A reworking of Michigan´s Lawful Internet Gaming Act will be required to address concerns about a perceived decrease in revenue for the state´s School Aid Fund.
Last Thursday, Michigan´s House Ways and Means Committee held a hearing to discuss the current package of online gambling bills introduced by Rep. Brandt Iden. The package is very similar to the one vetoed last December by outgoing Governor Rick Snyder, who – at the time – cited concerns about the impact regulated online gambling would have on the School Aid Fund.
Although the more plausible reason for the veto was the influence of anti-online gambling billionaire Sheldon Adelson, concerns about the School Aid Fund were once again raised at the hearing – with Chief Deputy Treasurer Jeff Guilfoyle telling the committee that the regulation of online gambling in Michigan could cost the state´s public schools $28 million per year.
How Could Online Gambling Cost $28 Million?
To see how the regulation of online gambling in Michigan could (allegedly) cost $28 million, you have to understand where the money currently comes from for the School Aid Fund. At present, Detroit´s brick-and-mortar casinos pay 19% tax on their profits, and about 8% of that goes towards the School Aid Fund. Lottery sales are taxed at 27% – all of which goes towards the School Aid Fund.
The proposed tax rate for online operators is 9%. One percent would go to the City of Detroit and 8% of the remainder would go towards the School Aid Fund. The Treasury is concerned that if brick-and-mortar casinos drive customers towards their online operations (to pay less tax on their profits) the tax revenues for the School Aid Fund will fall from 1.52% of Gross Gaming Revenues to 0.64%.
A bigger concern is the impact online casino games will have on lottery revenues. At present, Michigan´s online lottery generates a lot of its income from online games that resemble slots, scratch cards, and Keno. These games have terrible payout percentages, and the perception is that players would stop playing these games for online casino games with better payout percentages and lower tax rates.
The perceived threat to School Aid Fund revenues is not new. It was first raised in a Fiscal Impact Study (PDF) in December 2017; and, according to a second Treasury official to give testimony at the committee hearing – Bethany Wicksall – new Governor Gretchen Whitmer would also veto the Lawful Internet Gaming Act if it were to arrive on her desk with the current distribution of tax revenues.
How Real is the Perceived Threat to the School Aid Fund?
The threat to the School Aid Fund is unlikely to be anything near the scale being suggested by Michigan´s Treasury officials. Research has shown there is minimal cannibalization between online gambling and brick-and-mortar casinos; and, while there may be a small exodus from the lottery´s online games to regulated online casino games, the impact is also likely to be minimal.
The reason suggesting the threat is minimal is because any discerning online gambler would never play the low payout games offered by the state lottery. Instead they would choose to play at any number of US online casinos that accept players from Michigan. Therefore, what should happen is that regulated online casino capture business from the unregulated market – bolstering the School Aid Fund.
However, while the threat to the School Aid Fund is perceived to be real, what I would do if I was Rep. Brandt Iden would be to change the distribution of tax revenues in the Lawful Internet Gaming Act, and then change them back when the concerns are proven to be unfounded. The shortfall in payments to the Internet Gaming Fund would only be temporary, and partly covered by the first year licensing fees.
Iden Still has to Address Constitutional Concerns
There is one final sticking point though. Even if Rep. Iden did tinker with the figures to address concerns about the School Aid Fund, he still has to overcome the issue of his proposals being an unconstitutional expansion of gambling. Michigan´s constitution states any expansion of gambling has to be approved by a statewide ballot, and although Iden is trying to overcome this obstacle by referring to online gambling in Michigan as an “expansion of gambling opportunities”, the bill is likely to face a legal challenge.
Anti-gambling interests in New York have already shot down one unlawful expansion of gambling; and, as I noted last week, a second anti-gambling group in Rhode Island has started legal action against the state´s legislature to roll-back the passage of mobile sports gambling. It would be no surprise if the same happened in Michigan. Considering how long it has taken to reach this stage, it would have made sense to have a ballot when the “significant legal and policy questions” were first raised in 2016, but when was sense ever a factor in online gambling discussions?