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Christie's budget plan goes all in on Internet gaming

By - Last modified: March 4, 2013 at 6:13 AM

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The governor delivers his budget address last week. The Internet gaming bill Chris Christie signed is a big reason he expects nearly $436 million in casino tax revenue for the upcoming fiscal year. Observers say it's too soon to tell how sizable the benefit will be to state coffers.
The governor delivers his budget address last week. The Internet gaming bill Chris Christie signed is a big reason he expects nearly $436 million in casino tax revenue for the upcoming fiscal year. Observers say it's too soon to tell how sizable the benefit will be to state coffers. - (AARON HOUSTON)

Gov. Chris Christie is betting Internet gaming will prompt a major influx of cash in what has been one of the state's weakest revenue categories.

The governor's fiscal 2014 budget projects $435.9 million in casino tax revenue, fully $200 million more than his revised estimate for 2013. That's despite the fact that until last week's budget revision, casino taxes for fiscal 2013 were some 27 percent behind plan.

David G. Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas, said it's hard to know what kind of revenue New Jersey should expect.

"I think right now you can just pick a number, because it hasn't been done yet," he said.

Sen. Raymond J. Lesniak (D-Union) admits Christie's target is aggressive. "And in this case, I want the administration to be aggressive," he said.

In a widely circulated report, Wells Fargo analyst Dennis Farrell said online gaming could generate between $650 million and $850 million in annual revenue in New Jersey. The state's tax rate for online gaming is 15 percent; if Farrell's high-end estimate proved true, online gaming would bring in $127.5 million in new taxes. However, Christie's budget summary also suggests increased on-site casino revenue, as well.

In order to reach its target, New Jersey will need to move quickly.

Frank A. DiGiacomo, a partner at Duane Morris LLP, in Cherry Hill, said statutorily, the law can't take effect for at least three months. During that time, the state will need to create regulations, and casinos will need to find technology providers. He said some casinos have a head start in that regard; Caesars Entertainment, which owns four Atlantic City casinos, already operates online poker in Europe through a subsidiary.

Lesniak said he thinks online gaming could be operational here by September. DiGiacomo isn't so sure, "but you never know," he said. "There certainly are a lot of motivated parties."

Part of the motivation to move quickly is to head off other states. While federal law prohibits interstate online gaming, states like New Jersey could form compacts with other states to allow citizens of those states to play on the Garden State's system, creating additional tax revenue here.

Jeremy D. Frey, a partner at Pepper Hamilton LLP, in Princeton and Philadelphia, said more states means more liquidity — an industry term for the number of players. He said that's particularly important in online poker. The most popular form of online poker is peer-to-peer, meaning a player plays against other people, not against the house. The more liquidity, the more profitability for players, he said.

Lesniak said New Jersey's size and existing infrastructure give it a leg up when competing to compact with other states.

"Most states, even Delaware, won't be able to attract the investment necessary or have the liquidity necessary, because of their size, to really set up a viable Internet gaming system," he said.

Only Nevada and Delaware beat New Jersey in passing online gaming laws, though Nevada's law only covers online poker.

Lawmakers here originally proposed a 10 percent tax rate for online gaming, but Christie pushed for a higher 15 percent rate. DiGiacomo said the higher rate gives New Jersey room to pass more revenue to compact partners.

"You would have to cut in the other state on some of that tax, so by having it at 15 percent, it allows New Jersey to make it an attractive option for other states," he said.

However, Frey said New Jersey may face pressure to lower its rate if other states institute lower taxes.

Ultimately, Frey said it's clear online gaming will bring more money to state coffers, but he's not sure it will spark a rebirth of Atlantic City. He said online gaming's not so much about getting ahead as it is about staying afloat.

E-mail to: jaredk@njbiz.com
On Twitter: @jaredkaltwasser

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