Can Pennsylvania Do Online Gambling Better Than New Jersey?

Pennsylvania is becoming a flash point in the fight over online gambling. Last year the state ordered up a report on the state’s flagging casino industry, and on Wednesday the analysis predicted that legalizing online gambling could bring $307 million in casino revenue annually (PDF). A state representative tried to preempt any such plans in February by introducing a bill that would begin punishing people who gamble online, in a move that was immediately hailed by the Coalition to Stop Internet Gambling, run by casino magnate Sheldon Adelson.

Pennsylvania’s interest in computerized gambling comes largely from the flagging fortunes of its physical casinos. American gambling institutions are suffering from a glut in the market, and Pennsylvania is no different. Revenues for the state’s casino industry dropped slightly last year and signs point to that trend continuing.

Pennsylvania’s gambling plans have largely focused on luring people from nearby states where casinos are illegal. But every adjacent state now offers legal gambling of some form. This is likely to result in a situation where the per-capita spending on gambling is the same across states, says Econsult Solutions, which wrote Wednesday’s report. Pennsylvania’s gaming revenue per capita remains higher than the region’s as a whole.

Many of the proposed solutions are likely to turn the stomach of anyone who has moral qualms about governments promoting gambling. In addition to straightforward economic incentives, like lowering the tax rates on gambling, the report suggests such things as serving alcohol past 2 a.m., allowing for cash advances with credit cards on casino floors, and letting players cash large personal checks at casinos.

While these proposals might raise objections from gambling opponents, they are unlikely to be as controversial as options for completely new lines of state revenue. The study says that Pennsylvania could make as much as $110 million a year from sports betting (at least if New Jersey is successful in its litigation against the federal government over the legality of such wagers).

Econsult estimates just over $300 million annually in casino revenue. Stephen Mullin, the president of Econsult, offers an example where Pennsylvania taxes poker revenue at 20 percent and slot revenue at 60 percent, meaning Pennsylvania would make $110 million annually in taxes. He also thinks that could happen largely without cannibalizing casinos’ existing businesses. Here’s how that sort of projection gets made: The number crunchers look at countries with similar socioeconomic profiles to the U.S. where online gambling is legal. It then estimates Pennsylvania’s share of that total by looking at its share of gross domestic product and its share of the online poker market in 2010.

Take these numbers with a grain of salt. Early predictions from the government and private analysts vastly overestimated the windfall from online gambling in New Jersey. No one was more optimistic than the state of New Jersey itself, whose prediction that it would bring in $180 million in tax revenue this year was 40 percent higher than any other estimate examined by Econsult. In the first three months of the year, casinos paid $4.7 million to New Jersey in online gambling taxes. If it continues at that rate, the state would bring in just over 10 percent of what it was expecting.

Econsult acknowledges the shortcomings of New Jersey’s prognosticators, saying that technical glitches and hesitation among banks to deal with gambling revenues have stymied early returns. In a nod to the learning curve, it estimates that the first year of an online gambling industry in Pennsylvania would bring in only $184 million.

“These early numbers should converge with forecasts over time, and the estimates may still be met for the first year,” Econsult writes in its report. “However, the length of time before the market reaches the forecasts is uncertain, and there are some new concerns about liquidity in the New Jersey market.”

While temporary setbacks may be dangerous to New Jersey, “these should be less of an issue in other states going forward,” argues Econsult. As anyone who has every played the tables knows, it will be different the next time around.