PA Senate Passes Potentially Significant Online Poker Bill

The Pennsylvanian Senate yesterday passed an omnibus expansion of gambling bill that could have significant implications for Stateside online poker players.

Following months of speculation about what might – and might not – be included in the Keystone State´s proposals to fill a gaping hole in its budget, details emerged on Tuesday of an omnibus expansion of gambling bill covering brick-and-mortar casinos, online lottery games, Daily Fantasy Sports and online gambling.

The bill quickly passed two committee stages and was presented to the full Pennsylvanian Senate yesterday – where the proposals were passed by a majority of 38-12. The bill now goes to the House of Representatives. If passed in their current state, the proposals could have significant implications for online poker players – not just in Pennsylvania, but throughout the whole country.

On First Glance, the Proposals Look Pretty Good

The proposals relating to online poker are pretty much what campaigners were hoping for – a regulated system, managed by brick-and-mortar casinos, with a reasonable license fee ($5 million) and tax rate (16%). On that basis, there would be two or three operators willing to enter a market estimated to be worth between $30 million and $35 million per year.

The operators most likely to apply for licenses would be PokerStars, 888Poker and Party Poker. These three online poker sites already provide a service to residents of neighbouring New Jersey and, as the proposals allow for compacts with states that have regulated online poker, it would not take long until the player pool was expanded for the benefit of players in both states.

The regulation of online poker in Pennsylvania could even start a domino effect among other north-eastern states that have been flirting with legislation. New York, Massachusetts and Connecticut are all looking at proposals to regulate online poker, and the passage of legislation in Pennsylvania could be the nudge these states need to get their bills over the line. However, there is a problem.

Why the Proposals are Not as Good as they Look

The problem stems from the tax rate Senators want to charge on online casino gambling – 54%. The high tax rate is similar to what brick-and-mortar casinos in Pennsylvania already pay on slot revenues and, although it is an excessive tax burden, brick-and-mortar casinos have other revenue streams from which to make money – revenue streams such as dining, hospitality and conferences that do not exist in the virtual world.

The high tax rate would make the provision of online casino gambling in Pennsylvania financially untenable. For operators, it would not be worth paying a $5 million license fee and 54% tax. There would be no money in it for them. Unfortunately, without the revenues from reasonably-taxed online casino gambling, PokerStars, 888Poker and Party Poker will not have the money to offer decent promotions or a valuable rewards program to poker players.

Rake and tournament entry fees will also likely be higher than the industry average, making regulated online poker in Pennsylvania uncompetitive against offshore, unregulated sites. As has been seen in ring-fenced European markets with high tax rates, more than 50% of players have accounts with offshore operators because of the better deals they offer. The same could happen in Pennsylvania, which would half the estimated value of the market and possibly cause the whole thing to fail.

Wider Implications for the Whole US Market

If the bill to regulate online poker in Pennsylvania passes in its current state, there are two possible outcomes – both of which are EV-. If the market fails, neighbouring states will draw the conclusion that regulation doesn´t work and scrap their plans. If the market succeeds despite the high tax rate on online casino gambling, it will set a precedent other states will likely follow. It is a lose-lose situation for players unless the House of Representatives lowers the proposed tax rate on online casino gambling.

If the House takes this option, the whole bill has to go back to the Senate for reconsideration. The priorities of the Senate are clearly tax revenues. So – if there is no acceptable compromise reached on the tax rate – the regulation of online poker could be abandoned in favour of alternative tax-raising measures already under consideration. Considering the wider implications for regulated online poker in the US, maybe this is the best outcome.