Fiscal health check: Making the case for US igaming expansion

| By Paul Girvan | Reading Time: 7 minutes
Taking a deep dive into US states’ financial health, Paul Girvan looks to build an argument for the industry to fight for online casino regulation across the nation – and predicts where we may see action in 2023.
Fiscal health check

While online casino moves at a crawl, the pace with which sports betting has spread across the US is astounding. Approximately 33 states have passed sports betting legislation (18 of these provide for online), while six others have pre-filed bills awaiting action.

Contrast this with the slow pace of igaming adoption. Icasino is legal in six states, with Connecticut the last to go live in October 2021. Since then, the development of igaming has been quiescent. 

But in 2023, the pace of sports betting adoption will slow.

The “low-hanging fruit” has already been picked. Undoubtedly additional states (such as Alaska, Georgia, Kansas, Massachusetts and Missouri) will make moves in the vertical, but the flurry of launches will slow to a trickle. 

Currently, only a few states are actively looking at online casino as an option with prime contenders being Illinois and New York. Others such as Iowa, Ohio, Maryland and Massachusetts (possibly even Kentucky) may see the igaming issue being raised, but the immediate prospects for these seem dim. 

The contrast between igaming and sports betting adoption can be attributed to several factors. The US is sports-crazy. Politicians know it has a sizeable constituency which sees sports betting as a natural extension of the overall sporting experience. 

Existing gaming operators, both commercial and tribal, view sports betting as an adjunct to existing operations. Essentially, as long as they are able to benefit from it and are “cut in” on online betting, they have little to lose and much to gain. There is also the support of professional teams and leagues – powerful interests in most states.

Igaming lacks sports betting’s support

Online casino, on the other hand, is less accepted by the general public. Teams and leagues have no skin in the game. Compounding this negativity is the opposition of entrenched land-based casino operators, not to mention concern in some states that online gaming would threaten these brick-and-mortar incumbents. 

These concerns have not entirely been shifted by ample evidence that online and in-person can coexist without cannibalisation.

Tax revenue was inevitably part of the argument for legalising sports betting but it was not, and could not be, a driving consideration. In contrast, new tax revenue was a key factor linked to the spread of land-based gaming in the decades between 1995 and 2015.

For example, in Pennsylvania the development of the casino sector was specifically designed to provide relief for owners on their property taxes, to support local school districts. The goal of then-governor Ed Rendell was to raise $1bn each year for property tax relief. 

This was achieved and surpassed. However sports betting cannot provide the same level of tax relief. Much is made in the media of the vast sums wagered in sports betting, but with a hold of less than 10%, the actual GGR subject to taxation is anaemic in comparison to both land-based and online gaming.  

Contrasting tax contributions from betting and online casino

In Pennsylvania, the bricks-and-mortar sector paid $962m in taxes on slots and tables to the state alone in the 2021-22 fiscal year. Igaming taxes amounted to a further $341m, while sports betting’s contribution was just $104m. 

That tax contribution from betting is inflated by one of the highest tax rates in the country, at 36% of GGR. Most states – New York being a notable exception – set GGR tax rates in the low teens, resulting in an even greater disparity between land-based and betting receipts. 

Sports betting in Connecticut generated $13m in taxes, compared to close to $40m from icasino. The contributions from slots and tables, from the state’s two tribal operators, topped $215m. 

It’s New Jersey that arguably provides the most compelling case for the tax benefits of igaming. In September 2022, the Division of Gaming Enforcement reported a $16m contribution from casinos (taxed at 8% of GGR), compared to a $20m contribution from icasino (15% of GGR). Sports betting’s contribution? Just $5.3m. 

Following the money

This suggests sports betting is difficult to justify primarily from the standpoint of generating new tax revenue. Generally the largest source of new taxes are land-based casinos, but the train has already left the station for most states. New York’s efforts to issue a trio of downstate licences is a notable exception, driven by the need to shore up the state’s coffers. 

So igaming is potentially the place for states to turn. 

It offers a modest, yet significant, avenue to raise tax revenue. Most importantly, there’s room for significant growth in the vertical. 

Why, then, has it not been adopted in more states? 

Part of the answer lies in the previously-mentioned opposition, ambivalence or hesitancy from existing land-based operators. As a new vertical there’s not as clear evidence of a player base waiting for a legal offering, and sports betting has consumed the political oxygen over the past four years. 

But with that initial gold rush slowing to a crawl, is online casino going to be the next great driver of growth in the US?

Considering that there is a looming recession and a growing need to generate tax revenue, it may well become part of the conversation. 

In this context, can we look at a state’s fiscal health as an indicator of the potential for igaming legalisation in 2023 or beyond?

State debt and gaming legislation

The following two tables look at state debt for FY2022. 

The first table below presents the 15 states with the greatest debt pile.

StateState debtGross State ProductDebt as % of GSP
New York166.51,929.108.6%
California1453,571.704.1%
Massachusetts76.4668.711.4%
New Jersey65.3703.79.3%
Illinois65.1985.96.6%
Texas60.62,114.802.9%
Pennsylvania57.1879.36.5%
Connecticut41308.113.3%
Michigan39.1600.66.5%
Ohio35.4771.24.6%
Virginia30.8616.55.0%
Maryland30.4454.16.7%
Indiana26.6448.25.9%
Washington26.4705.93.7%
Florida23.81,299.501.8%
Source: USGovernmentSpending.com
Fiscal Year 2022
Amounts in $bn

In the second table, states are ranked based on debt as a percentage of gross state product. (This is a measure of the relative size of the economy of each state.)

