A comprehensive gaming reform package (SB 900) that included everything from online gambling expansion to 24-hour liquor licenses and allowing slot machines at OTB locations has apparently been scrapped as the state legislature continues to craft a budget that can pass the desk of newly elected Governor Tom Wolf.

There are signs that indicate the legislature could be looking at just one aspect of the comprehensive proposal: Online gambling expansion, but there is one sticking point that seems to be holding it up.

If the legislature can compromise on a tax rate, Pennsylvanians will likely be playing on legal online gaming sites this year or by the end of 2016, considering 11 of the state’s 12 casinos are in favor of iGaming expansion and agree on every major issue, unlike the stakeholder gridlock in California.

It is still possible that misplaced fear by Pennsylvania lawmakers could be the reason online gambling fails to pass this year.

The tax rate proposals

The hiccup seems to be where to set the tax rate on online gaming operators.

Representative John Payne’s HB 649 had a casino-friendly 14% tax rate; the same rate Pennsylvania collects from table games in the state’s casinos and a rate in line with New Jersey’s iGaming tax rate of 15%.

On the other hand, the comprehensive bill proposed by the state senate called for a 54% tax rate, identical to Pennsylvania’s tax rate on slot machines.

Why the discrepancy?

State Senator Robert “Tommy” Tomlinson appears to be the driving force behind the 54% tax rate, as he has openly expressed his concern that a tax rate below the rate imposed on Pennsylvania’s brick and mortar gaming would lead to casinos focusing on online gaming instead of B&M gaming — a patently absurd notion.

Tomlinson has made this pitch multiple times, and despite several experts explaining the differences in margins between the two, Tomlinson seems convinced his point of view is correct.

Even if the higher tax rate comes from a good place (a desire to raise more revenue for the state) it’s a logical fallacy. One might think a higher tax rate would mean more money for the state, but the reality is a higher tax rate would likely reduce the amount of money the state pulls in from online gambling.

First, gaming analysts are convinced that a tax rate as low as 15% only provides operators the potential for 5% margins. Essentially, any tax rate over 20% makes iGaming in a closed market like Pennsylvania close to unprofitable and will likely reduce the number of casinos and online software companies willing to enter the space.

Instead of 10 or 11 licenses at $5 million a pop, Pennsylvania would be lucky to have two or three casinos apply. Right off the bat, Pennsylvania could lose as much as $40 million.

Furthermore, to make up for the higher tax rate, online gaming operators would need to increase the rake on poker games and implement other penny pinching policies such as reducing the payout percentage of slot machines.

These customer-unfriendly actions would drive many patrons away from Pennsylvania’s regulated sites, as they could either drive across the border to play at the more customer-friendly New Jersey online poker sites (if they live close enough) or continue to patronize the numerous unlicensed online gambling sites available.

An untenable tax rate would sabotage online gambling before the first site ever went live. A high tax rate doesn’t allow potential operators the ability to compete on a level playing field.

What’s the answer?

If the lawmakers calling for a high-end tax rate are simply unwilling to compromise and concede to a rate under 20%, the only other option might be a proposal similar to the B&M casino tax rates; a higher tax rate on slots and a lesser rate on table games and iPoker.

If this is out of the question, then online gambling in Pennsylvania will likely have to wait another year.