The Pros and Cons of Internet Gambling

Will online poker be the revenue boost states are looking for?
by | February 16, 2012

Nevada is the first state to make it legal for state residents to play poker online. It won't be the last, however. At least a dozen states are looking at Internet gambling as the latest means to replenish their coffers.

States got the official go-ahead to consider online gambling late last year -- two days before Christmas. Illinois and New York had asked the U.S. Department of Justice (DOJ) to clarify whether they could sell lottery tickets over the Internet. The DOJ ruled that neither the 1961 Wire Act (a law that many believed precluded Internet gambling) nor the Unlawful Internet Gambling Enforcement Act (which makes it illegal for financial institutions to process payments for online wagers) applies to lottery sales over the Internet. More specifically, the opinion assured states that so long as the gambling operator and the customer are within the same state and the betting activity does not include sporting events, a state's own laws apply. That gives state legislators permission to pass Internet gaming laws.

The temptation is the revenue. The American Gaming Association, in testimony before a congressional subcommittee, estimated that legalizing online poker would generate roughly $2 billion a year in new tax revenues. Supporters of legalizing online poker in California came up with an estimate that would indeed be golden to the Golden State: It would net $100 million to $250 million a year from online poker. But Iowa released a study in December that found that its state intake would be far less than private companies had estimated, only $3 million to $13 million a year.

To get a handle on the pros and cons of legalizing online gambling, I talked to David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas. Here are highlights from our conversation.

What is the effect of the federal ruling that selling state lottery tickets online does not run counter to the Wire Act?

It clears states to sell lottery tickets online. More and more, people shop online so it makes sense to be able to buy lottery tickets online. But there is no hard data about whether this will grow revenue or shift it. People have a finite amount they'll gamble.

What about online poker? Will it be the revenue boon some states think it will be?

Poker is 1 percent of all gaming revenue in Nevada. It's not a huge moneymaker for casinos, but it's a very popular, social game. If you could monetize that and move from social poker to playing for money online, that would be lucrative for states.

Since it's a game that people play against each other -- as opposed to black jack or roulette, which they play against the house -- how would states make money from it?

[In casinos that have poker], the casino takes a rake, or small percentage of each pot. The percent varies from 2 to 5 percent of each pot. That's how they make money. If states did it online, a state lottery corporation could run a poker room and take a portion of the pot. But it's not like this is free money. You have to market the site. You have to develop the site. It may make more sense for a state to allow casinos to open online poker rooms. Minnesota, for instance, has tribal casinos. They could turn online poker over to the tribal casinos. Or, a state could sign a reciprocal agreement with a casino -- even if that casino is in another state. Californians, for example, can't gamble on Nevada casino's online sites. But if the state of California had a deal with a Nevada casino, people in California would be able to play poker online there. The advantage to the state is that it doesn't have to set up a regulatory system. It has to do some due diligence, of course, but the state wouldn't be reinventing the wheel. There may be other ways for states to handle online poker. As they deal with their budget crises, states will get very creative.

If you were going to sit down with a state legislator and give advice about setting up online poker, what would you say?

I'd say, "Look at all the options. What is going to get you the best return in exchange for the smallest investment?" You don't want a huge regulatory regime that's a white elephant. You want to look for the best way to get protection for your citizens. You have to think about how to develop a system to safeguard their interest, have accountability for operators and make revenue for the state.

How do you protect the people in your state who want to play poker online?

Robust regulation. The legislation authorizing online gaming in Nevada, which passed during the 2011 legislative session, directed the Gaming Commission to pass regulations governing online play. So now Nevada's online gaming regulations set guidelines for what sites have to do. There are mechanisms for complaints and dispute resolution built into the regulations. You can read more about Nevada's laws by going to our website and clicking on reports.

States not only face a question of how to regulate online gaming, but how to tax it. It's a fine line: If you tax the industry too much it's counterproductive. You want to tax it enough to make it worthwhile for the state.

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