[toc]One of the primary sticking points in the battle to legalize online gambling in Pennsylvania has been the tax rate.
Proposals in the House and Senate call for a tax rate between 14 and 25 percent on all games.
If the higher end of that range weren’t prohibitive enough, a growing contingent in the Pennsylvania Senate Community Economic & Recreational Development Committee (CERD) is pushing toward a more oppressive rate: 54 percent on slots and 16 percent on table games.
If those figures look familiar, it’s because they are the tax rates at land-based casinos in Pennsylvania. But land-based and online are two very different animals.
Put simply, land-based can survive oppressive tax rates, online operators cannot.
And even if online operators bite the bullet, and try to make a 54 percent tax rate on slots work, they could ultimately end up hurting their affiliated land-based brands.
Slots are an online casino’s bread and butter
If the roles were reversed, and the 54 percent rate were on table games exclusively, then an argument could be made that the prospective PA online gambling industry could weather the storm.
That’s because online sites make the overwhelming majority of their gross gaming revenue on slots. This comes as little surprise. Land-based casinos too rely on slots for the bulk of their gaming revenue.
But the disparity between slot and table game revenue online is even greater.
Last month, land-based casinos in Pennsylvania generated $210 million in slot revenue versus $79.5 million for table games. This works out to a roughly 72.5/27.5 percent split.
Comparatively, anecdotal evidence suggests that online slots account for more than 80 percent of New Jersey online gambling revenue. New Jersey taxes all online games at the same 15 percent rate.
Given this, it’s safe to say that if PA taxes its online gambling industry at the same rate as land-based, the effective tax rate would be even higher for online.
Using the splits listed above reveals an effective tax rate of 46.4 percent online versus 43.6 percent land-based.
It’s not because of low returns
Online slots generate more revenue than their land-based counterparts because the returns are lower online, right? Wrong.
In Atlantic City, the average slot returns somewhere in the vicinity of 91 percent. Online, the returns are closer to 95 percent.
So, then how can slots comprise a bigger percentage of revenue online? While there is no clean-cut answer to that question, some theories arise:
- Players are less likely to trust digital table games than their physical counterparts. Slots function basically the same both online and live.
- Slots are highly prevalent online, often making up over 85 percent of an online casino’s game library. They’re also the first game format players see when they log on.
- Mobile applications are even more focused on slots. It isn’t common for a NJ online casino app to feature over 100 slots and video poker games, and just a smattering of table games — usually limited to blackjack and roulette.
- Online bonuses are much easier to clear playing slots than other games.
- Online penny slots feature a bigger spread of denominations, with maximum bets often exceeding $50. At land-based casinos, it’s rare to find penny slots that allow for wagers of more than $5.
- The high returns on online slots are effective at increasing retention rates.
The last theory warrants additional consideration. It’s highly plausible that one of the reasons slots are such money makers in New Jersey is because players see them as better investments.
If the returns were decreased, players would go broke much faster, and feel less compelled to return. A player who gambles $500 a month on slots at 95 percent is worth far more to the operator than one who gambles $500 once on slots at 89 percent, and never returns.
Unfortunately, if lawmakers impose a 54 percent tax rate on online slots in PA, operators will have little choice than to lower returns and hope no one notices.
But they will.
The real impact of online slots returns
Let’s assume that in order to carve out a path to profitability under a 54 percent tax rate, a PA online gambling operator must lower its slot returns to from 95 percent to 89 percent.
What does that mean for the player — does a six percent downgrade really matter that much?
Short answer is yes.
If a player invests $100 and wagers $1 per spin, the player will last 2,000 spins, on average, at a 95 percent return rate. At 89 percent, that same player goes broke (again, on average) after just 910 spins. That’s less than half the amount of play.
It stands to reason that players will feel much more inclined to stick around if they get four hours of mileage out of their investment than two. And keeping players gambling is so much more critical online than live. Online, there simply isn’t anything else to do but gamble.
By contrast, live venues offer a number of high margin amenities that exist outside gambling, such as food and beverages, hotels, spas, entertainment, and so forth.
The bottom line is online gambling sites must keep players happy. The main way they can do that is by offering solid games. If they’re forced to slash returns on slots, players are more likely to get frustrated and do something else.
The land-based casino carryover effect
The negative ramifications of a high tax rate on online slots could extend beyond the online properties.
It’s been proven time and time again that online gambling does not cannibalize land-based casino revenue. One reason is that only a smattering of online customers are active at land-based casinos. In other words, most online players are new players, wholly unknown to the casino.
Going further, online gambling appears to have a complementary effect on land-based.
Online gambling re-engages former customers of the land-based casino. It leads to increased spend among active brick and mortar players. It also acts as an effective driver of new traffic to physical properties.
Here’s the problem: If PA imposes a prohibitive tax rate on online slots, new online only players are more likely to have a poor experience on the site. Some of these players will view the online casino brand, and by extension the affiliated land-based brand, negatively.
Due to their poor perception of PA gambling, they may seek out alternative avenues for their gambling fix, possibly shifting their gambling dollars to the black market. The PA online gambling site loses a customer, the affiliated land-based venue loses a potential customer, and the brand’s reputation takes a ding.
Yes, the tax rate is that important.
But what about…?
Of course, one can make the counterargument that online-only players won’t play slots at live venues if the online returns are better.
That may very well be true. But isn’t it better to get the online only player in the door and have them not play slots, than for them to not visit the land-based casino at all?