Pennsylvania’s high tax rates on casinos, and now on sports betting, have placed the Keystone State in the crosshairs of U.S. gaming industry officials for more than a decade.
But state officials not only are comfortable with their decisions, they believe their numbers represent a potential model for other states to follow. That was the position taken on Saturday by Kevin O’Toole — the executive director of the state’s Gaming Control Board — when he spoke at the National Council of Legislators from Gaming States conference at Harrah’s in New Orleans.
But Marc Dunbar, a Florida-based attorney with 25 years in the gaming industry, took issue with the Pennsylvania model during a productive debate at the event.
“Let’s understand that sports wagering today is a very sophisticated computer technology business,” Dunbar said. “It’s not three guys chewing on cigars trying to figure out from their friends who is injured, and trying to set a line that way. The computers can detect trends, move lines, and balance risk.
“They’re not in the game to lose money, obviously. But what you need to do as policymakers is to make sure to create an environment to allow these technology businesses to thrive and to reinvest in more technology. That’s the best line of defense against fraud.
“So if you put regulatory or tax handcuffs on them, you are guaranteeing your jurisdiction is going to be exploited. You need only look around the world to see ways that it can happen — if not sports betting, then lottery or horse racing. If you don’t allow tech companies to invest in more product, they will not be able to be as sophisticated as the people who want to cheat the game.”
Confidence on both sides of debate
O’Toole, whose state has a nation-high sports betting tax rate of 36%, politely disagreed.
“With respect to sport wagering operators, all jurisdictions are attracting the best — those that have experience in the U.S., and a lot with international expertise,” O’Toole said. “They know their job, and they are entering into agreements with our casino licensees who also are smart business people. So I would be shocked if any of those sports wagering operators would do anything less in the area of risk management, because our tax rate is 36%, than they would do in New Jersey at a lower tax rate. They submit to us a description of how they handle risk management, and we expect them to accomplish that irrespective of the tax rate. And we are confident that they will.”
Dunbar, whose father Peter was a state legislator and a lobbyist, said that his personal experience in the gaming industry leads him to a far different conclusion.
“I couldn’t disagree more on that last point, and I say that respectfully,” Dunbar said. “Risk management is impacted by the tax rate — there is no doubt about it. You want to protect your business, but practically speaking there is only so much you can spend, particularly on the technology side. I’ll tell you this: Those [states] with high tax rates are going to be the ones to not have a robust sports wagering 5-10 years from now.”
The PA way
Earlier in the event, O’Toole had laid out for the 60 or so legislators in attendance the history of the Pennsylvania model.
That includes casino legalization in 2006 — just with slot machines. Three years later, table games were approved.
O’Toole pointed to the relatively “modest capital investment” operators have had to make; even with modified gaming floors for table games, he said investment tended to be $200-$450 million ($2.4 billion Revel casino in Atlantic City opened in 2012 and closed in 2014).
A comprehensive gambling expansion bill in late 2017 included a provision for sports betting that has put Pennsylvania among the first 10 states with sports betting. Another provision was for five “mini-casinos” — no more than 850 slots or 30 table games — to be added beyond the 12 traditional ones. That blind auction raised $129 million for the state, O’Toole said.
“I never thought I was ever going to be an auctioneer, but it was my responsibility to pull the winning envelope out of the box,” O’Toole said.
Pennsylvania has a seven-member gaming control board, O’Toole explained, with three appointments by the governor and four by the legislature.
“It has worked out very well in Pennsylvania,” O’Toole said.
Across state lines?
One area of unanimity on the panel is that some sort of interstate compact for sports betting would be beneficial, a la multi-state lotteries.
“Our legislation allows for that, but I don’t anticipate that will even be thought of for several years,” O’Toole said. “I think those of us in retail markets — New Jersey, Pennsylvania, West Virginia — feel comfortable that we are going to be able to generate business. We want to see how that develops before we get to the point of considering interstate agreements.”
As for Pennsylvania’s 54% casino tax rate, O’Toole pointed to how it has helped save the state’s horse racing industry.
“About 11 or 12% of that tax goes directly to the racehorse development fund,” O’Toole said. “The majority of that goes to increased purses at our six tracks, as well as for pension plans and health benefits for horsemen. After 12 years, it’s a struggle for the tracks to be profitable. But at least they can break even, and some are profitable in marginal ways.”
O’Toole said that state casinos have generated at least $2.3 billion in slot machine revenue over each of the past eight years.
“We continue to generate revenue on a consistent basis even as there is more competition,” O’Toole said. “And for those who paid the $10 million fee to offer sports wagering, we want them to be successful. On week one of sports betting, one of our casinos had its fifth-highest table game revenue week of the past eight years.”
After the panel concluded, O’Toole told Penn Bets that he doesn’t expect Pennsylvania’s high sports betting tax rate to depress betting volume.
“The player, regardless of what type of gambling they like to play, has no concern about the tax rate,” O’Toole said. “The tax rate affects other things, but it doesn’t effect a patron’s decision on where to gamble, or what type of activity they want to gamble on.”