Internet Gaming Expansion - Where Do We Go From Here?

Responding to pressures for new sources of revenue to fund the federal government, on Wednesday of this week the U.S. House of Representatives, Financial Services Committee, approved the “Internet Gambling Regulation, Consumer Protection, and Enforcement Act” (H.R. 2267) by a vote of 41-22.  H.R. 2267 was introduced by committee chairman Rep. Barney Frank (D-MA) earlier this year.  While Rep. Frank’s bill has a long way to go before it or any other Internet gambling bill becomes federal law, its passage by the committee is a sign to our industry that it needs to be prepared for new competition in our burgeoning online market.  Anticipating this development months ago, the NTRA has been actively negotiating on the industry’s behalf as Washington decides whether and how to regulate Internet gambling. Click here to link to my blog from nearly a year ago on this very subject.
In many ways, these developments in Congress are, as Yogi Berra once said, “Déjà vu all over again.”  Once more, government is seeking to find new ways to fund its growing need for more money.  It’s a pattern that has been around for a long time.

During the Depression in the 1930s, there was enormous pressure on state governments to find new tax revenues and to create jobs.  These pressures coupled with racing’s unique, labor intensive agri-business model and its willingness to pay states sizable monopoly franchise fees (now referred to as excise taxes) led state governments to pursue a major expansion of racetracks and pari-mutuel wagering in America.  Some 21 states legalized pari-mutuel horse racing in the 1930s. The decades that followed were, by almost any measure, great days for racing in the United States.

But it wasn’t long until other forms of gambling began a slow but steady creep onto the American landscape.  First it was the re-emergence of state lotteries in the late 1970s and early 1980s as states sought to recover from the recession and accompanying high interest rates of that era.   The passage of the Indian Gaming Regulatory Act of 1988 led to an explosion of Native American gaming nationwide in the early 1990s.  Then came commercial casinos which have spread like Kudzu across the American landscape as state governments have struggled to keep up with the public demand for more services and lower taxes.  

At every turn, racing has responded to new competition with innovation.  We answered lottery expansion with in-state simulcast wagering.  As casinos started their march across the landscape, we  quickly added  limited and then full card interstate simulcasting.  These innovations helped us grow handle significantly in the late 1990s through 2004.  Racinos – racetracks with casino gaming - have enabled racing to compete with the explosion of casino gambling nationwide of late.  And last but certainly not least, racing has utilized its unique right under the Interstate Horseracing Act to conduct pari-mutuel wagering via the Internet.     

Now comes yet another challenge for racing and other forms of gaming in the U.S. - international expansion of gambling via the Internet. Europe, looking for ways to balance government budgets, is now embracing online casino-style gambling.  Countries like England, France, and Italy have liberalized their laws to allow some forms of online betting.  Other European giants are looking to do the same.  Foreign-based operators are eager to service a legal U.S. online gaming market.  Congress is now officially weighing its options.

Clearly, some members of Congress want to tax and regulate Internet wagering for the same reason government always wants to tax and regulate gambling - potential new jobs and tax revenues. In the case of the Frank Bill, estimates run as high as $42 billion in potential new tax dollars for the federal coffers over the next 10 years.  That’s a lot of money for a federal treasury that is bleeding red ink.

That kind of money puts a lot of pressure on Congress to pass a bill like Frank’s, which would establish a structure to regulate and tax all forms of Internet gambling and create a mechanism for federal licensure of Internet gambling operators.

While Rep. Frank’s bill drew headlines this week after it passed out of a House committee, the industry should strongly prefer the provisions included in a Senate bill sponsored by Senator Robert Menendez (S. 1597). Sen. Menendez’s bill authorizes only online “games of skill” like poker, and it clearly exempts racing from the tax and regulation scheme.   Plus, the Menendez bill not only addresses longstanding concerns about the application of the Wire Act to legal pari-mutuel wagering on horse racing, but also addresses critical tax issues for horse players like withholding and reporting – two areas where horse racing and its players are at a distinct disadvantage against other forms of gaming.  That’s why the NTRA prefers the approach taken by the Menendez bill.   

Racing was smart and capable enough to become active in I-gaming a long time ago because of our experience with simulcasting and “remote” players.  We now have to defend the turf that we previously staked out while also playing offense on other fronts.  Some will undoubtedly assert that we must stop the passage of federal Internet gaming legislation altogether.  That is easier said than done, especially with the pressures now on Congress to pay for the high cost of many of its programs.   

Instead, we are using this as an opportunity to seek new money for important industry and regulatory initiatives like state-of-the-art drug testing laboratories and equipment.  Las Vegas revitalized the casino industry by implementing stricter controls to assure the public of their integrity.  We think that is a good strategy, and with the added revenue provided by expanded Internet gambling, we will get there faster.

What sorts of new programs or innovations could or should be funded if expanded Internet gaming is legalized in the United States?  How can we parlay our current position into new money for horse racing? What is fair compensation for that loss of our existing monopoly?  Let me hear from you.

Recent Posts

More Blogs