Pennsylvania Online Gambling Could Generate $113m In Annual Tax Revenues

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Thursday, May 8th, 2014 | Written by Shane Larson

Back in December 2013, Pennsylvania lawmakers commissioned a feasibility study on the future potential of Pennsylvania’s gambling industry. That Econsult report, entitled ‘The Current Condition and Future Viability of Casino Gaming in Pennsylvania’ was then presented to the Pennsylvania Legislative Budget and Finance Committee this week, with the message clearly in favour of a future state gambling expansion. Amongst the wagering options suggested for the state was igaming, sports betting, fantasy sports, prediction markets, small games of change, and airport slots.

Pennsylvania’s $1.2bn budget deficit problem

With The Keystone State facing an estimated $1.2 billion budget deficit according to the Independent Fiscal Office, the need to examine all potential revenue streams has become of prime importance in order to avoid spending cuts and tax increases. As Sharon Ward, director of the Pennsylvania Budget and Policy Center, explains:

“The only way you can close a deficit of that size is with budget cuts in areas such as health care or education, or with revenue increases.”

Initially it was hoped that revenues from Pennsylvania’s’s casino industry might have been sufficient to offset shortfalls elsewhere, but just like other gambling states across the US, an economic downturn combined with increasing competition from neighbouring states has lead to a downward trend in gambling revenues, which is likely to continue in the future.

Increased competition

Since approving casino gambling back in 2004, Pennsylvania has risen to become the second biggest gambling resort in the USA, knocking New Jersey into third spot. By 2013, however, Pennsylvania’s 12 casinos reported their first ever decline in revenues, down by 1.4% to $3.1 billion, and translating into $1.4 billion in gambling taxes for the state.

In Pennsylvania’s latest feasibility report, the study draws particular attention to the role increased competition has played in declining growth, with casinos in New York, Maryland and Ohio expected to commandeer 4-5% of Pennsylvania’s casino revenues by 2020, and a possible New Jersey casino expansion to Camden and Meadowlands expected to reduce state revenues by a further 6-7%.

Representing a combined 12% reduction in state gambling revenues before the end of the decade, expanded gambling, and in particular revenues from internet gambling, has been touted by the report as a viable means to plug the leak.

Benefits of online gambling

From the six online gambling options discussed in the report, igaming (casino games and poker) was estimated to generate the greatest potential returns , while sports betting could also produce $110 million a year, but would depend on New Jersey first successfully overturning a federal law which currently restricts legal sports wagering to just the states of Nevada, Delaware, Oregon and Montana.

Overall, an expanded state gambling market could rake in an extra $307 million a year in gambling revenue, according to the Econsult report, with $178 million derived from online casino games and $129 million from poker. In year one, Pennsylvania could then rake in an estimated $68 million in tax revenues, rising to $113 million thereafter.

No threat to land-based casinos

As well as assuming igaming services would be offered via Pennsylvania’s land-based casinos, the report also highlighted the fact that not only would igaming not cannibalize their existing business, but that the evidence suggests “the impact would be on the positive side.” This particular point is deemed of significant importance as recently Chris Krafcik of GamblingCompliance.com commented via Twitter that:

“Sen. Tomlinson told me in Dec. ’13 that he would not push a bill unless evidence showed #iGaming was complementary with land-based gaming.”

Backing up its claim, the Econsult report noted that igaming appeals to a market of new gamers and therefore presents brick-and-mortar casinos with a golden opportunity to attract new customers. Highlighting the differences between the social interaction provided by traditional casinos, and online casinos where smaller bets can be placed away from crowds, the report states:

“This, combined with the fact that iGaming typically happens in the home in the afternoon or evening, suggests that for many this is a substitute for other forms of home entertainment, rather than a substitute for traditional offline casino gaming.”

Igaming tax rates of prime importance

Finally, the report suggest a regulated online gambling tax rate of 60% for igaming, and 20% for poker. That figure is higher than those set by the legalised markets of New Jersey and Nevada, and has received criticism from various advocate groups who have suggested gamblers will instead choose to continue playing on unregulated, offshore sites who pay no taxes, and so are able to offer gamblers more attractive promotions and bonuses. However, the report does draw attention to this dilemma, and so suggested the following:

“Given the importance of network effects and the competition with illegal offshore sites, as the industry begins, lower rates may be optimal in the short-run. To account for this, legislation could set a lower rate initially that increases to 20% and 60% respectively over time.”