Internet Gambling: Betting on New Tax Revenue
If two Democratic lawmakers succeed, online gambling would be legal and taxable—and both the federal government and state governments would benefit.
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The Fiscal Times
May 20, 2010

If two Democratic lawmakers have their way, online gambling would be taxable—and federal and state governments would reap the benefits. But there’s a glitch: Congress would have to declare Internet betting legal and then try to regulate it.

On Wednesday, the House Ways and Means Committee began debate on a bill proposed by Rep. Jim McDermott (D-Wash.), to impose federal and state taxes on Internet gambling firms, and to direct the revenue to state social service programs, such as foster care and children’s health insurance. The bill, introduced in March, could bring in about $42 billion for the federal government and $30 billion for state and local governments over a ten-year period, according to McDermott’s office and a Joint Committee on Taxation report.   

“Prohibition hasn’t prevented the millions of Americans who want to gamble online from doing it,” McDermott said at the hearing. “It has forced internet gambling operators to work offshore, it has put consumers at risk, and it sends billions in dollars of revenue to other nations.”

Americans continue to bet more than $100 billion annually with offshore Internet gambling firms. “These offshore firms are operating underground without any checks, so there is nothing to stop them from being lax with underage gamblers or even problem gamblers. This bill would change that,” said Michael Waxman, a spokesman for the Safe and Secure Internet Gambling Initiative, a group that supports both bills.   

Republican Rep. Bob Goodlatte (R-Va.), who favors keeping the 2006 law, pointed out that some statistics show that the 2006 law is working. A study done by the Annenberg Public Policy Center found that college-age kids’ weekly use of the Internet for gambling decreased from 5.8 percent in 2006 to 1.5 percent in 2007.

The U.S. offshore gambling industry is expected to generate $5.7 billion in 2010, according to data from H2 Gambling Capital, a U.K. consulting firm that tracks gambling statistics.  Another survey conducted last year showed 10 million Americans play poker online for real money. 

Betting on Controversy

It’s not exactly a slippery slope from bingo to online betting, which was banned by Congress in 2006 after a group of Republican lawmakers added a provision prohibiting online poker, sports wagering and casino games to a port security bill.  For those who like to place their bets, legalized gambling is a no brainer.  Only two states—Hawaii and Utah—do not have any form of legalized gambling.

Rep. Barney Frank (D-Ma.) is leading the effort to repeal the Unlawful Internet Gambling Enforcement Act (UIGEA), which officially goes into effect on June 1. He introduced a bill in May 2009 that would give the Treasury authority to grant Internet gambling companies five-year licenses to accept U.S. wagers as long as they obey state gambling laws and apply safeguards against underage players, gambling addicts, money laundering and fraudulent activities.  But people who really know the Internet think many of these so-called safeguards are impossible to enforce.  

The bill—which does not legalize sports betting—is pending July markup by the House Financial Services Committee, which Frank chairs. It would require Internet gambling companies to pay a 6 percent tax on gambling deposits to state governments, and a 2 percent tax to the federal government. It would also require licensed gambling operators to send the IRS and players annual 1099-IG tax forms to disclose their winnings on their income taxes. 

The liberal-leaning Democrat Frank has taken a more Libertarian approach in this case. That attracted the Republican and Libertarian congressman Ron Paul of Texas to co-sponsor the bill.  “I have always believed that it is a mistake to tell adults what to do with their own money,” Frank said at the hearing. Some adults will spend their money foolishly, but it is not the purpose of the federal government to prevent them legally from doing it.”

Frank is also one of the top House beneficiaries of gambling groups' money, collecting $58,400 from the gambling and casino industry since 2009, according to campaign contribution numbers. Though Frank has rallied behind gambling regulation for over a decade, Rep. McDermott is a relative newcomer to the idea. While searching for funding to provide housing and health care to foster children who are aging out of the system, he came across the issue of unregulated wagers by chance, he said. 

“It doesn’t make any sense for us to make something illegal in this country that people are going to do anyway, and then criminalize people,” Rep. McDermott told The Fiscal Times. “We tried prohibition in the 1920s and it didn’t work. This is the same case with gambling. Why not legalize it and tax it just like you do alcohol or cigarettes or a lot of other things?”  Of course, this begs the question—what about other vices and addictions, including prostitution and drugs?

Tell us what you think: Should online gambling be legal, and should it be taxed?

Related Links:
Online Gambling Tax May be Jackpot for Congress, Lawmaker Says - Bloomberg
House Effort Would Legalize, Tax Online Gambling - Miami Herald
McDermott Bill Would Use Revenue from New Online Gaming Tax for Foster Kids - The Hill
Internet Gambling Again in Play - Washington Post
Joint Committee on Taxation Report