Internet Gaming: Supporters Would Make it the Wager of the Season

Jun 1, 2014

Poker, blackjack and roulette could soon join such games as Angry Birds, Candy Crush and Words With Friends on the laptops, tablets and smart phones of Illinois residents. 

And Illinois policymakers helped usher in that possibility. Two days before Christmas in 2011, the U.S. Department of Justice issued a new interpretation of the federal Wire Act, which until that point was believed to ban Internet gambling. Under the new opinion, the act only outlaws sports betting. The reassessment of the Wire Act came after Illinois and New York asked for approval to sell lottery tickets online. Now lawmakers in both states are considering taking things a step further by allowing online casino games. 

When Illinois lawmakers were looking to fund a capital bill in 2009, gambling expansion was the preferred solution. The plan allowed for slot machines and video poker machines in bars, restaurants and truck stops across the state. It also called for leasing the state’s lottery to a private manager and allowing for the sale of lottery tickets online. But first, the state had to get permission from the feds. 

“The hang-up was, there had been an interpretation by the Justice Department that the Wire Act ... said you can’t sell lottery tickets on the Internet,” says Illinois Senate President John Cullerton. “So we sent them a letter saying, ‘Can we sell lottery tickets on the Internet?’ They sent a letter back saying, ‘Not only can you sell lottery tickets on the Internet, but you can also have basically Internet gaming short of sports betting.’” 

Cullerton says he does not gamble, but he says he also does not want Illinois to miss out on gaming revenues. “I don’t like gaming either, but the geography of the state is what dictates the fact that we already have casinos because it started in Missouri and then in Iowa. So we said, ‘We’re losing all this money.’ In Indiana, two-thirds of the license plates over there are from Illinois. So our money is paying for Indiana’s schools as opposed to the other way around. So that’s what got me interested in being for gaming.” 

Cullerton says this is why he has tried to introduce the possibility of online gambling in Illinois. If Internet gambling is the next big thing, why shouldn’t Illinois get a cut? “If it’s inevitable, if it’s going to happen, if our people are going to be allowed to gamble on somebody else’s website in another state and they make money and we don’t, obviously we don’t want to do that.” Last year, Cullerton tacked on an amendment that would have created a Division of Internet Gaming under the Illinois Lottery to a larger gambling expansion bill. The proposal didn’t go anywhere, but Cullerton says he has been working to get the conversation going about online gambling in Illinois. 

So far, three states — Nevada, New Jersey and Delaware — have taken the plunge into Internet gambling. The Washington Post reported that this year up to 10 states might consider legislation allowing for some form of online gambling. The offerings in the states that have legalized online gaming differ. Delaware residents can play poker, roulette, blackjack and slots. Gamblers in Nevada can only play poker online, and must head to brick-and-mortar casinos for other games. Only people located within each state’s borders can participate. However, Delaware and Nevada recently inked a deal that will eventually allow residents from both states to join in on poker games together. 

The idea that the spread of online gambling is inevitable is the argument that proponents are making in states considering legalization. They frame the move as regulating something that already exists. “Any effort to regulate Internet poker should not be viewed as an expansion of gambling in Illinois. Today, Illinois citizens have access to online poker, online casino games and online sports betting. Regulation simply would mean corralling the current unregulated marketplace and turning it into a system that is safe for consumers and accountable to regulators and our government,” John Pappas, executive director of the Washington, D.C.-based Poker Players Alliance, told a Senate committee that was considering the topic earlier this year. 

It is true that there are several websites based in other countries that offer poker and other games to American customers, but the Justice Department has cracked down on such sites. In 2011, before issuing the new interpretation of the Wire Act, the department shut down the three most popular poker websites operating in the U.S. on charges of money laundering and bank fraud. The shutdown froze accounts, cutting players off from money they had logged on the websites. All three companies eventually reached settlements with the Justice Department intended to allow the return of money to players. The founder of one of the websites, a payment processer and a bank manager were all convicted on bank fraud charges. The raid and subsequent freezing of assets came as a shock to the American poker community and had a chilling effect on the online market. 

Though the states that legalized online poker entered a market that had lost some of its largest competitors, so far they have failed to rake in the big pots of revenue that they had hoped for. 

Last year, New Jersey estimated that it would bring in $180 million in state revenues. When New Jersey Gov. Chris Christie signed the state’s budget last summer, the estimate was trimmed to $160 million. New Jersey’s State Treasurer Andrew Sidamon-Eristoff admitted in February that the number would likely be closer to $34 million. At that time, online gaming had only brought in $4.2 million in tax revenues since its launch in November of 2013. At $48 million, the revenue estimate for next fiscal year is much more modest than the state’s original projections. In March, investment firm Morgan Stanley reduced its estimate that the American gambling market would reach $5 billion by 2017. Now the firm is projecting a $3.5 billion market.

Despite its setbacks, Morgan Stanley estimates that the market could reach $8 billion by 2020. Several factors that experts believe are holding back online gambling could eventually be resolved. Many online platforms experienced serious technical glitches when they were launched. Legal online poker still faces competition from websites based outside of the country, which American law enforcement may have more motivation and backing to target if online gambling catches on in the U.S., bringing tax revenues to government coffers. Some banks do not allow their credit cards to be used for Internet gambling. But if demand grows, financial institutions may come around to appease customers. 

