Analysis: Finish line in sight for Pennsylvania egaming push

Having to find $1bn to fill a black hole in its state budget, a growing number of Pennsylvania politicians are pushing egaming legislation forward as an answer. Brad Allen reports on the effort and its chances of success.

The Pennsylvania state legislature is not known for its decisiveness. In fact the 2015-16 financial plan was passed 267 days late. But when faced with a June 30 deadline for this year’s financial plan and a $1bn hole in the state’s budget, politicians were forced to make some quick and bold decisions.

Containing some of the most expansive gaming legislation the US has ever seen, amendment 8374 to HB 2150 was easily passed by the House, 115 votes to 80. The bill includes measures to regulate and tax online gambling, daily fantasy sports (DFS) and even sports betting, should it ever be legalized at a federal level.

“This is a huge opportunity,” says Barbara DeMarco, a gaming consultant at Porzio Governmental Affairs. “It’s a big step when any house takes a vote with such a wide margin of approval even on an unfinished bill.”

The driving factor is of course money, with politicians needing to fill a huge budget deficit and proposals to raise property tax and personal income tax proving predictably unpopular in a Republican-controlled state.

“They are a billion dollars in the hole and if an elected official tries to bridge that gap by raising taxes as has been suggested, he might not find himself elected again,” says DeMarco.

“On the other hand you have this politically acceptable ‘Sin Tax’ on gambling which could raise close to $250m, according to House Gaming Committee Chairman John Payne. That’s a third of your budget deficit right there. If you’re a legislator you’re going to err on the side of what’s best for you to get re-elected.”

Of course the $250m figure being bandied around is on the optimistic side and perhaps deliberately so, since it’s intended to help fill the budget. In New Jersey, Governor Chris Christie famously predicted that online gambling would raise between $200m and $1.2bn for the state each year, before the actual figures showed a return of $34m in 2014. A source close to the negotiations said the state expected the majority of the cash to come from license fees, and agreed that $250m was “a little aggressive”.

The meat

So what does the bill include and how does Pennsylvania expect it to go some way to filling its financial black hole?

Top of the list is the expansion of online gambling. The bill said that licensed commercial casinos in Pennsylvania can apply to the gaming board to operate casino-style gambling on websites and mobile applications, much like in New Jersey, with the reported cost of a licence at $10m.

Mobile gambling apps would also be allowed, albeit only accessible in Pennsylvania’s international airports. Proceeds from website gambling would be taxed at a 14% rate to the state and 2% towards ‘economic development projects’. App gambling would face a significantly higher burden with tax rates at 34% to the state and 20% to the airport.

Elsewhere, DFS in Pennsylvania would become regulated and taxed, with operators required to apply to the Pennsylvania Gaming Control Board for a license and pay a 5% tax based on in-state participation.

The amendment even includes a clause for sports betting, allowing casinos to apply for an online or offline license should it become legal under federal law. These clauses are buttressed by a range of land-based measures to boost gambling revenues, including slot machines in airports and off-track betting parlours.

Who’s on board?

According to DeMarco, the amendment has a broad spectrum of support, despite its omnibus nature, with casinos supportive thanks to the rule tying online sites to their land-based properties.

“Casino operators will have it no other way,” she says. “Online gaming may increase the overall pie by 5-10% but then the pieces within that gets smaller for the existing entities. People are staying at home and playing games on their tablets rather than the racino, so it makes sense they would link the two.”

Indeed the link between the two also means that operators are pushing for the legislation rather than blocking it. “Harrah’s, which has internet gaming in Delaware and New Jersey, has almost certainly been pushing that egaming aspect,” she says.

That push has also been given momentum by the run of record-breaking profits in nearby Delaware and New Jersey, according to Bill Thomas, chief of staff for Representative Rosita Youngblood, who wrote the all-important amendment.

“Those neighbours have set an example and piqued the interest of people looking to generate revenue from egaming,” says Thomas. “Their success has really helped the process move forward.”

He also points out that the proximity of these pro-gaming states offers a number of other benefits, including removing the stigma of the activity.

“Our residents understand that it’s already a reality,” explains Thomas. “We have 150,000 people registered with the Poker Players Alliance who are currently playing online poker so it’s not a new thing. It’s just a matter of bringing it into the regulated environment and making it safer and making it pay for the state.”

In fact the proximity of those pro-gaming states could be a boon for the industry itself, as Youngblood’s amendment contains terms for a compact with New Jersey, which could see poker liquidity pooled and a deal worked out to improve geofencing restrictions, which have been an issue for residents near the states’ borders.

Promising prospects

So what are the prospects of HB 2150 becoming law in its current form? The Senate did not vote on the bill before its summer hiatus in part due to fears it would not have passed.

While the Senate Appropriations Chairman Patrick Browne told the Associated Press he expects the bill to be addressed in the fall, a source close to the situation told EGR NA it will likely be pushed back to Q1 2017 for political reasons.

One third of the Senate is also up for re-election in November’s election, and members are reportedly unwilling to put their head above the parapet and support ambitious legislation just before election time.

“Pennsylvania has a big religious belt in the middle and expanding gaming in a major way made members uncomfortable,” the source said. “And you don’t want to call a bill up in the Senate if you don’t have the votes, because if it doesn’t pass, then it’s dead.”

Compounding those concerns was the wide ranging nature of the gambling bill, with clauses on app gambling, egaming, DFS, sportsbetting, and a variety of land-based measures.

“There were so many ideas on there that it just got weighed down,” the source said. “Every time you threw on another good idea, you lost a couple of votes somewhere.”

He suggested the bill would likely get stripped down to just egaming and DFS before being put to the Senate to give it the best chance of passing.

However he was optimistic a streamlined bill would have a good chance of passing before next year’s state budget deadline.

“I’m pessimistic this year, but I tend to think we can get the votes in 2017,” the source said, not least because the legislature has already earmarked $100m for the state budget from gambling, most of which could be raised almost instantly from licensing fees.

Consultants working with gaming companies in Pennsylvania also said they were 90% sure the egaming aspect of the bills would get passed, while one gaming provider told EGR NA the company was preparing as if Pennsylvania were going online in 2017.

The finish line indeed looks to be in sight, and given the potential impact on the New Jersey poker market through a shared liquidity pact, and the potential domino effect on nearby New York State, Pennsylvania’s long awaited gaming bill could well prove to be worth the wait.