconstitutional and set a deadline for the Legislature to fix it, which prompted the look into the overall gaming law.

Most of the attention focuses on the bill’s tax rate for online gaming: a reasonable 16 percent of gross revenue from table games and poker but a whopping 54 percent on gross slot revenue. Those are the same rates Pennsylvania imposes on land-based casinos.

The proposed online slot rate more than triples the 15 percent rate in New Jersey, where gross online gaming revenue have topped $20 million for the past seven months. Delaware has a 43.5 percent tax rate for online slots and 29.4 percent on table games, but only after total online gaming revenue surpasses $3.75 million in a year. Until that happens – and the total for fiscal 2017 was just $2.7 million – the state gets all online revenue. Nevada, the only other state with iGaming, offers only online poker.

Despite warnings from industry executives and analysts that an excessive tax rate would stymie online gaming before it begins, Pennsylvania legislators opted for the higher rate, arguing that they wanted to prevent casinos from steering players away from land-based slots. That position held even though a legislative study and numerous experts proved that most online players don’t currently visit casinos.

“You’re not going to get any takers,” at that rate, Sue Schneider, editor of Gaming Law Review and Economics and one of the world’s top iGaming experts, told me in May. “It’s just not feasible.”

The 54 percent online rate could be the highest in the world, Chris Grove, publisher of OnlinePokerReport.com, told CDC Gaming Reports.

In May, his site published a breakdown of how New Jersey’s online revenue is spent: about 44 percent for advertising and player retention, 20 percent in taxes and regulatory fees, 18.5 percent in payment and platform costs, 12.5 percent in staff and administration and 5 percent in profit. (The full breakdown can be read here.)

John Pappas, executive director of the Poker Players Alliance, which advocates for legalizing online poker, called the bill’s table game rate appropriate but said the high slot tax rate could hurt players.

“Operators are going to have to make tough choices, and unfortunately consumers could pay the price with bad odds and lower payouts for these games,” he said. “We would urge lawmakers to revise this tax rate very soon, or the state could be missing out on millions in revenue.”

If the high rate remains in effect, he said, innovative operators might find a way around it by devising slot games that look like table games.

Several legislators say Pennsylvania’s tax rate on land-based casinos amounts to making the state a majority partner in slot operations. Throughout the online debate, the governor’s office and legislative leaders said they did not want to harm the state’s casino industry, which in fiscal 2016-17 provided almost 18,000 jobs and $1.3 billion a year in gaming tax revenue alone.

When the state set the 54 percent rate in the 2004 law that allowed slots-only casinos, many in the industry said it was too high. But the new casinos flourished, and with the addition of table games in 2010, Pennsylvania casinos overtook New Jersey in total gaming revenue for the first time in November 2011.

Fast-forward to 2017, and the arguments over the slot tax rate sound familiar.

Pennsylvania has the benefit of being an early adopter of online gaming, and its population of 12.8 million is about equal to that of New Jersey, Delaware and Nevada combined. That’s a huge source of players.

If online gaming and the other expansions become law, and if casino operators see an opportunity similar to what they saw before, Pennsylvania’s bet could pay off again.