When the Pennsylvania legislature passed a sports-wagering law last year, it placed an audacious initial bet — it set the highest fees and taxes in the nation for operators to participate in the sports-betting business.
Critics say that Pennsylvania's $10 million license fee, along with a 36-percent tax rate — four times higher than New Jersey's — are a big impediment to the roll out of sports betting in Pennsylvania. None of Pennsylvania's 12 casinos have yet to apply for a license to cash in on a potential multi-billion-dollar business now conducted mostly in the shadows.
"With a 36 percent tax and a $10 million license fee, there are other states that are more interesting to us," said Dan Shapiro, vice president of business development of William Hill USA, the giant British bookmaker that operates two of the three legal sportsbooks that opened in June at the New Jersey Shore.
"It's just not something we're looking at seriously right now."
Insiders say it is likely that one or more larger casinos will apply for sports-gaming licenses, though the window is narrowing for the gaming control board to certify the license in time for the start of the NFL regular season in early September.
But lawmakers are confident that they've bet on a sure thing — the opportunity to draw thousands of sports-crazy bettors to casinos, and the siren call of conducting online betting even during sports events, will be too hard for casinos to resist.
"If the Sands in Allentown decides to do it, or the Rivers in Pittsburgh, or the SugarHouse in Philadelphia, then all of a sudden everyone will fall in line, and they'll all want to be part of that," he said.
Pennsylvania's sport-wagering legislation, which was passed last year while federal laws still outlawed the practice outside Nevada, got little attention until the U.S. Supreme Court legalized sports betting on May 14.
"We look forward to adding sports betting across all our gaming platforms as soon as possible," Greg Carlin, chief executive of Rush Street Gaming LLC, operator of SugarHouse Casino in Fishtown, said in a statement after the court decision.
Right now SugarHouse and Pennsylvania's other licensed casinos, which are the only entities that can apply for sports-betting certificates, are holding their cards close to the vest in this high-stakes poker game with the state.
A sports-wagering license, in addition to allowing betting at a physical casino location, also permits its owner to conduct online sports-betting. As in New Jersey, only bettors whose computers or phones verify their location is within state lines are permitted to wager to avoid running afoul of the federal Wire Act prohibitions on cross-border gambling.
Casinos lobbied Pennsylvania lawmakers to reconsider the high taxes and fees, which they say make it difficult to earn a profit.
The state fees "are the highest in the world and may make it impossible for a casino operator to make any return on its investment of capital," Daniel Ihm, vice president and general manager of the Hollywood Casino at Penn National Race Course near Harrisburg, said in a letter to the Pennsylvania Gaming Control Board in June. With Pennsylvania's high costs, he estimated Hollywood Casino would lose 40 cents on every $100 bet.
Even the National Football League, which opposed the legalization of sports betting, urged the legislature to reconsider the taxes because they make licensed sportsbooks uncompetitive with illegal bookmakers.
"As the board works with state policymakers, we respectfully ask that you reconsider laws and regulations that could have the unintended consequence of advancing illegal sports betting," Jocelyn Moore, the NFL's senior vice president of public policy and government affairs, said in a letter to the gaming board.
But the legislature declined to reopen the law and adjourned for the summer, confident there is a low risk to the state if the casinos do not take up the offer. The Pennsylvania budget is counting on receiving only $30 million in revenue this year from sports-gaming licenses, according to the Independent Fiscal Office.
There is no doubt that Pennsylvania's 36-percent sports gaming tax (the state portion is 34 percent and 2 percent goes to host communities) is very high compared to other states. Nevada's sports-betting tax is 6.5 percent, and West Virginia's rate is 10 percent. New Jersey's rate is 8.5 percent for wagering in casinos, and 13 percent for online sports betting. In addition, all states must pay a federal excise tax, which amounts to about another 5 percent.
And Pennsylvania's $10 million license fee compares to a $100,000 fee in West Virginia. New Jersey charges no fee.
"I know it's expected for industry to complain about high taxes," said Chris Grove, a sports betting expert at Eilers & Krejcik, a Las Vegas gaming consultant. "I think you have something beyond that in Pennsylvania."
He said Pennsylvania's tax rate is "so much of an outlier that it may distort the market in terms of who participates in it, how competitive it is, and how able it is to take share away from the existing black market."
