Online gambling is on the clock again in Pennsylvania.

The PA Senate CERD Committee will meet Tuesday. It’s likely to discuss an innocuous-looking bill authorizing tablet gaming at certain Pennsylvania airports.

The bill, H 271, passed the Pennsylvania House of Representatives earlier this month without much fanfare, thanks in part to its very limited scope. However, there is more to the bill than meets the eye.

Matthew Kredell, state Rep. George Dunbar said, “We put in one thing, tablets in airports, and basically said, ‘You load it up with what you want in it’ … it puts the ball in [the Senate’s] court.”

In effect, the House passed it in order to give the Senate an opportunity to assemble the other pieces of a comprehensive gaming package that will meet revenue targets in the state’s budget.

We don’t yet know what pieces the Pennsylvania Senate may add.

It all comes down to tax rates

If a group of state senators gets its way, Pennsylvania’s gaming bill would likely include the legalization and regulation of online gambling. This isn’t necessarily good news for legal online gaming supporters, and like most things, the devil is in the details.

In the case of the rumored Senate online gambling proposal, the structure of the bill would be such that Pennsylvanians wouldn’t have access to licensed online gambling sites. That tax rate would be too much of a burden on casinos.

A small group of state senators, led by Robert Tomlinson, are calling for online gambling tax rates that would mimic land-based taxed rates — 54 percent for slots and 16 percent for table games.

Tomlinson has long-called for such a tax rate, citing (wholly unfounded and downright absurd) concerns that casinos will cease trying to generate billions of dollars of revenue at their land-based properties in order to generate hundreds of millions in online revenue.

Or as my colleague Robert DellaFave astutely put it:

A 54 percent tax rate is a non-starter

The 16 percent table game rate would be in line with other proposals. But the slot tax rate is a burden no online casino operator would be able to bear.

The tax rate would not generate more revenue for the state or bolster casinos with a new, beneficial revenue stream. Instead, it would simply kill online gambling before it ever got off the ground.

Based on publicly available revenue reports and talks with New Jersey online operators, it’s obvious online gambling doesn’t possess the margins to withstand a 54 percent tax rate on online slots. If the state implemented such a tax rate, one of two things would happen. Neither of them would be helpful for Pennsylvania or the casino industry:

  • Operators would shun Pennsylvania, seeing no reason to part with the million-dollar upfront licensing fee when there is zero opportunity to ever turn a profit due to the excessive tax rate.
  • Daring operators would pass the burden on to the customer, ensuring the existence of a thriving black market with which the licensed operators would be unable to compete.

The margins don’t exist for a 54 percent tax rate

Per Online Poker Report:

OPR polled multiple operators in New Jersey to construct this generic snapshot of where a dollar of online gambling revenue goes:

  • 24 cents to advertising
  • 20 cents to player reinvestment (player promotions and retention costs)
  • 18.5 cents to payment processing, KYC, geolocation costs, and platform and content royalties
  • 17.5 cents to taxes
  • 12.5 cents to general and administrative needs, including staff
  • 2.5 cents to other regulatory fees

That leaves five cents of profit from each dollar of revenue.

More importantly, the entire premise for the 54 percent tax rate has no basis in reality, as detailed in the two columns below.