Casinos wary of Pa.’s new gambling tax, higher than any other state’s
games and 54 percent for slot machines — but industry officials say that’s a problem because profit margins are lower from online gaming. They are midway through a 90-day period set by the Pennsylvania Gaming Control Board to exercise an option to pony up $10 million for a comprehensive online gaming permit. None of the state’s 13 operators thus far has indicated whether it will seek one, though many or most are expected to do so and potentially begin offering online games in late 2018.
Until recent weeks, little attention was paid to another part of the gambling bill that addressed sports betting, as it was only a hypothetical. The law stated that if the federal ban were lifted on the states’ ability to allow wagers on sporting events — as the U.S. Supreme Court later decided in striking down a 1992 federal law on May 14 — Pennsylvania’s casinos could pay yet another $10 million fee to set up sports-betting operations. The revenue derived from losing wagers will be taxed at 34 percent for the state and 2 percent for local governments. The federal government also claims 5 percent of revenue.
In Nevada, the only state where widespread sports betting has been allowed for decades, the industry retains as revenue about 5 percent of what’s wagered on games, which is used to cover the cost of taxes, labor, facilities, technology, etc. Any amount left over serves as profit — a smaller one than for other forms of casino gambling — though Nevada uses a 6.75 percent tax rate across the board for all casino games.
Those involved in the sports betting industry believe a Pennsylvania tax rate set about five times as high as Nevada’s for such wagers ignores their low-profit aspects and will reduce casinos’ ability and incentive to drive bettors away from the existing black market. Only a few other states have been as quick as Pennsylvania to legalize and set tax rates for sports betting, and the others thus far are no more than twice the Nevada rate — including West Virginia’s 10 percent rate.
“If you’re paying $10 million up front for the privilege of paying 41 percent in [combined state, local and federal] taxes, plus the infrastructure costs, it’s difficult for me to see how you make money in Pennsylvania,” said Joe Asher, CEO of William Hill US, the largest sports book operation in Nevada. His company is eager to contract with Pennsylvania casinos to run their sports betting operations — it has already made such arrangements in New Jersey — but he is uncertain if the state’s casinos will find it worth their while.
“You can’t run a casino in an underground black market and pay zero taxes, but you can run [an illegal] bookmaking operation that way,” Mr. Asher said. “A bookmaker will be able to offer a 25 percent rebate on losses to his customers and still have an advantage over the legal market.”
He, Mr. Schippers and others are hoping Pennsylvania lawmakers will revisit the tax rate issue for either or both sports betting and internet gaming, but that could be a tough sell anytime soon.
There is no experience yet to prove the rates are unworkable, nor any evidence that above-the-norm tax rates for casino slots and table games have been a detriment.
Pennsylvania casinos generated $3.22 billion from gambling last year, with $1.33 billion siphoned off in government taxes.
“I think any of that discussion [about reducing tax rates] is more about thinking of their shareholders and saying ‘Let’s get as big a piece of the pie as we can get,’” said state Rep. Robert Matzie, D-Ambridge. “No matter how the economy’s going, whether it’s in recession or booming, the one business that never goes out of business is the casino.”
Mr. Matzie is familiar with the issue because he sponsored a sports betting bill that passed the House Gaming early Oversight last year setting Committee a state-local tax rate of 16 percent, just like table games, with an upfront fee of $5 million. When legislative leaders crafting the expansion package massaged a version of his bill into it, they doubled the fee and more than doubled the tax rate. Mr. Matzie said he was in agreement, in anticipating labor costs involved with sports betting will be lower than for table games.
“I think they will all participate and would be shocked if they didn’t,” Mr. Matzie said of the casinos. “In sports-crazy Pittsburgh and sports-crazy Philadelphia, you’re going to see it bring a lot more people into the casino, watching the bigscreen TVs, and when they get those people in the door to bet, they’ll also hopefully drop money at the tables or in the slots.”
As Pennsylvania is out ahead in dealing with the sports betting issue, in addition to being one of just four states thus far to approve internet gambling, it’s unclear how out of the norm it might be when all is said and done. Other states could follow its lead and aggressively tax the industry, just as Maryland did in recently legalizing slot machines at tax rates even higher than Pennsylvania’s. Or like West Virginia with sports betting, they could set lower rates that might undercut a neighbor.
“It’s a complicated issue, and no two states are the same,” said Ethan Wilson, a policy director for the National Conference of State Legislatures. “States want to get as much revenue as possible while also maintaining a healthy, robust industry. … Nevada has wanted for a long time to be known as very friendly to the gaming industry, to grow that economy and draw people into the state based on that activity.”
Mr. Schippers, of Penn National, which has extensive operations in non-Nevada states that could soon also authorize sports betting, said Pennsylvania’s new approach to the industry is worse than the high slots taxes it started with in original 2004 legislation. He said the state did extensive analysis at the time to place casinos in markets that would help assure their success, and a provision in the initial law gave them financial protection from any harmful leg is lat iv changes during a phase-in period.
Now, he said, the Legislature is implementing tax rates and other changes — such as new mini-casinos that Penn National intends to build for competitive reasons — that serve the state’s revenue needs but don’t represent the wants or needs of the casinos. “Even though there were hightax rates initially, we felt the rules of the game were well-established and we had market protection,” Mr. Schippers said. “We invested hundreds of millions of dollars and they changed the rules of the game. … Pennsylvania went from being one of the most stable jurisdictions in the country to one of the most unstable. Every year for five-plus years it has been a wild roller-coaster ride of expansion talk.” made Penn no National, formal decision which has yet about offering sports betting or internet gambling, has been more vocal in criticizing Pennsylvania’s legislation and taxes than other casino operators, though none has acknowledged lobbying to win any of the new options they are being given. Officials from the Rivers Casino and The Meadows Racetrack and Casino were unavailable to comment. Mr. Schippers said his comments could not represent The Meadows, because Penn National’s acquisition of the racetrack from Pinnacle Entertainment as part of a larger deal won’t be finalized until late this year. The Washington County racino’s pending sale creates uncertainty about how it will approach the internet and sports betting options this year, as it would have to invest millions of dollars in licenses and infrastructure investments at a time when it would not expect to reap the later benefits. As for Pennsylvania gamblers, they presumably care little about any casino’s taxes and fees. They are just eager in many cases to place sports bets legally for the first time, whether at the casino itself or from an online account the casino may create. And many younger gamblers may be drawn to other internet gaming in the form of slots, craps, blackjack and poker they will be able to pursue. No timetable has yet been set for when any of that new gambling can begin, which depends not on just the casinos but regulatory requirements of the Pennsylvania Gaming Control Board. But whether they like the tax rates or not, either some, many or all casinos seem destined to participate. “I would think once you get one that moves forward, you’ll see others follow suit ethe best they can,” said Sue Schneider, an industry analyst and consultant who is editor-in-chief of the Gaming Law Review publication.