Internet gambling deposit tax a bone of contention in Ways and Means hearing

19 May 2010
This morning, the House Committee on Ways and Means held a hearing on the taxation of Internet gambling proposed by Rep. Jim McDermott (D-Wash.) in the Internet Gambling Regulation and Tax Enforcement Act of 2010. McDermott introduced the bill as a companion to a bill sponsored by Rep. Barney Frank (D-Mass.), the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, which would regulate the industry in the United States.

There were plenty arguments about the merits of regulating the industry altogether, but the most contentious issue was the idea of a tax on player deposits.

McDermott opened the hearing as a witness, stating that Internet gambling prohibitions have not worked and that Americans have deposited $12 billion on offshore Internet gambling sites and have made more than $100 billion in bets on those offshore sites already this year.

"None of these activities is regulated and taxed by the U.S. government," said McDermott. "Driving Internet gambling offshore has been a policy failure. The GAO has called Internet gambling borderless, and I think it's time for Congress to stop pretending that the future won't come."

McDermott estimated that taxing the industry would generate $42 billion, with the bulk coming from income taxes on winning players. Other revenues would be derived by a tax of 0.25 percent on all wagers, which is consistent with current gambling tax law, and a two percent tax on player deposits at the federal level. The bill would also give states and tribes the opportunity to share in that deposit tax at a rate of up to six percent on those same deposits in lieu of all other taxes. Combined with existing state income taxes, McDermott estimated states and tribes would raise $30 billion over 10 years.

Rep. Bob Goodlatte (R-Va.), one of the original supporters of the Unlawful Internet Gambling Enforcement Act, which became law in 2006, then argued as a witness against taxation and regulation, saying that Internet gambling has dropped in college-aged males since the law passed.

While there were several members of the committee who seemed to be against the prospect of regulating the industry for moral reasons, the greatest resistance to McDermott's proposal appeared to come from the Nevada Congressional delegation, which has supported the idea of regulating the industry. While Rep. Dean Heller (R-Nev.) and Rep. Shelley Berkley (D-Nev.) both agreed that they would like to see Internet gambling regulated in the United States, they both disagreed with McDermott's proposed deposit tax.

"Common sense regulation of gaming on the Internet will protect American consumers, and I believe it will create at least 32,000 jobs," Berkley said, but then added, "I am unable at this time to support this special tax called for by Mr. McDermott's bill. The issue of taxation and legalization are separate and distinct."

Heller agreed, asking if the tax would make sense if someone walked into a department store with $1,000 then walked out having bought nothing. Later during the hearing, McDermott got a chance to respond and called the argument against a deposit tax a "straw man."

"When you put $1,000 in an online gambling account, you're not going to leave it there forever," said McDermott. "A gambling operator is willing to pay a two percent deposit tax because he knows you're going to spend that money. The alternative to a deposit tax would be a gross gambling tax … In talking to the industry, they say this is the best way to do it."

Heller asked if brick and mortar gambling companies were saying this was the best method, and McDermott responded that is was current Internet gambling operators that believe this is the best method. Heller wondered aloud if current brick and mortar operators would be interested in entering the online space if this tax went into effect, and McDermott responded that doing so would be optional and if they chose to do so they would have to operate under the rules set forth in the law.

Several members of the committee also brought up examples of problem gambling and questioned whether it would make sense to regulate the industry at all. However, as several witnesses and members of the committee pointed out, those problems will exist regardless of whether Congress takes action to regulate the industry.

"There are tragedies right now," said Rep. Earl Blumenauer (D-Ore.). "It is very clear that reasonable (operators) would rather have regulation. They don't want problem gamblers, just like Las Vegas doesn't want problem gamblers. They're a black eye for the industry. I think we're denying reality."

It is unclear at this time if the committee will vote on the bill and send it to the House floor.

Aaron Todd

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Home-game hotshot Aaron Todd was an editor/writer at Casino City for nearly eight years, and is currently the Assistant Director of Athletics for Communications and Marketing at St. Lawrence University, his alma mater. While he is happy to play Texas Hold'em, he'd rather mix it up and play Omaha Hi/Lo, Razz, Deuce-to-Seven Triple Draw, and Badugi.