Online Gambling Tax May Be Jackpot for Congress

When U.S. Representative Jim McDermott went looking for revenue to improve foster care for kids, he said he stumbled on what may turn out to be a jackpot: a tax on Internet gambling.

McDermott is seeking to impose taxes on online poker and other Internet gambling that could bring the federal government as much as $42 billion over 10 years, according to a congressional analysis. States may collect as much as $30 billion, McDermott’s office estimates.

“It’s a human activity that people are going to do, and it’s a good place to pick up some dough,” said McDermott, a Washington Democrat, in an interview. “I’ve gotten a thousand ideas pumped at me about what we should do with the money.”

The House Ways and Means Committee tomorrow will consider his proposal, which depends on passage of a separate bill to legalize some Internet gambling and roll back a law designed to block wagering beginning June 1. That bill would let U.S. residents gamble online with companies licensed by the Treasury Department.

Las Vegas-based Harrah’s Entertainment Inc., the world’s biggest casino company, is among companies and groups lobbying Congress to legalize online gambling.

Backers of legalizing, regulating and taxing Internet gambling, such as Poker Players Alliance Executive Director John Pappas, say a growing number of Americans are placing bets with offshore operators.

‘Source of Revenue’

Online gambling gives Congress “a huge new source of revenue that is just sitting there on the table,” said Michael Waxman, a spokesman for the Washington-based Safe and Secure Internet Gambling Initiative. The group represents financial services companies such as U.K.-based payment processor UC Group.

Opponents such as Chad Hills, an analyst for gambling research and policy at Colorado Springs-based Focus on the Family, say tax gains would be offset by social costs, such as gambling addiction.

Online betting is “the most predatory, addictive and invasive form of gambling,” Hills said. “If people are sitting around in their pajamas on their computer in their living room playing on multiple Internet sites, what is this going to do to the United States?”

The U.S. offshore Internet gambling market is expected to climb to $5.7 billion in 2010 from $5.4 billion last year, according to U.K.-based H2 Gambling Capital, which supplies data on the industry. The global market is about $30 billion.

$24 Billion

If the U.S. legalizes the gambling, the market could grow to $24 billion in five years, according to H2. That excludes sports betting, which wouldn’t be allowed under House proposals.

The biggest offshore gambling sites for U.S. players include PokerStars, based in Isle of Man, and Full Tilt Poker, based in Ireland, according to H2.

“People will always find a way though some form or another to deposit money and play online,” Pappas said. “That growing reality is why Congress needs to act.”

McDermott’s measure depends on passage of legislation proposed by Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, to end a ban on most Internet gambling.

Frank’s bill would scale back a 2006 law that, starting next month, will bar banks from processing payments to offshore gambling websites. Critics of the 2006 law say it makes no distinction between legal and illegal online wagering. Some states allow online betting on horse and dog racing, and California allows lottery tickets to be purchased online.

Safeguards

Under Frank’s proposal, licensed gambling companies would be required to have safeguards to protect against underage and compulsive gambling and to prevent people from placing bets online in states that prohibit it. Such oversight would protect consumers against fraud, identity theft and other crimes, McDermott and other proponents say.

McDermott’s proposal would require Internet gambling operators to pay a 2 percent tax to the federal government on betting deposits and a 6 percent tax to states. The federal treasury also would collect taxes on gaming-company profits, and bettors would pay taxes on winnings.

“The taxing is a momentum, and I think you’re going to get more momentum when the regulations go into effect and the banks have to start doing all this hassle,” Frank said.

Frank said he plans to bring his gambling measure to the Financial Services Committee after Congress finishes separate legislation on rules governing Wall Street.

‘Crack Cocaine of Gambling’

Representative Spencer Bachus of Alabama, the top Republican on Frank’s panel, said he’ll do all he can to defeat efforts to legalize and tax online betting, which he called the “crack cocaine of gambling.”

Bachus said revenue estimates for McDermott’s proposal are bloated because they assume all states would participate. The Alabama congressman said he’s concerned the prospect of more government revenue will attract lawmakers who thus far have opposed legalizing Internet gambling.

The 2006 law to enforce the ban had overwhelming support in the House, passing by a vote of 317-93, with 115 Democrats backing it.

“I know the government is in a search for money, but if you have something that is destructive to society, you shouldn’t let $40 billion be the price tag,” Bachus said.

To contact the reporter on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net

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