Catch-All Bill Introduced in Pennsylvania

Jay Costa (l.), the minority leader of Pennsylvania’s state Senate, has introduced a bill that would authorize online gaming, daily fantasy sports, online lottery sales and tablet gaming at airports, plus a fix to the local host fee. But the high tax rate envision for iGaming and fantasy sports may doom the legislation.

Jay Costa (l.), the minority leader of Pennsylvania’s state Senate, has introduced a bill that would authorize online gaming, daily fantasy sports, online lottery sales and tablet gaming at airports, plus a fix to the local host fee. But the high tax rate envision for iGaming and fantasy sports may doom the legislation.

Just one week into the 2017 legislative session, online gaming is back for consideration in the Pennsylvania legislature. Democratic state Senator Jay Costa introduced a bill January 11 that would legalize online gaming and daily fantasy sports, as well as restoring the local-community host fee struck own last September by the state Supreme Court.

The measure would authorize online gaming and DFS for 10 of the state’s 12 casinos—Category 3 resort-class casinos would be left out—with iGaming sites tied to land-based casinos. It also would authorize online ticket sales by the Pennsylvania Lottery, and “tablet gaming” at Pennsylvania airports.

However, unlike the measure passed at the end of last year’s session by the state House of Representatives—a last-ditch attempt to restore the local community host fee while legalizing iGaming with details to be worked out later—Costa’s bill contains tax rates for iGaming and DFS—rates that are so high that they call the future of the measure into question.

Costa’s bill sets the tax rate for online gaming at 25 percent, which is 11 points higher than the rate contemplated in last year’s House bill. Moreover, it envisions a $10 million licensing fee for online casinos (the fee was $5 million under the House measure) and a $5 million fee for content suppliers feeding games to the online gaming sites, which would be required to be affiliated with a land-based casino.

For DFS, Costa’s bill sets a $2.5 million licensing fee and a 25 percent tax rate, which would be by far the highest tax on DFS profits in the nation. The highest rates in the states that have already legalized DFS are 15.5 percent in New York and 11.5 percent in Missouri.

Land-based casinos are taxed at 54 percent (slot machines) and 16 percent (table games).

Costa, the Senate minority leader, estimates that his bill would generate $137 million for the state in the next fiscal year, a claim immediately disputed by several knowledgeable industry sources, who say that there would be few DFS or iGaming companies willing to fork over the measure’s high fees and taxes.

“You can lop off $5 million from Costa’s estimates right away,” wrote iGaming expert Steve Ruddock on the USPoker.com website, “because no DFS company is likely to pay a $2.5 million license fee—never mind 25 percent in taxes.”

“I’m a little rusty on my DFS research, but the proposed Pennsylvania license fee, I believe, is roughly 50 times more than the next-most-expensive such fee,” wrote Gambling Compliance Research Director Chris Krafcik in a Twitter tweet.

Ruddock estimates that the $10 million licensing fee and 25 percent tax rate would mean that only half of the 10 qualified casinos would opt to offer online sites—if they could find a DFS company willing to pay the fee to participate. Those that did sign up, he said on the USPoker blog, would not reinvest in marketing or expansion because the fees and taxes would hamper profitability.

“A 25 percent tax rate will make it impossible for an online poker room to turn a profit,” Ruddock wrote. “If the tax rate remains at 25 percent, I would be surprised if a single online poker operator launched in Pennsylvania. One potential solution is for the legislature to tax poker and casino at different rates. Even if it does, the rate might also be too high for online casinos to operate in the black, although it’s not as unreasonable as it is for online poker sites.”

The bill has other elements that may hamper its progress. The inclusion of gaming expansion measures such as tablet gaming at airports was one of the factors causing state senators to shelve the House-passed measure last year. And the fix for the local host fee is likely to ultimately fail as well.

The Costa bill would create a flat $10 million annual payment to local communities hosting the 10 racetrack and stand-alone casinos. This was the minimum payment imposed by the original gaming law, and it was declared unconstitutional because it violated the state constitution’s tax uniformity clause, placing a larger tax burden as a percentage of revenues on smaller casinos than larger casinos. (Mount Airy Lodge initially sued to challenge the provision’s legality.)

The original law provided that licensees pay the communities in which their casinos are located $10 million annually or 2 percent of revenues, whichever is larger. However, no casino since the first opened in 2006 has registered enough revenue that the payment was larger than $10 million. Thus, Costa’s bill would return the status quo—and likely, would soon be challenged on constitutional grounds just as the original law was.

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