The fact that Pennsylvania received nine applications for interactive gaming licenses is something to celebrate, especially since gaming taxes and license application fees are some of the highest in the world.
The concern now is that this establishes a precedent for other states considering gambling legislation.
Pennsylvania’s fees have not proved to be a deterrent to applications. Now, other states may ask themselves why they too should not set their fees and taxes at similar levels.
After the Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992 (PASPA) the legislative floodgates opened.
On top the states already considering online poker regulation, there are now around 20 states somewhere on the road to introducing sports betting legislation.
Will these states follow Pennsylvania’s example and adopt extremely high license fees and taxes?
The draft legislation in New York includes a one-off licensing fee of $10 million, although at the moment proposals for the level of gambling taxes in other states don’t seem to replicate Pennsylvania’s position.
However, with the evidence of Pennsylvania in front of them, state politicians have a strong incentive to re-examine their own gambling tax proposals.
To do so, would be a mistake, for four good reasons:
- The black market
- State tax revenues
- Industry viability
- Market concentration
High taxes drive customers to offshore sites
Pennsylvania’s online gambling tax rates are almost the highest in the world. Taxes are:
- Online table games and poker: 14% + 2% local share = 16%
- Online slots: 52% + 2% local share = 54%
- Sports betting: 34% + 2% local share = 36%
- Daily fantasy sports: 15%
Taxes on online poker and table games are actually right in the sweet spot, maximizing tax revenues while still allowing operators to make healthy profits and offer customers games at prices competitive with the offshore black market sites.
On the other hand, taxes on sports betting and slots are almost punitive.
The experience of different tax rates in European markets suggests a direct correlation between tax rates and the proportion of players attracted to the regulated sector (channelization).
Copenhagen Economics was commissioned by the Swedish government to study the issue, and it found that the levels of channelization in different countries was:
High taxes send players to the black market.
State tax income correlates to tax rates
Fewer people gambling in the regulated sector means fewer taxes for the state; it means more people exposed to the risks of playing in the black market and it means less revenue for the operators.
Copenhagen Economics put the channelization numbers together with tax revenues in a graph:
The bottom line is that Pennsylvania’s high tax rates will generate less tax revenue than lower rates and simultaneously reduce the proportion of players protected by the state gaming laws.
Online gambling operators can only lose money for so long
France has similarly high rates of gaming taxes on online poker and for sports betting. Five years after introducing national online gambling regulation, the regulator ARJEL produced a detailed report on progress.
The 2015 report identified that 8 out of 11 online poker license holders posted a loss in every quarter since they began operating in the licensed market. Only three sports betting operators had profited on the same basis.
Loss-making operations can only survive as long as their owners believe that things will change in the future. When the hope dies, so does the business and unemployment results. Loss-making businesses also pay no corporate taxes.
High taxes and the need to recoup the investment in license fees put gambling operators in a tough position.
They can reduce the odds on bets; increase the rake on table games; reduce VIP scheme benefits or eat the extra costs and reduce their profit margins. In practice, operators mix and match the various options, but whatever solution they come up with their margins come under pressure.
The answer to thinner margins is to increase volume, and that results in a battle royale for the market. The end result is effectively an oligopoly, where the market concentrates in the hands of the most powerful brands.
In Spain, 95 percent of online poker revenues have been going to just two operators, PokerStars and 888. In New Jersey the market is effectively split only three ways—PokerStars, Borgata/PartyPoker, and WSOP/888 have all the market, bar a few crumbs which Pala Poker has picked up.
This level of market concentration is a concern for regulators because they must monitor carefully to detect any signs that the operators are abusing their market position.
It is great news that so many casinos have applied for online gaming licenses in Pennsylvania. On the other hand, Pennsylvania has set itself up for a fall.
On the basis of experience in other jurisdictions, Pennsylvania will be collecting less in state taxes; its casinos will be making lower profits, and a large number of its citizens will continue to gamble without consumer protection at offshore sites.