Online Gambling Won't Solve State Debt Woes, But it Could Help

By FOXBusiness

The years-long tug of war between gambling fans and foes has been heating up since the U.S. banned online gambling in 2011, but with state debts mounting and legalization on the horizon, the so-called volunteer tax has been looking pretty appetizing.

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While gambling taxes are hardly the cure for state’s daunting debt woes, they may provide new sources of revenue needed by the indebted to pay down obligations, help fund state-sponsored projects and spark job creation.

"The main political motivation for legalization of gambling is tax revenues and employment," said Doug Walker, an economics professor at the College of Charleston. "It is unlikely that online gambling will lead to significant increases in jobs, but generally, more economic activity is better than less."

The gambling sector in the U.S. is highly lucrative, and if individual states start adopting online poker, they may be able to make use of the excess cash.

The U.S. commercial casino sector (which doesn’t include Indian reserves) posted $35.64 billion in revenues last year, with the Las Vegas strip leading with annual sales of $6.07 billion and Atlantic City following with $3.32 billion.

Of the 22 states where commercial casinos operated in 2011, casinos in total contributed $7.93 billion in tax revenue to state and local governments, a 4.5% year-over-year increase, according to the American Gaming Association.

“This is a source of tax revenue that people actually want to pay.”

Russell Fox, a principal at Clayton Financial

Gaming in Philadelphia, which has the nation’s highest tax rate on gambling profits at 48%, contributed $1.45 billion in casino tax revenues last year, while Nevada, where gambling is the state's largest source of tax revenue, followed with $866 million.

“Any form of intangible entertainment like this can have a fairly big financial impact,” said Dr. I. Nelson Rose, a professor at the Whittier Law School and gambling expert who authors a blog called Gambling and the Law.

And that's just existing brick and mortar casinos.

Randy Fine, managing director of The Fine Point Group, the largest full-service management and consulting firm in the gaming industry, said online poker would be “very additive to state budgets.”

“I’ve heard estimates of online poker being a $6 billion a year business, if a state could take a third, that’s $2 billion,” Fine said.

Gambling supporters view it as a painless volunteer tax, or one that only affects those who wish to participate. People continue to find ways to gamble online, often through illegal, unregistered web sites, so their argument is, why not regulate it?

“Almost every state with few exceptions is struggling right now,” said Russell Fox, a principal at Clayton Financial and Tax of Las Vegas, who specializes in gambling tax and operates a blog called Taxable Talk. “This is a source of tax revenue that people actually want to pay.”

Walker, who has studied the economic and social effects of gambling for 15 years, agreed, saying, "Too many critics try to argue that gambling does nothing but shift money from hand to hand ... but people enjoy the activity, so they are benefiting from it."

While legalization has its clear benefits to the player, it also helps states, as the money they make by taxing gambling profits is often reinvested into the local economy. In New York, for example, much of the tax is funneled to education, while Pennsylvania says the money goes toward property tax relief, economic development and tourism.

“They can’t cut services anymore, can’t raise taxes, so [the gambling tax] raises some money, particularly for states that are desperate,” Rose said.

This is especially true for online gambling, which, because of its digital structure, makes it easier for the Internal Revenue Service to track winnings and casino revenues.

While casinos meticulously count every chip and dollar that comes in and goes out and pay taxes on gross revenue, gambling winnings, or the player’s take, often slip under the radar.

“People who played a few days a year ignored it, especially if they didn’t get paper work,” Fox said. “But if online gambling were legal in the U.S., these people would get a 1099, and people who get paperwork tend to include it in their tax return.”

Online gambling, which took a hit last year when the U.S. banned online poker sites from operating in the U.S. -- but then caught a break in December when the U.S. Department of Justice said it would start allowing individual states to legalize online betting for casino games -- may soon pop up in states like Nevada and New Jersey.

Social media marketing company Nowsourcing, which produced a related infographic for client last week, estimated that each of the 22 states that have commercial casinos made about $1.62 billion on average in 2011 in gambling revenues. Hypothetically, if all 50 states had legalized gambling, they would have made a collective $81 billion (50 x $1.62 billion) last year, it said.

Of course, that’s not a perfect estimate, as state tax rates vary across the country and some states like Utah have long said they will never legalize any form of gambling.

It’s also just a drop in the bucket compared with the billions of dollars in state debt (California alone is $28 billion in the hole, while Illinois is out $15 billion). Rose said even the most optimistic estimates on what the federal government could raise by legalizing Internet gambling is “literally insignificant” compared with the $15.7 trillion in national debt.

"Debt is more a problem of excessive government spending," Walker said. "Until spending is limited, the ability of new tax revenues to have a significant effect on debt is limited."

They also note that while revenue, jobs and other positives on the economy are easily measurable, it’s hard to put a dollar amount on the negative impact of gambling.

Online poker would likely make it more difficult to regulate underage gambling and some argue it could help fuel gaming addictions among the so-called problem gamblers, which make up just 1% to 2% of the population, according to Walker.

Yet, those concerns haven’t stopped big casino companies like Caesars, Wynn Resorts (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM) from buying up online poker sites and online gambling licenses ahead of an expected wave of legalization in the U.S., and they certainly haven't stopped people who want to play online poker from finding ways to do so.

Wynn is also said to be in talks with Zynga (NASDAQ:ZNGA) to create a strategic partnership that would help the casino giant capitalize on gambling and tap the social gamer's more than 230 million average monthly active users.

Many of the acquisition-hungry casinos are looking to buy companies that have never taken bets from Americans, as it remains to be seen whether banned sites like PokerStars will be invited back after they were booted last year.

However, PokerStars is a more than $1 billion business operating from the Isle of Man, a self-governing dependency of the United Kingdom located in the Irish Sea. If it were to legally relocate to the U.S. and face regulations, it would likely bring a slew of new jobs and billions in tax revenue.

U.S. regulators could take a page out of Spain’s gambling playbook ahead of the sector’s sweeping changes and allow online poker operators who previously took bets from Americans pay a back-dated tax.

While the recent move in Spain has been criticized and called desperate, the gambling companies have nevertheless started to pay up. digital last month said it would pay 33 euros ($41.5 million) to the Spanish Tax Ministry to meet the new regulations, while 888 paid about $9.3 million.

PokerStars is said to owe as much as $257 million.

“In Spain, they’re getting their money,” Rose said.

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