StateState debtGross State ProductDebt as % of GSP
West Virginia13.794.914.4%
Rhode Island9.769.114.0%
Connecticut41308.113.3%
Massachusetts76.4668.711.4%
Vermont3.737.89.8%
Alaska5.558.19.5%
New Jersey65.3703.79.3%
Hawaii8.594.39.0%
New York166.51,929.108.6%
Maine680.17.5%
New Hampshire7.6104.87.3%
South Dakota4.565.26.9%
Maryland30.4454.16.7%
Illinois65.1985.96.6%
Michigan39.1600.66.5%
Source: USGovernmentSpending.com
Fiscal Year 2022
Amounts in $bn

Looking at the above, it is not surprising there have been rumblings about Illinois and New York looking at igaming legislation. 

Public policy specialists The Pew Charitable Trusts digs deeper by analysing the fiscal health of states, looking at the cumulative share of revenue to expenses, from 2005 to 2019. Eight states’ expenses exceeded revenue during this period: New Jersey, Illinois, Massachusetts, Hawaii, Kentucky, Maryland, New York and Delaware. 

Running at a loss

The Pew Charitable Trusts then calculated how long each state could operate under existing balances, as outlined in the map below.

 

Pew Charitable Trusts - Total reserves by state
Eight states are in particular need of additional tax revenue

Based on this measure Illinois, New York, Mississippi, Louisiana, Virginia, Pennsylvania, New Jersey, Rhode Island and Washington – all states that have legal sports betting – fall well below the national median. 

Saving for a rainy day

However many states have established “rainy day funds” designed to allow them to continue to operate for a period under extreme disruptions (much like the effect of the pandemic).

Pew Charitable Trusts-Rainy day fund by state
A host of sports betting states have little cash reserves

Illinois and New York stand out again, as does Washington.

Alleviating the tax burden

Another way to look at the data is by looking at the tax burden on state residents. Reducing tax burden on citizens through the enactment of gaming expansion is a powerful motivating factor.

Pew Charitable Trusts - State and local tax burden
Could igaming alleviate the state tax burden on citizens?

As the above map shows, New York, Connecticut, Illinois, New Jersey and California impose large tax burdens upon their citizens.

Shoring up pension pots

Then there’s one of the most prominent and worrying concerns for state legislation, massive unfunded pension debts.

Pew Charitable Trusts - Unfunded pensions by state
The need to cover pension obligations could be another motivating factor

Under this criteria states such as Illinois, Kentucky, Mississippi, New Jersey and New Mexico top the list.

Education funding

Yet another area of concern for legislators across the country is to provide adequate funding for K-12 education. This is a strong motivator and an area that was successfully targeted by land-based gaming legislation in Pennsylvania.

Pew Charitable Trusts - Education gap
States that are minding the gap could turn to igaming

In terms of education spending gap Florida, Texas and California are most in need.

What does this data tell us?

New York is desperately in need of help as it carries the largest debt of any state, and it imposes the greatest tax burden upon its residents. It is no secret that New York is looking towards not only land-based casinos, but also igaming. As senator Joe Addabbo said in November 2022, lawmakers would look at online casino “first and foremost”. 

This explains the state’s ongoing expansion of land-based gaming, but also suggests that it is a prime candidate for gaming legislation.

Massachusetts and Maryland carry significant debt but appear less strained under other measures. In each, it will likely be more a matter of seeking consensus among stakeholders.

Where else could we see an igaming push?

Excluding states that already have igaming, where the issue is complicated by tribal considerations, and smaller markets, few others stand out. Significant unfunded pension liabilities in Kentucky and Mississippi suggests igaming tax revenue, if specifically targeted, could offer an avenue forward.  

While online gaming is not a panacea to fiscal struggles, its ability to generate tax revenue in comparison to sports betting could make it an important component in overall efforts to address fiscal health in a number of states.   

Therefore in approaching state legislators on igaming, a discussion of potential tax contributions play a much greater role than it has done for sports betting. Igaming offers a reasonable solution best targeted to specific areas of fiscal stress. 

Industry lobbyists should therefore work to identify prominent problems and programmes in each state that can be positively impacted by igaming taxes. By doing so they could drive greater grassroots support. The above data can only hint at possibilities. It is necessary to identify specific problems and programmes that tax revenue from igaming can help solve or support. 

Giving people HOPE

For example, funding gaps in the Helping Outstanding Pupils Educationally (HOPE) scholarship in Georgia is often linked to gaming expansion. Property tax relief associated with school districts was a key component for land-based gaming in Pennsylvania.

This is not to say fiscal issues should be downplayed in other states. Other funding needs specific to each state and local priority should be identified and directly targeted by igaming legislation. By doing so the industry adopts a natural local, and often vocal constituency, that can help build support for online casino. 

With the inflow of federal dollars during the course of the pandemic, the fiscal health of many states surprisingly improved. This may have weakened the case for online gambling over the last few years, but the looming recession is sure to exacerbate fiscal issues.

This presents an opportunity to deploy the argument that online casino can be part of the solution to states’ fiscal struggles. Even now states such as New York and Illinois offer fertile ground for the expansion of online gaming.

With the waning of the wildfire that was sports betting and a concerted effort by the industry, the opportunity now exists that the coming years will see a significant uptick in the adoption of igaming.

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