Pennsylvania Legislature has passed online casino, poker and dfs

What Happens If PA Goes Through With An Oppressive Online Slot Rate? Hint: It Isn’t Pretty

Piggy bank with lipstick on it
Pennsylvania legislators continue to complicate what should be an uncomplicated path toward legalizing online gambling.

At this juncture, it seems nearly inevitable that the next piece of legislation will call for an oppressive 54 percent tax rate on online slots, coupled with a 16 percent rate on table games and poker.

These rates would parallel those of the state’s 12 land-based casinos, with the misguided rationalization being that lower tax rates on online gambling will “force casinos to the Internet.”

There have also been even more disturbing rumblings; one that suggests all online casino games be taxed at 54 percent, and another that would grant PA casinos a limited exclusivity window to procure one of 12 licenses, after which any entity could apply.

Lawmakers also floated around the idea of separate $5 million licenses for online casino and online poker.

Forgetting about the most absurd of these proposals for just a second, here’s a look at a few possible futures for PA online gambling should a 54 percent online slot tax rate be enforced.

Casinos receive exclusive invite, no one shows up

Sadly, this is one of most realistic scenarios. Quite simply, if lawmakers impose a $10 million licensing fee on online gambling, and couple that with a 54 percent tax rate on online slots, it’s likely not a single PA casino operator will sign up.

Influential PA casino operator Penn National already voiced this sentiment. From SVP of Public Affairs Eric Schippers:

“We are trying to knock down some sort of silly notion that you could have tax parity between iGaming and the slot machines and that it could be a successful industry and we’re trying to convince them that if they do this, no one will sign up for it.”

There’s already a slew of evidence out of New Jersey that online gambling margins are razor thin. With that in mind, operators could not reasonably carve out a path to profitability if the slot tax rate was too high.

Who is going to take a $10 million chance when the odds of getting out of the red are next to nil?

Even the state’s biggest land-based operator, Parx Casino, who can afford to take a risk, would probably abstain. Reason being that Parx appears satisfied with the status quo. So, it would probably only jump on the online gambling train if others did so first.

At 54 percent, those others probably won’t. It’ll be like online gambling was never legalized, and black market sites will continue to reign supreme.

No one shows up, PA Lottery runs the show

If not a single casino applies for a license, then PA may find a willing participant in the lottery.

According to a recent report published by Gambling Compliance (paywall), the Pennsylvania Lottery would be happy to operate the state’s online gambling industry, if permitted.

Sadly, some deem this notion a viable one, evidenced by statements made by Sen. Joe Scarnati:

This is wholly untrue. And in a recent article, Online Poker Report publisher Chris Grove sums up why:

  • The licensing fees from online gambling would be washed away. According to our analysis, PA online gambling stands to generate $126 million in upfront licensing fees. Only if the casinos are purchasing those licenses though.
  • The PA lottery has no experience running online gaming. There’s a strong likelihood its rollout would be inferior in just about every single imaginable way.
  • If casinos run online gambling, and run at a loss, it’s on them. If the lottery runs the show, and runs at a loss, it’s on the state.
  • In New Jersey, online and live casinos complement one another. The online brand acting as a driver of traffic to the equivalently branded land-based casino. That synergy doesn’t exist if the lottery calls the shots. Suddenly the threat of cannibalization becomes very real.

Some casinos take a shot, customers suffer

There’s a plausible scenario where select casinos do sign up for online gambling (despite the high tax rate on slots) and pass the buck to customers.

In several respects, this is the most worrying thing that could happen.

Should PA casino accept a 54 percent slots tax rate, they’ll need to take drastic measures to improve their bottom lines. Most of these would fall on the player:

  • Reduced payback on games
  • Fewer or even no promotions
  • Lackluster VIP programs
  • Smaller game libraries

In New Jersey, the majority of online gamblers are online-only. Should the same hold true in Pennsylvania, these new players are going to get crushed. What results is lower retention rates for the online operator, and even worse, a damaged reputation for its associated land-based brand.

And all of this is forgetting that operators would have to cut back on their marketing spend.

Spreading brand awareness proved an uphill battle in New Jersey, where the industry only began to flourish after several years. If PA operators are hindered in their ability to market, fewer patrons will know about the industry, it’ll struggle to reach maturity, and the black market — which will also offer better returns and promotions — will continue to thrive.

Why not just shift attention to table games?

One strategy operators could toy with is to shift the crux of their focus to table games. After all, these games will be subject to a relatively reasonable tax rate of 16 percent.

Unfortunately, this approach is not without its difficulties.

For one, anecdotal evidence from New Jersey online casinos operators suggests that more than 80 percent of casino revenue comes via slots. Cutting this down to even a 50/50 split would require massive strategy adjustments, and would still probably fail.

And even if it worked, the effective tax rate would reside at 35 percent. That is still among the highest in the world, and beyond unsustainable for an online gambling operator.

Furthermore, there are finite number of table games resources, and even fewer solid options.

By contrast, slots are available by the truckload — some NJ online casinos have over 300 — but there are only a smattering of popular table games. Back in the day, NJ online casinos tried to offer a wider selection of table games, but some were cut, presumably due to unpopularity.

In Pennsylvania, where table game revenue only comprises 27.5 percent of total land-based gaming revenue on its best month, Blackjack, Roulette, Baccarat, and Three Card Poker alone won’t cut it.  This, despite PA casinos boasting some of the best blackjack rules, and worst slot payouts, in the country.

What will cut it is a more reasonable tax rate on online slot terminals.

Robert DellaFave

About

In addition to being an ardent poker player, Robert DellaFave works as a contributor to and editor of several online publications dedicated to regulated US online gambling. Based in New Jersey, Robert also works as a game developer.