National Report Spells Out The Sharp Disparity, Higher Return Of PA’s Approach To Taxing Gambling

AGA report: Pennsylvania's gaming tax revenue is nearly twice that of Nevada, more than three times that of New Jersey.
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Pennsylvania’s different approach to taxation of gambling — one that is onerous to some eyes, successful to others — is never starker than when the American Gaming Association releases its annual report on the industry’s performance.

The AGA’s State of the States 2021 report came out last week, and as always, it provided many tables and charts comparing breadth, revenue, taxation, and other aspects of each jurisdiction’s gaming industry.

It has for years been the case that Pennsylvania, while not the biggest commercial gaming state — industry forerunners Nevada and New Jersey are No. 1 and No. 2 — leads the nation in direct government revenue collected from operators’ success. When the report lines up all the states, however, it can be startling just how much of a distinction there is between the Keystone State and other jurisdictions.

According to the AGA, Pennsylvania’s commercial gaming and sports betting in 2020 amounted to $2.7 billion in revenue and $1.19 billion in “direct gaming taxes to state and local governments and other designated causes.” (The Pennsylvania Gaming Control Board has previously reported somewhat different numbers for 2020 of $2.65 billion in revenue and $1.1 billion in taxes, but we will refer to the AGA’s numbers in this article to be in sync with the report’s comparisons to other states.)

Even though Nevada by far remained the national revenue leader from gaming, with $7.87 billion in a year when all states’ industries suffered due to the COVID-19 pandemic, its low tax rate netted $609 million, barely half of Pennsylvania’s amount.

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While New Jersey remained modestly ahead of Pennsylvania in revenue tabulated by the AGA, its $351 million in taxes collected (again, a somewhat higher amount than the state’s own Division of Gaming Enforcement reported) amounted to less than one-third of Pennsylvania’s total. Mississippi, the state with the fourth-most gaming revenue, reaped less than one-fifth of what Pennsylvania did from taxation.

The top 10 states reported by the AGA in gaming tax collections and the comparison to their gaming revenue — which does not count the tribal casinos that exist in some of the states — are shown below.

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Different tax strokes for different folks

The stark differences in tax collections reflect vastly different approaches by the states in their reasons for legalizing various forms of gaming over the years and their philosophy in how they treat the industry.

Starting with Nevada and echoed in the approaches by New Jersey, Mississippi, and Louisiana, the gaming industry can be viewed as a key tourism draw and jobs generator in states — or in locations such as Atlantic City  that might struggle economically without casinos.

A hospitable approach to gaming operators results in a state tax rate of 6.75% or less in Nevada for all gaming. Mississippi’s combined state and local taxes range from 7-12%. New Jersey’s rate ranges from 9.25-17.5%, depending on the type of gambling.

Pennsylvania, meanwhile, goes as high as 54% for how it taxes slots, both inside casinos and online, and 36% for sports betting taxes. No other state with such an extensive gambling industry uses rates so high. The blended tax rate for all gaming in the state amounts to a little over 40%, and with gaming revenue on pace to exceed $4 billion for the first time in 2021, tax revenue will likely reach a record high above $1.6 billion.

Comparatively high taxes — mostly benefiting the state but also with a small local government cut, generally 2% — have been part of Pennsylvania’s approach to each element of gaming it has added, starting with 2004 casino legislation. Its gaming expansions, including the last major one in 2017, have typically come amid much hand-wringing among its governors and legislative leaders over budget shortfalls.

“Pennsylvania has always been driven by a budget gap,” compared to other states when legalizing gaming, observed Brendan Bussman, director of government affairs for the Global Market Advisors consulting group.

By comparison, neighboring New Jersey, which has been ahead of Pennsylvania in each step of commercial gaming, has viewed the industry as a broader economic engine rather than one to target for taxation and fees. The last time any significant proposal was made to increase gaming taxes — suggested by former Gov. Jim McGreevey in 2002 — it was quickly shot down as a threat to casinos.

“It doesn’t work to overtax casinos,” New Jersey Sen. Paul Sarlo, chairman of the state Senate’s Budget Committee, told njonlinegambling.com for an article explaining why there’s no interest in that state in adjusting tax rates now.

No talk in Pennsylvania of lowering rates

Each successive step by Pennsylvania in gambling legalization — accompanied by tax rates and fees higher than counterparts — has drawn warnings from industry officials or analysts that operators might shun the state or be forced to offer an inferior product. Such pessimism has yet to become reality, however, based on the number of casinos (14, with more in development), iGaming sites (16), and online sportsbooks (12, with more coming) and the options they offer consumers.

It’s unknown how the industry might look any different today or might have developed any quicker in Pennsylvania if the rates were lower. Nothing has ever occurred, however, to make the legislature consider revising rates to put them more in line with the rest of the industry.

Susan Hensel, who had nothing to do with devising the rates but spent 15 years interacting with operators as the gaming board’s licensing director before recently resigning, doesn’t believe they’ve been a hindrance. She told Penn Bets, “You can look at the success of Pennsylvania and say that the model worked. Different jurisdictions make different policy choices about what they want.”

Those different choices made will keep jumping out in the numbers in the AGA’s annual reports, apparently, for a long time to come.

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