Another state, another crisis, another half-baked plan to plug a budget gap without cutting any spending. Legalizing online gambling in Pennsylvania, while certainly an improvement over outlawing it entirely, won’t significantly increase Pennsylvania’s state revenues overall, nor will it hurt or much help the firms currently operating casinos in the state like Penn National Gaming, Pinnacle Entertainment, or Las Vegas Sands. Sheldon Adelson’s aversion to online gambling notwithstanding, perhaps this is an opportunity for him to see that it’s not a threat to his business.
First, spending a day or weekend to have fun at a casino is very different from spending a few minutes or hours on your phone playing poker or slots on your daily commute. Though the two markets certainly overlap somewhat, it’s not like legalized online betting will thin out the casino crowds noticeably. The two activities are qualitatively different consumer experiences and won’t cannibalize all that much.
Second, remember when Chris Christie infamously predicted $180 million a year from a 15% internet gambling tax, but only ended up with $12 million? Something similar will happen in Pennsylvania. There will be a marginal increase in tax revenue but it will be much smaller than the politicians are expecting. The reason will be the same for why this happened in New Jersey. iGaming is not a productive industry. It doesn’t produce wealth. It only produces entertainment by consuming wealth. That’s fine, but that doesn’t increase tax revenue on net, at least not by much. Gaming is a consumer service, and therefore only redirects wealth from other industries for entertainment purposes.
The politicians are expecting the new legislation to rake in $200 million annually from license fees and taxes. Even if they do, they’ll lose tax revenue elsewhere as individuals balance their budgets so the net increase will be much smaller.
The only way to increase tax revenue on net through online gambling is to accept bets from outside the state, which Pennsylvania is not doing. If, for example, Pennsylvania were to accept customers worldwide (theoretically speaking), then certainly there would be a big bump in tax revenue, because you’d have all these non-Pennsylvanians pumping money into Pennsylvania and that new money being taxed. Of course, Pennsylvania cannot legally do this, so all it can do is allow its own residents or people within its borders to spend money gambling online. The vast majority of them, except for the tiny amount of gambling addicts, will balance out their spending habits according to their own personal budgets. If they choose to spend more money, and therefore pay more taxes gambling online now that it’s legal, they will cut back elsewhere and pay less taxes there, maybe buy cheaper food, eat out less, drive less, not do construction on their homes or whatever.
This is how normal people behave. In order to balance their personal budgets, they cut spending in some aspect of their lives so as not to go too deep into debt. Governments, of course, only come up with more taxes, never spending cuts. While yes, trying to increase the tax loot by legalizing something is much better than just increasing taxes on already legal activities, the gaming community shouldn’t be showering the politicians with praises for this. A polite but suspicious thumbs up and maybe a dead fish handshake followed by a generous amount of disinfectant hand gel is enough.
Consider the way the legalization is set up. The outlandish tax rate of 54% on online slots makes it uncertain that all of the licenses will even be bid on. The 36% rate on sports wagering will make sportsbook barely profitable or even unprofitable. The obvious favoring of the big players, as always, is aggravating. Only the biggest existing casinos will even be eligible to bid on a license for new and smaller venues. Large casinos are free to operate up to 5,000 slot machines, but not smaller companies. And we wonder why Big Business keeps getting bigger and small business struggles. Perhaps because by law, small businesses are not allowed to become bigger, as in cases like this.
The move, though positive, is not a signal to buy Penn or Pinnacle or any other company that would benefit. The benefits will be slow and both are already at multi-year highs. The greater importance here is trends. The more states that legalize online gaming, the better, even with outlandish taxes and licensing fees that all but prevent profitable business models. Once it’s legalized it won’t be reversed, and taxes can eventually go lower when they figure out that a 54% rate isn’t going to help anyone.
Most important though is that more legalization can eventually open the door to bigger operators like 888 and The Stars Group and other European firms finally legally gaining access to large portions of the US market. Also, the more states that legalize, the greater the chances of legalization at the Federal level, which would be big enough to change markets. That’s where we’re headed and that’s a good thing, though there are sure to be protectionist issues that come up as foreign firms try to become more involved. Point being, legalized online gambling and expanded casinos are a good small step, though the immediate effects will be minor to negligible, both for the politicians who want more tax revenue and for the companies affected in Pennsylvania.
