PA Is Licensing Online Casino Operators To Offer Slots – But Is The Tax Rate Prohibitively High?

Thanks to some heads-up legislative work, Pennsylvania is quickly moving into the lucrative world of online gaming. Unfortunately, in their zeal to realize tax income from the new industry, PA lawmakers may have set the tax rate so high it will stifle the market – leading to less state revenue than they might hope.

PA lawmakers got off to a good start

Prior to the anticipated SCOTUS repeal of PASPA, Pennsylvania Governor Tom Wolf signed an expansive new gaming bill into law. The new law authorized online poker and traditional casino games to players and casinos operating within the state borders.

This good news for all concerned. There is a clear demand from PA players who want the convenience made possible by the practice. Operators are ready and waiting to move into the space to service this demand. Most importantly, from the state’s perspective, new tax revenues can be realized from the “newly created” industry.

But will state greed kill the golden goose?

Unfortunately, PA legislators have set the tax rate for online slot games at a whopping 54%. This is on top of the already hefty $10 million fee for a full online gaming license (a partial one can be had for $4). License fees operate economically as pre-taxes. The two together make Pennsylvania’s online gaming tax rate the highest in the nation by a wide margin and could be so prohibitively high that PA realizes less tax revenue than it could by setting rates lower.

Pennsylvania’s full online gaming licenses are initially on offer to the state’s current brick & mortar casinos. Those that go unclaimed will then be offered to out-of-state operators. These licenses are already being snatched up, but not necessarily so that online gaming will be offered under them. It is likely that some land-based casinos will buy the licenses defensively, shelling out the millions of dollars just so online competition will be somewhat less than it would be absent the defensive measure.

High taxes lead to shuttered doors and lost opportunities

This bizarre practice makes sense in light of a 54% tax rate plus the hefty licensing fees. Combining taxes, license fees, and other regulatory costs, the typical PA online slot operator faces total state obligations of around 50%. Compare this to a similar online operator in neighboring New Jersey. New Jersey’s tax, license, and regulatory burden adds up to around 20%. That’s a staggering difference, and perhaps one that cannot be made up.

It has been estimated that New Jersey‘s top operators have EBIDTA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of 10-15%. That’s a pretty lean beast already. Can similar Pennsylvanian operators afford a tax burden 150% greater? No wonder some casinos are considering purchasing the online licenses just to sit on them, perhaps hoping lawmakers will reduce tax rates in the future.

Message to PA lawmakers: Sometimes less is more

In economics there has been a long understanding about the relationship between tax rates and tax receipts. This relationship has been called the Laffer Curve, although its wisdom long predates its namesake, Art Laffer. The idea is at least as old as the 14th century. At tax rates of 0%, zero taxes are raised, for obvious reasons. At tax rates of 100%, zero taxes are also raised, why would anybody produce if all profits were taxed away?

Somewhere in the middle is a tax rate that maximizes taxes raised by the state. It is impossible to know exactly what that tax rate is (supply and demand curves are real things, but very difficult to measure), but if casinos are buying licenses just so they can NOT use them, it’s safe to assume the state is taxing at somewhere higher than the optimal rate. And remember, this is the optimal rate from Pennsylvania’s point of view.

PA should rethink things

It doesn’t make any sense to legalize online gaming just so you can tax it so prohibitively that it can’t flourish. Such a practice hurts Pennsylvanian gamblers, operators, and recipients of state services.

 

Author: Adam Haman