Taking lessons from across the pond

Words by Keith O’Loughlin, executive vice president of sportsbook, OpenBet

Since the turn of the year, there’s been a near palpable wave of optimism in the push towards egaming regulation across the States. Much hope is pinned on Pennsylvania to finally become the next region to pass legislation following New Jersey’s embrace of online gambling back in 2013. There’s still some way to go, however, in moving these bills over the finish line and opening up online gambling into new regions across the US.
A major sticking point and topic for hot debate recently has been the tax rates which these new jurisdictions impose upon online businesses. The rates some legislators are currently proposing are simply too high to make operations profitable.

The concern for many is that these new markets are doomed for failure before they even open if the tax rate is set at a level that makes it impossible for operators to make a reasonable profit or such that profitability is so far down the road that the upfront investment is untenable.

New Jersey is often cited as an example of how egaming can work in the US, and rightly so. The regulated online market has been hugely successful since its inception. When looking to adopt a robust regulatory framework, however, it is also important to look to what our European counterparts are doing for inspiration.

Appropriate tax models

Tax continues to be a major hurdle for all involved in the fight to legalize online gaming in the US. For instance, Pennsylvania has proposed a 54% tax rate as stated in the Senate version of its online gambling bill. In comparison to other jurisdictions, this is very high and operators and suppliers would have a difficult time reaching breakeven on invested capital, and could have an effective tax rate that exceeds 100%. The proposal was based on assumptions about land-based gaming that simply does not translate to egaming.

New Jersey taxes online gaming at a rate of 17.5% of gross gaming revenue, and the UK also has an even lower tax rate of 15% for online gambling operators across all verticals at the point of consumption. US legislators and others might argue that these tax rates are too low, but experience in Europe shows that setting the tax rate too high has a negative impact on overall revenues.

Firstly, it’s been proven in the UK and other jurisdictions that you can increase gross gaming revenue despite a low tax rate. Secondly, a lower tax rate also reduces the rate that players are “channeled” to illegal and unregulated operators. An overly high tax rate, by contrast, drives players to these illegal and unregulated operators, even if egaming is legalized in their state because the unregulated operators can offer a better return and gaming experience. As proven in Europe, high channelization ensures a safe and controlled environment which benefits both operators and their players.

New Jersey is a close-to-hand example to show US lawmakers how and why regulated egaming works, with sensible taxation leading to growing revenues for state coffers. A recent economic impact study by the iDevelopment and Economic Association (iDEA) found that legalized online gaming has grown at a 27% rate and produced nearly $200m in gross gaming revenue in 2016, contributing $34.5m in tax revenues to the state.

The success of the UK remote market should be seriously considered by US lawmakers as a highly successful model worthy of emulation. Several major players in the States currently have a strong heritage of operating in the well-regulated European markets, including the likes of Paddy Power Betfair, William Hill and NYX Gaming Group. Such companies have systems in place ready for regulation in the US, should an appropriate model be reached.

Strong collaboration

For legislators across the States to take notice and seriously consider egaming as a safe and secure practice, we believe a cohesive approach is required from all stakeholders of the industry.

One group that is systematically working to expand the online gambling industry into new territories in the US is iDEA. Much of what iDEA does is to educate lawmakers and media about how state-regulated egaming is beneficial to both the community and economy. For instance, an independent report recently commissioned by iDEA found that New Jersey’s online gaming industry has generated almost $1bn in economic output and created 3,400 jobs.

The report was recently presented and well received in Pennsylvania, and while there’s still some lobbying to do in order to drive egaming legalization and regulation forward, it’s far more effective for the decision makers to hear the message from a cohesive group speaking in a single voice.

iDEA’s membership is continuing to grow and currently includes leading operators and suppliers, such as Paddy Power Betfair, GVC, Golden Nugget, Resorts Interactive and Vantiv, as well as NYX, which are all aligned on moving online gaming into taxed and regulated state environments and out of the hands of illegal and unregulated operators.

Future steps

Trade associations such as iDEA are helping to educate key figures in the lawmaking process about the work operators and suppliers do in the industry.

In the battle for sports betting regulation in the US, the American Gaming Association (AGA) has done exceptionally well to raise awareness of the benefits of legalized gambling, as well as its efforts to repeal The Professional and Amateur Sports Protection Act (PASPA). Like online casinos, sports betting happens on a daily basis in the US and it’s just as important – regardless of product – to adopt a robust regulatory framework for a safe and secure environment.

Although it remains to be seen what will follow in the months ahead and how the legal landscape will change in the States, the desire to legalize and regulate new forms of gaming continues to grow across the US. We believe that a collaborative approach with key stakeholders in the US and a view to the lessons learned from New Jersey, the UK and Europe are key to expanding egaming in the US in a legal, regulated and sensibly taxed environment.

We’re well positioned for the opportunities that Pennsylvania will bring through our strong client base in New Jersey. When Pennsylvania does legalize online gambling, we look forward to the next steps of working with regulators on the product and technical framework.