But a well-funded pushback against online gambling at the federal level could put an end to the burgeoning industry. One of the leaders of the national opposition to online gambling is Sheldon Adelson, who is chief operating officer of Las Vegas Sands. Adelson’s company owns several casinos and resorts in America and other countries. Adelson has donated millions to Republican political campaigns and frequently falls on top ten lists of the richest people in the world. Adelson has said that he will spend “whatever it takes” to ban Internet gambling at the federal level. 

Republicans in both the U.S. House and the U.S. Senate have introduced legislation that would undo the justice department’s 2011 interpretation of the wire act. “The DOJ opened the door for massive change in policy without significant public input. These fundamental changes need to go through Congress. By restoring the original interpretation of the Wire Act, we are putting the genie back in the bottle and allowing for an open debate to take place,” U.S. Rep. Jason Chaffetz, a Utah Republican, said in a prepared statement. Chaffetz and U.S. Sen. Lindsey Graham, a Republican from South Carolina, have found bipartisan support for their legislation. Some governors, including Texas Gov. Rick Perry, South Carolina Gov. Nikki Haley and Florida Gov. Rick Scott, also support the proposal. 

Some economists say gambling is not the economic driver or revenue cash cow it is cracked up to be. John Warren Kindt, an emeritus professor of business and legal policy at the University of Illinois, argues that gambling hurts the economy because it sucks up money that would instead be spent on consumer goods and services. Kindt also says that while gambling expansion brings upfront revenues to states, it also creates more negative effects on society, such as foreclosures, crime and the dissolutions of families. Kindt says of the new revenue: “It’s peanuts compared to what’s going out the back door” to try to counteract the adverse effects of gambling. He points to the National Gambling Impact Study Commission’s 1999 report, which recommends a ban on any online gambling expansion in the country. Congress created the commission to study the economic and social impacts of gambling on the country. The report also lists Internet gambling as one of only two exceptions in which states are not best equipped to handle regulations within their borders. 

Kindt has long been a vocal critic of gambling expansion. He says his opposition is driven by his research, which shows that gambling is a net negative for state revenues and the economy. “We’d be all for it, if it would work. It doesn’t work,” Kindt said of himself and his academic colleagues. He says that the consequences of gambling expansion are largely missing from the debate in Illinois. “They don’t care about the social consequences,” he says of supporters of expansion. “They don’t want to hear it, and that’s because they’ve already made up their minds that they want more gambling.”

Opponents say that online gambling is a greater danger than brick and mortar casinos because it can be done anywhere at any time. “There are more than enough opportunities to gamble in Illinois,” says Anita Bedell, executive director of the Illinois Church Action on Alcohol & Addiction Problems. “Making gambling more accessible 24 hours a day, seven days a week from smart phones, computer tablets and iPads will make it easier for people to gamble and lose their money. Internet gambling can be done in isolation and [is] easy to hide. Gamblers could empty their bank accounts and run up huge credit card debt without leaving their home, their office or their dorm room.” Opponents also say that Internet gambling would create opportunities for criminals seeking ways to launder money or bribe officials. Going online and intentionally losing money in a poker game to another party, who was in on the deal, could be a simple way to transfer illegal cash. 

Those in favor of legalized Internet gambling say such possibilities are all the more reason to allow governments to regulate and police the market. “Prohibition will only play into the hands of the criminal element, just as it did in the 1920s when alcohol was banned,” says Pappas.

Cullerton agrees that legalizing Internet gaming in Illinois would allow for more control over the practice because players would have to identify themselves. “People can run around to 7-Elevens and buy lottery tickets all day, and nobody would know that they bought them.” He says problem gamblers could be more easily identified because their activities could be tracked, and residents who choose to be on the state’s gambling exclusion list could be kept from wagering online. 

Cullerton says that Internet gaming will likely not be on the table in Illinois until legislation that allows for more casinos and slot machines at horse-racing tracks is passed and signed into law. One possible framework for Internet gaming in the state would allow casino license holders to operate online gaming platforms, for an additional fee, of course. Cullerton says that if race tracks get slot machines, they would also likely be allowed to delve into online gambling. “To pass an Internet gaming bill, you still have to accommodate politically the interests of the horse-racing industry,” he says. He says that the details of legalization have not yet been hammered out, but he thinks an Internet gambling bill would have a good shot at being approved by the General Assembly in the future. “It hasn’t been drafted in a final version yet, but I think it’s very passable.” 

Illinois casino owners have mixed feelings about the idea. Tom Swoik, executive director of the Illinois Casino Gaming Association, says that some of his members support it, and some are opposed. “I think that they would like to see federal legislation that authorized it, so that it can be done pretty much anywhere and across state lines.” He says that all of his members recognize that online gambling is “on the way,” and they want to be involved. 

Cullerton says that if there is enough oppositional will in Congress, the spread of Internet poker could be quelled. But he says that is not the way he sees things headed. “I think there’s more of a trend towards a need for money for government, and it’s easier to have this type of revenue than it is to have taxes, direct taxes.” He says to look no further than the legislation that in many ways set the ball rolling on this national debate — Illinois’ capital bill. Instead of increasing the unpopular tax on gasoline, which typically funds road projects, lawmakers approved a massive gambling expansion. The move brought illegal gambling that was already occurring out of the shadows, but it also brought gambling to places it had never been before, like your favorite mom and pop restaurant down the street. In this climate of budget cuts and intense pushback against new or increased taxes, it is not so hard to imagine that lawmakers might soon be willing to bring it to your iPad, too.

Illinois Issues, June 2014