Gaming Industry Sees New Potential As State Revenues Fall

As the economic hardships wrought by the COVID-19 outbreak begin to take their toll on state legislatures, gaming industry representatives are cautiously optimistic looming budget shortfalls will compel lawmakers to embrace new forms of revenue that seemed politically impossible before the virus.

As virtually every gaming facility in the country remains shuttered, and with it hundreds of millions of tax dollars, stakeholders are hoping legislators could increasingly view online lottery, poker, sports betting and casino games far more favorably than even just a few months ago.

“I think you’ll see a lot more activity around online casino games probably later this year and into next year,” said Stacie Stern, FanDuel Government Affairs Director, during an industry conference Thursday. “Those discussions are already happening. There are lawmakers who are asking to be educated.”

Though significant logistical hurdles remain, mostly surrounding the coronavirus itself, the new economic reality in all 50 states has opened a lane for further gaming expansion online, one of the few industry components not decimated by social distancing measures. Internet gaming has in fact been one of its few growth economic growth engines as most Americans remain in their homes.

Only a handful of states have legal digital sportsbooks, and even fewer iLotto, iCasino or real money online poker, but an unprecedented crisis could mean an unparalleled new opportunity.

New Realities Set In

In the most expansive online gaming markets, gambling taxes generate a few million dollars monthly for annual state budgets usually allocated in by the billion. In the limited group of states with any type of online options such as Michigan, New Hampshire and Pennsylvania, March reports have shown double-digit revenue increases and triple-digit first-time customer increases.

But in the early days of social distancing measures, this has recouped a small fraction of brick-and-mortar casinos and physical lottery tickets.

This didn’t deter sentiments from many of the speakers during Thursday’s meeting of the 2020 SBC Digital Summit, a gaming industry teleconference. Speakers at a series of panels, while contextualizing everything within the uncertainties with the COVID-19 outbreak, largely agreed the current climate presents unrivaled expansion opportunities.

“I certainly think it’s going to expeditiously change the way states view online gaming and the way they can get tax revenue,” said Tom DiEnno, managing director of KPMG Philadelphia. “You’re going to see a lot more of the states with new gaming, whether it’s online, mobile or even route gaming.”

DiEnno said the new limitations imposed by the virus could lead the industry away from densely-packed mega-casinos and more toward online options, along with smaller retail facilities.

This, in turn, could help reverse the current on gaming regulations that have been anathema to most industry stakeholders, such as in-person registration requirements. Several states, most notably Nevada, require in-person registration for mobile sportsbooks. And only six states allow a full set of options for buying lottery tickets online, far and away the largest revenue generator in regulated gaming (if retail is considered).

With thousands of lottery retailers and all casinos closed, this could force lawmakers to reconsider ways to keep tax revenues coming.

“States are going to need alternatives to the big casinos that hold thousands of people,” DiEmmo said Thursday. “’If it shuts down, how am I going to keep those revenue streams going’?”

Further Opportunities Available

Other SBC Summit panelists saw online gaming as a no-risk proposition for state governments.

“There is an inevitable fiscal crunch coming and so anything that generates more tax revenue, particularly where the incidence of that tax is not punitive, that’s a good thing,” said Roar Digital CEO Adam Greenblatt.  “And particularly so in the U.S. where we’ve got a big offshore market. The extent to which those players can repatriate those tax revenues is a free hit for tax collectors.”

Multiple speakers agreed there would be little appetite for new taxes, so an untapped revenue stream was the only option for state legislatures, most of which are mandated to balance their budgets, to make up budget shortfalls without unpopular government service cuts.

“There is nobody worse off as a result of that action, as opposed to a new tax where someone who has to ultimately bear the burden of that tax is theoretically worse off,” Greenblatt said.

For Stern of FanDuel, which like Roar is also expanding rapidly its U.S. digital sportsbook offerings, the new economic and logistical hardships facing traditional casinos has led lawmakers to reconsider prior oppositions. With more than 40 states generating taxes from some sort of land-based gaming facility, online may be one of the few options to try to recoup some of those lost dollars.

She said that extends to more politically and socially conservative states that have few or no gaming options and are now desperate for a new revenue source. She could see some states permitting mobile sports betting for their revised 2021 fiscal year budgets, or even online casinos.

“In some of the southern states specifically I think a lot of the moral ‘pearl clutching’ type of opposition you typically see to online casino, there are those who are taking a step back saying, ‘we don’t even know when the brick and mortar casinos are going to be able to return, how they’re going to be able to return?’ Stern said. ‘So is there still an opportunity to generate revenue’?”

Challenges Remain

Panelists tapered their hopes with acknowledgements of the myriad obstacles before a new state could place a legal online bet.

Medical and economic responses will dominate the time and minds of elected officials when, or if, they return to their respective statehouses, said lobbyist Steve Brubaker. He said most bills nationwide have “ground to a halt” because of the response, making it difficult to find room for online gaming expansion that would be just a minor part of a far larger recovery effort.

“I think we’ll see a lot of states that just chuck all of the nonessential pieces of legislation aside and pass bills that are focusing on taking care of the economy after COVID,” Brubaker said. “I’m wondering if any other type of legislation besides that will be completed for the rest of this session.”

If lawmakers find the political capital to pass a bill, it may still not achieve its purposes, warned John Pappas, founder and CEO of Corridor Consulting. He cited Pennsylvania and Illinois, both of which undertook massive gaming expansions in recent years but both did so with exorbitant fees and tax structures.

“I think we have to be cautious that when we’re going into states that are saying, ‘Hey, we need the revenue, we need this’,” Pappas said during a conference session Thursday. “We need to educate them on why having a competitive market with low tax rates and reasonable fees will create more revenue in the long term for this state, rather than just saying, ‘let’s just try to get as much as we can out of this industry in the short amount of time’, which is really not the best policy.”

Still, industry officials are taking an overall bullish approach to future online gaming legislation, at least at Thursday’s conference.

“I think with the concerns about bringing brick and mortar casinos back, this is a real opportunity for online gaming, online casino,” Stern said.