[toc]On Tuesday, Pennsylvania Gov. Tom Wolf outlined his budget plan to the PA General Assembly.
And although he made no specific mention of online gambling during his address, an accompanying executive brief proposes $250 million from gambling expansion revenue over the next 18 months:
As part of the final 2016-17 Budget agreement, the legislature committed to enacting a gaming expansion proposal that would generate $100 million in the current fiscal year.
This commitment continues to be reflected in the 2017-18 Budget, which further proposes an additional $150 million in revenue from gaming expansion for the budget year.
As suggested, the $100 million earmarked from gambling expansion in fiscal 2016-17 is not a new revelation. Last July, Wolf struck a budget deal that included raising that sum from generalized expansion of the state’s gambling industry.
However, Wolf’s $150 million proposal for 2017-18 initially strikes as far-reaching.
Is there a path forward for new gambling protocols to reach that figure?
Wolf’s proposal cannot be met without online gambling
One thing is for certain: The total amount of $250 million cannot realistically be achieved without online gambling expansion.
Online gambling licensing fees would act as an immediately impactful revenue stream for Pennsylvania. Under last year’s HB 1887, interactive gaming licensees would be required to pay a one-time authorization fee of $8 million.
Significant vendors would be charged $2 million.
Modestly assuming that nine out of the state’s 12 land-based casinos become license holders, that works out to $72 million in upfront revenue. Approximately $10 million more would be generated from supplier licensing fees, for a total of $82 million.
But wouldn’t most of that sum be accounted for in the $100 million proposed for this fiscal year? Seems so.
Fair enough, but the industry also stands to generate a significant amount of tax revenue in its first year. In a bull case scenario, we project that Pennsylvania online gambling could take in as much as $250 million in its first full year in operation.
That works out to roughly $40 million in year one tax revenue under the provisions of HB 1887.
Assuming online gambling sites are in operation for the bulk of fiscal 2017-18 — a very optimistic scenario — online gambling could account for $122 million, or nearly half, of the $250 million proposed by Wolf over the next year-and-a-half.
That’s undoubtedly an impressive sum. But again, most of that revenue would be front-loaded, leaving doubt as to whether gambling expansion could generate $150 million from July 2017 through June 2018.
Other possible scenarios
Scenario #1 – Land-based casinos stagger their applications
In one scenario, the state’s brick and mortar casinos and significant vendors stagger their applications over the course of the next year. This may unfold like so:
- Approximately six casinos and a smattering of significant vendors ante up in fiscal 2016-17, accounting for roughly $55 – $60 million in licensing fees.
- Three or four holdouts wait until fiscal 2017-2018, boosting revenue for that period by roughly another $30 million.
- A few new brands launch throughout the industry’s first full year, much like Virgin Casino and Pala Casino did in New Jersey. Each pays a significant vendor fee.
Now, PA online gambling generates somewhere in the vicinity of $70 million in fiscal 2017-18. Not bad, but that still leaves $80 million to be fulfilled.
Scenario #1a – Other gambling expansion protocols start generating revenue quickly
Beyond online gambling, several other gambling expansion protocols have been floated around. Cumulatively, these could generate significant revenue for the industry in fiscal 2017-18:
- Video gaming terminals (VGTs) at non-casino locations
- Gaming tablets and/or slots at airports
- Slot machines at OTB parlors and tracks
- Daily fantasy sports
One problem here is that VGTs have proven a controversial topic. Last year, a clause legalizing VGTs at bars in taverns throughout the state had to be stricken from HB 2150 before it would pass in the House.
Secondly, licensing fees and tax revenue from daily fantasy sports will only account for a small slice of the $150 million proposed.
However, revenue from gaming tablets/slots at airports, and from slot machines at other non-casino locations, could be substantial. For perspective, McCarran Airport in Las Vegas alone took in over $25 million in fiscal 2014-15.
Also, proposed license fees and taxes from these vehicles are sky high.
In Philadelphia, the airport license fee for slot machines would be $5 million. In Pittsburgh, it would be $2.5 million.
License fees for gaming tables could run as high as $2.5 million apiece. And airport slots would be taxed at the same 54 percent tax rate as slots at land-based casinos, with 34 percent going to the state.
Similar licensing fees and tax rates would be applied to OTB parlors that opt to add up to 250 slot machines, except with 92 percent of the vertical’s 54 percent gross gaming tax going to the state.
Should these verticals get up and running quickly, they could account for a significant portion of the $150 million proposed by Wolf. Combined with the particulars outlined in Scenario #1, hitting that benchmark becomes more realistic.
Scenario #2 – Online gambling is taxed to death
In a recent co-sponsorship memoranda by Sen. Jay Costa, a 25 percent tax rate on online gambling is proposed. In addition, operator license fees would be set at $10 million and supplier fees at $5 million.
On paper, this would result in materially higher upfront revenue in fiscal 2016-17, and far more tax revenue in fiscal 2017-18: perhaps $60 million or more.
The problem is the proposed tax rate would stifle the industry’s ability to grow. Online casinos would be forced to tighten their belt, resulting in lower marketing spend, tighter games, and in a worst case scenario, individual sites to fold.
Smaller suppliers would likely choose to skip over the Pennsylvania industry.
Online poker, where margins are already razor thin, may prove untenable under this tax rate.
Thus, an offsetting process occurs, where state coffers collect a greater percentage of a smaller pie. This is not a recommended course of action, as it stymies the industry’s growth potential.
There are scenarios in which Pennsylvania could conceivably generate $100 million in revenue in fiscal 2016-17, and $150 million in fiscal 2017-18.
However, in order for this to happen, online gambling would have to be taxed heavily. Either that, or some online gambling license applicants would have to apply after July and other gambling expansion revenue streams would have to get off the ground quickly.
That’s a rather particular set of circumstances. But at the end of the day, it doesn’t really matter when online gambling generates its revenue, as long as it does so consistently over the course of the next 18 months.
And we can say with confidence that will be the case.
Image credit: George Sheldon / Shutterstock, Inc.