Online Gambling: States Roll the Dice for More Tax Revenues

By Rick Mayer,

You can’t open a newspaper without reading about it, or turn on the television without seeing it: States need a lot more cash to fund exploding budget obligations. The expenses are always increasing, but in this lackluster economy, tax revenues aren’t. It is a vicious circle, really. States increase taxes to cover budget deficits. Taxes get too high. Those who can afford to do so leave and take their adjusted gross incomes (and, in some cases, their companies) with them. The result: higher unemployment back home, and fewer people left to carry the tax load. Many of these left-behind residents can’t keep up with the burden and soon need public assistance. This leads to increased social program costs, and the cycle escalates. California, New York, and New Jersey are prime examples of the trend. So, what do you do when your conventional sources of revenues aren’t enough?  How about sanctioning a once illegal-activity so that you can tax it

Yes, we Americans are truly a creative lot. Believe it or not, each of the 13 original colonies enacted lotteries specifically to tax them. After all, they needed to pay their mounting debts and grow their fledgling economies. Some colonies even had more than one lottery! The proceeds from this taxation helped establish some of our most prestigious universities, such as Harvard, Yale, Columbia, Princeton, and William and Mary. So much for those pesky Puritan values when growing the colonial coffers was at stake! So it is clear that the taxation of gaming is nothing new.

When you think of gambling, the first place that comes to mind is usually Las Vegas. But it turns out that the actual winner of gambling operation expansion is Pennsylvania. In addition to the standard corporate tax, Pennsylvania levies a tax rate of 55% on all slot revenues, and 16% on table games. That translates to more revenue than all of Nevada’s operations. Traditional gambling is legal today in 22 states with more than 560 different casinos in one form or another. Excluding lotteries, gambling generated almost $7.6 billion in tax revenues for states and localities in 2010. Proponents suggest that the positive impact is even greater because of the hundreds of thousands of jobs created.

The legalization of online gambling is seen as the next golden goose for cash-strapped states, as well as a boon for tech companies. In February 2013, the governors of New Jersey and Nevada signed laws to legalize online gambling in their states. Only online poker is approved in Nevada right now, and the law is presently limited to intrastate play only. Baby steps at first, but we all know how that goes, and where that will lead. Eventually, through new legislation, it will lead to online gambling across state lines, and a potentially huge revenue jackpot. New Jersey projects that state revenues from casino gambling will nearly double next year to $436 million, thanks in large part to online gambling. That said, someone now needs to create the programs and run the services, and the competition is fierce among tech companies for these very lucrative contracts.

New Jersey is the most populous state to approve online gaming, following Delaware and Nevada. Many others are considering it. An Illinois senate committee filed a bill earlier this week that could authorize online gambling there. Even the federal government wants a piece of that action with games of its own.

Yes, to this day the creativity of our state and federal legislators carries on. It is in our DNA, I guess. So, what will be taxed next? Guess we have to stay tuned to find out!