This week my job is to spend too much time at the Las Vegas Convention Center, walking the exhibit halls and stalking the conference rooms of the Global Gaming Expo. Here’s a takeaway from the first day, from KLAS:
The economy took center stage at the largest gaming conference in the world that opened in Las Vegas. But the nation's economic struggles may actually be a win for the expansion of the gaming industry.
These days almost anything is just a click away except legal gambling. For that, you must walk into a licensed and regulated casino. Next year that may change when congress goes back into session, according to American Gaming Association President and CEO Frank Fahrenkopf.
"Looking at our industry in hard times, it is a way to provide some revenue for state government," he said.
Nevada alone faced a $1 billion deficit this year. The federal government deficit makes that look like pocket change.
As the lobbyist for the gaming companies, Fahrenkopf says the internet may be the solution. He believes a bill setting up federal regulation and taxation of legal internet gambling can pass in 2009.
"Having $8 to $15 billion, as the offshore folks say, is there in new taxes has to look very, very inviting to a new congress," he said.
Las Vegas Now | Insiders Look to Online Betting as Big Business.
As I’ve been saying for years, there’s simply too much money in online gaming for the industry–and for states–to let it go untapped for long. But I have an issue with the $8 to $15 billion in government revenues figure floated there. I’d like to try to deconstruct this estimate and come close to a better figure, using just logic and educated guesswork.
In 2007, Nevada casinos “won” $168 million from 907 poker tables, yielding state tax revenues of slightly less than $13.5 million. Poker is not a big money-maker for Nevada casinos: by contrast, the state’s slots took in $8.5 billion.
But the online poker market will be much larger. Let’s say that customers will spend $10 billion on online poker in a year. That’s more than double the entire take for Atlantic City casinos in a year and one-eighth of the current total national gambling win, but we’ll think big here. Poker players are winning and losing that money to each other. The house is only collecting a “rake” from each pot. This money is going back and forth between players, and each time, the house takes its cut.
I’m going to be generous to the industry and suggest a 10% rake–players, I know you won’t like this, but this is just a thought exercise.
Out of $10 billion wagered in pots in a year (and won by players), the house would keep 10%, or $1 billion. From that billion dollars they’ve got to pay their bills and, hopefully, leave a little something for profit. Before you say “that’s a lot of money!” remember that this is for the entire industry, and they’ve all got IT guys to pay, plus hopefully something left for the shareholders.
But before they can drive that money off to the bank, the state has to take a cut. If online gaming is taxed at the going Nevada rate, we’re talking about an effective tax rate (figuring in licenses and per-game costs) of 8% or so. So out of that $1 billion won by all casinos, the state gets $80 million.
If, however, we assume that the industry would assent to a higher tax rate, let’s say 20%, you get $200 million collected in taxes in a year when $10 billion is wagered on online poker (again, with a very high average 10% rake).
Right now, that would barely make the Clark Country School District solvent, let alone put a dent in Nevada’s budget deficit. But wait, that $200 million won’t all go to the Silver State: we’ve got to assume that if other states are letting their citizens gamble online (and not play at state-taxed casinos), they’ll want a cut. So that $200 million is spread out over the entire country.
I think my math here is sound, and my assumptions about rake and tax rates are, I think, at the high end.
So can someone explain to me how online gambling is going to generate even $8 billion in taxes a year, as was mentioned above? I’m not at all being sarcastic–I’d really like to know if there are some data points I’ve missed. According to my calculations, people would have to bet $400 billion on online poker to get $8 billion in annual tax revenue. That’s more than five times the total combined annual take for all kinds of gambling in the United States.
According to my calculations, that about $1.3 million per capita for the entire population of the United States. So unless each of us has been sitting on $1.3 million in mattress money that we’ll play online (and that money would have to magically renew itself each year), I honestly don’t see how a figure of $8 billion in revenues is defensible. I’d say that $200 to $500 million in state tax revenues is possibly in the ball park but still optimistic, given that we don’t even have solid figures on the size of the industry.
Common sense would seem to suggest that allowing people to play poker online won’t magically quintuple the annual American spend on gambling. Even if it doubled the total amount of American gambling, we’d still only get, at best, an additional $1.6 billion a year. And we’re still talking about Americans suddenly gambling twice as much as they’ve been in the past.
If I wrong on the numbers (quantatative work isn’t my strongest suit, but I think I’ve got a decent grasp on simple arithmetic), please let me know and I’ll amend this. By $10 billion poker handle might be low: the table games (non-poker) handle for the whole state of Nevada was $30 billion last year, but that includes a lot of high end play. Even if I’m off by a magnitude of ten, and there is actually $100 billion wagered each year, I don’t see how we get to tax revenues of $8-$15 billion, unless we’re talking about a dramatically different tax model.
I’m not saying that we shouldn’t legalize online poker. I’m just saying that we should do it for the right reasons (personal liberty, player protection, minimizing hypocrisy), not because we’ve been promised a magic $8 billion treasure chest with no logical proof.
