Will High Tax Rates Drive Away Pennsylvania’s Sports Betting Business?

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There’s a feeling of deja vu as Pennsylvania gambling properties prepare to launch sports betting.
Pennsylvania Gaming Control Board Director of Licensing Susan Hensel noted at a Global Gaming Expo panel at the Sands Convention Center in Las Vegas this week that the state “has been underestimated before,” and that it is likely to happen again. “They said the casino tax rate would never work,” Hensel noted, but today, “Pennsylvania is the No. 2 state in the country in casino revenues.”
You couldn’t blame Hensel for making the comparison between sports betting, where Pennsylvania will have a high tax rate while neighboring New Jersey boasts a much lower one, and the dance more than a decade ago regarding general casino taxation.

A quick history lesson

Let’s go back to before Pennsylvania casinos debuted in 2006. Just three years earlier, Borgata, billed as the first “Vegas-quality casino in Atlantic City,” spurred competing casinos to spend hundreds of millions in upgrades just to try to keep up.
Pennsylvania was mocked in Jersey circles for around a 50 percent tax rate (more than five times what AC casinos paid) that, critics said, would mean gamblers still would prefer to travel to Atlantic City for the top-notch shows, dining, and shopping rather than settle for a “slots warehouse” down the road.
Then the new casinos opened, and lo and behold, gamblers turned out to be willing to settle for a more affordable Gin Blossoms nostalgia concert and a three-star meal rather than drive dozens of miles more to spend a fortune on a Britney Spears show and a high-end meal that left the wallet a lot lighter for gambling purposes.
For sports betting in the Keystone State, operators have to pay a $10 million licensing fee, a 34 percent tax on gross revenue, a 2 percent local share assessment tax, and a 0.25 percent federal excise tax on handle. In New Jersey, taxes are just 8.5 percent of gross revenue for in-person and mobile betting and 13 percent for online wagers, with a $100,000 licensing fee and a 1.25 percent local share tax.

Starting five

Some gloom-and-doomers predicted that Pennsylvania would get no takers at such numbers. But from mid-August to late-September, five of a possible 13 applications had been made: by Parx (which plans to have both a land-based and a mobile sportsbook), Harrah’s Philadelphia, Hollywood, SugarHouse, and Rivers casinos. And Mount Airy has a deal with The Stars Group (think PokerStars), so that’s another one in the hopper, we can assume.
So can Pennsylvania lawmakers begin making plans for a sports betting victory lap? Not quite.
I talked to one potential PA sports betting partner this week at the Las Vegas event, and was told the price just wasn’t right.
Also, the success in the casino tax gamble was that the high cost of doing business in large part just reduced the quality of non-gaming amenities — a tradeoff that more gamblers than expected were and are willing to make.
With sports betting, operators again will have to cut corners to profit, but this time, it could come in the form of offering odds that will make winning in the long run very difficult. That might work with the casual gambler, but is likely to turn off the higher rollers.
So in the Philadelphia area, you could have a scenario with the latter group split between continuing to play with illegal bookmakers and offshore websites and crossing the border to wager legally at Atlantic City casinos or on New Jersey mobile apps.

What we can learn from Europe

At a G2E panel on Thursday titled “How Sports Betting Works in a Regulated Market,” Khalid Ali — secretary general of ESSA, the European sports betting integrity alliance — pointed to France, which taxes a remarkable 9 percent of the sports betting handle.
“There are only 16 licenses there, compared to more than 200 in the [United Kingdom],” Ali said. “Even more damning is that Denmark — a country of only 5 million people — has 32 licenses.”
Speaking of damning, the former “integrity fees” label that sports leagues used earlier this year to angle for a slice of the action on sports betting took another beating at that same panel. (Interesting side note: Hensel said that in October 2017, when Pennsylvania legalized sports betting — pending a favorable U.S. Supreme Court ruling that came in May 2018 — and a slew of other gambling items, this topic never came up. So we can pretty much trace its origin to an Indiana bill at the start of 2018.)
The very first question from moderator Jennifer Roberts, a UNLV gaming law professor, referenced the fact that leagues such as MLB now use the term “royalty fee” instead.
But as was the case with American Gaming Association executive Sara Slane on Wednesday while dueling with an MLB executive, former chief Nevada gaming regulator A.G. Burnett showed no mercy on that front.
“An integrity fee is ridiculous” from a regulator’s perspective, Burnett said. “It’s a money grab disguised as something based on integrity. Any fee directly coming from handle [even the lowered 0.25 percent now sought by some leagues]can be quite damaging to the sports betting world. It’s sort of offensive to me to hear that.”
Ali piled on, taking dead aim at the leagues’ argument that since the betting can’t exist without them putting on the games, they should get some financial reward for their efforts.
“There are other industries out there that sit on the back of other industries,” Ali countered. “For example, retail fuel is solely dependent on the car manufacturing industry, yet they aren’t getting a royalty. Lobbyists only exist because of politicians. That kind of argument just doesn’t wash.”

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John Brennan

John Brennan has covered NJ and NY sports business and gaming since 2002 and was a Pulitzer Prize Finalist in 2008, while reporting for The Bergen County Record.

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