Pennsylvania governor Tom Wolf approved the Gambling Expansion Bill Monday, making the Keystone State the fourth to legalize online gambling. Last week the Senate and House passed the bill in quickfire succession, and Wolf’s signature allows Pennsylvania to join Nevada, Delaware and New Jersey as states where residents can legally gamble online. In 60 days’ time the bill will officially become law, allowing state regulators to begin processing online gambling applications early in the New Year.
The bill allows Pennsylvania residents to play online table, slots and poker games, as well as daily fantasy sports and online lotteries. For online casino operators, there will initially be 12 licenses made available for each gaming vertical – table games, slots and poker. Pennsylvania’s established land-based casinos are expected to be given priority on the licenses, but it will be interesting to see if they use them all up. Indeed, the danger is that they might not even apply at all.
One factor that may discourage Pennsylvania’s bricks-and-mortar casinos from applying for a license is the punitive tax rate that has been proposed on slot games. An eye-watering rate of 54% has been mooted for slots, which suggests to seasoned analysts that such a rate is designed to scare away online slot providers. Industry sources have indicated that this rate is double the level at which they could reasonably expect to turn a profit. If 54% is the rate at which Pennsylvania will tax slot games, then initial applications will be for table games and poker only, and even that might not be a sure thing.
Slot games are the big money-spinner for casino operators, with more than half of profits estimated to be coming from such games. The New Jersey online casino scene has thrived since its legalization back in 2013, with 12 operators now sharing revenues of over $100 million. Much of this is driven by online slots, which are cheap to run and produce a reasonably steady and predictable income stream. The danger for Pennsylvania is that if casino operators aren’t allowed to offer a slot product, they may well decide not to enter the market at all.
A 54% tax rate would surely be a massive mistake by Pennsylvania, who are desperate to plug their ballooning deficit. New Jersey’s rate of just 15% for all casino games, including slots, seems to have struck a good balance between the financial needs of the state and the operators’ need to turn a profit. A study by PWC back in 2012 examined varying tax rate scenarios for online gambling in the Swedish market, and concluded that a 10% rate would result in the most revenue in the long term.
These are early days in the process, and it’s not too late for Pennsylvania to dial this punitive 54% rate back. The likelihood is that when regulators see the non-existent demand for licences, then they will see sense and reduce the online slot tax rate to the same 16% rate they hope to charge for poker and table games.
But then again, governments aren’t always known for doing the sensible thing, so watch this space.