Late last week the Illinois legislature held a hearing to help formulate new laws to allow both sports betting and online gambling.
At the hearing, State Representative Lou Lang told the combined committee that it was important not to move forward too quickly. He pointed to Pennsylvania as an example not to follow:
“If you go too quickly, you make a real mess as Pennsylvania did.”
PA taxes too high because it doesn’t understand sports betting
Rep. Lang explained why he believes Pennsylvania got it wrong. He said that Pennsylvania legislators did not understand “how different sports betting is from other forms of gambling.”
The specific errors Pennsylvania made were in setting taxes too high. Pennsylvania sports betting is taxed at 36 percent of gross gaming revenue compared to 6.75 percent in Nevada.
This makes it extremely difficult for operators to make a profit. More importantly:
“If this industry is taxed too high, illegal betting continues.”
Lang explained that sports betting companies are different from casinos. Bettors are betting against each other, not against the “house.”
Operators match up bets for and against an outcome and charge a “vig” for the service.
So, although the headline numbers for sports betting handle may sound huge, the operators are only receiving, perhaps, 5 percent of this number. Out of that, they have to pay for:
- Operating costs
- Marketing costs
Make taxes too high and the operators have only one option.
Lang explained that higher prices are a deterrent to bettors playing in the regulated sector. Unregulated offshore operators can offer better odds, so bettors see no incentive to come to regulated sports betting sites.
“Why would somebody who’s just a casual bettor make a legal bet as opposed to an illegal bet?”
Extensive evidence supports Lang
Pennsylvania legislators received extensive background evidence on the impact of high taxes before they passed their new gaming laws.
When Richard Schwartz, CEO of Rush Street Interactive, gave evidence, he pointed the legislators in the direction of several pieces of European research. Rush Street owns both Rivers Casino and Sugarhouse Casino in Pennsylvania. Schwartz will be running its online operations, so he has skin in the game.
The government-sponsored research he put into evidence showed that there is a strong association between gambling tax rates and the proportion of bettors that use the regulated sites.
Higher tax rates mean more players and bettors staying in the black market. They also mean a lower tax take for the state, but this seems to have passed Pennsylvania legislators by.
Pennsylvania is moving its mess forward slowly
Inherent in Lang’s criticism is the idea that there’s a choice between moving gaming legislation forward quickly and making a hash of the job. That turns out not be a real choice.
New Jersey was the first state to get sports betting up and running after the Supreme Court overturned PASPA. New Jersey Governor Phil Murphy placed the first sports bet at the Monmouth Park racetrack on June 14.
Since then, there have been a couple of regulatory hiccups, but on the whole, sports betting regulation has been a roaring success. As per the last revenue numbers issued by the Division of Gaming Enforcement (DGE), operators took in $184 million in wagers in September. And those are early numbers that are growing fast.
So it is possible to move quickly and have good regulation.
Pennsylvania’s high taxes aren’t the result of it making hasty decisions though. They are the result of the already high tax rates levied on casinos. Slots in casinos are taxed at 54 percent.
Some voluble politicos and shortsighted casino lobbying argued that sports betting taxes should be set high so that existing gambling would not be cannibalized. Well, both have now shot themselves in the foot.
PGCB procedures slowing the introduction of sports betting
Furthermore, the rate at which the Pennsylvania Gaming Control Board (PGCB) is moving means that the rollout of sports betting and online gambling is not going quickly.
Even after the PGCB gives an operator permission to launch, there is a long delay while preset conditions are fulfilled. At the last meeting of the PGCB, Greenwood Gaming received authorization to begin sports betting at Parx Casino and the South Philadelphia Turf Club.
But the Office of Enforcement Counsel (OEC) said that it wanted to check that the sports betting systems at Parx Casino were working well before allowing sports betting at the Turf Club.
New Jersey regulators manage to do a great job without imposing any such delays.
PA online gambling will probably not be fully up and running at all Pennsylvania licensed casinos until mid-2019.
Pennsylvania gets a big thumbs up for actually legalizing online gambling and sports betting. But a competitive marketplace will require some pride-swallowing and a reduction in the sky-high gaming taxes.