Americans now bet an estimated $150 billion a year on sporting events, mostly illegally, and that number is expected to rise in legalized states where wagering is destigmatized and easily accessible — especially if bettors can wager online through mobile devices.
State taxes are collected not on the total amount bet, but on the "gross gaming revenue" — the house cut, or the amount of money not paid out to winners. A sportsbook typically pays winners about 94 percent of the money bet. The 6 percent of the bets remaining is the amount on which the state tax is assessed.
Casinos in high-tax jurisdictions are expected to recover the higher cost by offering less attractive odds, and by spending less on marketing, technology, and customer service, say gaming experts. While the government generates more income at high tax rates, the casinos generate less employment and legal economic activity.
"These changes would be expected to make legal sports betting less attractive to some gamers relative to illegal alternatives," said the authors of a 2017 study by Oxford Economics for the American Gaming Association. That study examined three taxing scenarios in which the "high tax" model was 16 percent — less than half of Pennsylvania's rate.
At tax rates above 20 percent, gamblers migrate to illegal bookies in larger numbers, according to a 2016 study of online gaming by Copenhagen Economics for the Swedish government. The study, which examined European gambling taxes ranging from 15 percent in the United Kingdom to 46 percent in France, concluded that the optimal tax rate fell into a range of 15-20 percent.
For William Hill, the international bookmaker that operates the sportsbooks at Monmouth Park Racetrack and Ocean Resort Casino in New Jersey, a high tax rate creates an environment where illegal bookies continue to thrive because they don't pay taxes and compliance costs that a regulated bookmaker faces.
"At the end of the day, a bookie who has had a relationship with his client for many years can say, `Hey don't go to the casino, wager with me, I'll give you a 25 percent rebate on your losses at the end of the year,' because he has that advantage over the legal operators," said Shapiro, William Hill's head of business development.
The Pennsylvania legislature took up the sports-betting measure last year anticipating that the Supreme Court might rule in New Jersey's favor and overturn the Professional and Amateur Sports Protection Act of 1992. But legislators were also concerned that Congress might enact new federal legislation outlawing sports betting that would exempt states with sports-betting laws already on the books.
Matzie, the sponsor of the sports-betting law, said he initially set the sports-betting tax rate at the same rate as casino table games because they are comparable labor-intensive gaming forms. But as lawmakers examined the business more closely, the Republican leadership believed that the potential for online sports betting more closely resembled automated slot machines, which are taxed at a higher rate.
It was also seen as an easy target to generate revenue without raising general taxes. "There aren't many folks in the General Assembly who want to raise taxes, so any opportunity you can come up with without touching everybody, I think that led to a discussion that got the number up, too," Matzie said.
When the gaming bill was approved, most public attention was focused on the more immediate impact of mini casinos and online gaming, rather than the hypothetical prospects of sports gaming still banned under federal law. The sports-betting tax rate was not subject to a complete analysis.
"It made sense, it was reasonable, it was rational, and no one was really fixated on it anyway because of all the other commotion going on in the gaming bill," said Drew Crompton, chief of staff to Senate President Pro Tempore Joe Scarnati and the Senate's top attorney.
But now that the sports-betting tax rate is set, the legislature is inclined to wait and see how it all turns out. The casino industry has a history of complaining about high taxes. And yet casino gaming is thriving in Pennsylvania.
"So far," said Crompton, "we're not worse for wear."
State taxes on sports wagering are calculated on a casino's gross winnings or "hold" from betting – not on the total amount wagered by bettors.
According to Pennsylvania law, the 36 percent tax is assessed on "gross sports gaming revenue," which is defined as the amount of money placed in bets minus the cash that is paid back to winners.
If a casino's hold is 5 percent, it retains $5 for every $100 bet. The 36 percent Pennsylvania tax is assessed on $5 – which means the state's cut is $1.80 of every $100 bet.
If a casino's hold is 6 percent, it retains $6 of a $100 bet, and the state's share would be $2.10.
The 36 percent tax includes two parts: 34 percent to the state and 2 percent to local governments that host the gaming facility.
The federal tax on sports betting is calculated differently – not on the casino's gross gaming revenue, but on the total amount bet – the "handle."