Net Gambling Bills Protect Established Gambling Interests

(October 25, 1999) It began in the 105th Congress as an altruistic effort to clean up the Internet and protect its users from the pernicious effects of gambling. Sen. Kyl and Rep. Goodlatte introduced short and simple bills to criminalize Internet gambling. But legalized gambling is big business, and the states also have a big stake. The bills did not become law.

In the current Congress, the 106th, Sen. Jon Kyl (R-AZ) and Rep. Bob Goodlatte (R-VA) have modified their bills, in part to win enough support to gain passage. The most recent version of the bill, HR 3125 IH, filed by Rep. Goodlatte on October 21, contains 37 pages of exceptions, exemptions, immunities, loopholes, definitions, and clarifying clauses. If this bill becomes law, countless lawyers will send their children to college on the fees they collect for explaining this bill to gambling industry and ISP clients.

The bill now looks like it would accomplish two things. First, it would provide some protection to people from the ills of compulsive gambling, and limit the exposure of children to gambling. Second, it would protect entrenched legalized gambling interests, including state and local governments, from competition from new market entrants. And in the process, it would protect the taxes and revenues of state governments.

The original bills introduced in the 105th Congress were simple. They banned online gambling, and imposed criminal penalties on both the gambler and the gambling business.

Sen. Jon Kyl

S 474 (105th), introduced by Sen. Kyl, provided only a few insignificant exceptions. For example, it exempted purchases of registered securities. An investment in a high tech startup's IPO may be a gamble, and it might be offered through an online brokerage, but that was not the target of his bill.

The only form of gambling, in the commonly understood sense of the word, which was exempted, was "de minimis" bets.

Sen. Kyl was able to win passage of his bill in the Senate in July of 1998 by attaching it at the last minute as an amendment to an unrelated appropriations bill. This procedure is not available in the House.

Also, the bill's opponents were focusing their efforts on the House, and the committee with jurisdiction -- Judiciary. By July of 1998 the House Judiciary Committee was about to become embroiled in the Clinton impeachment, and had little time for other matters. The House version of the bill went nowhere.

In order to win passage of their bill, Sen. Kyl and Rep. Goodlatte have had to eliminate opposition. They have done this by adding exceptions to the bill. This has been discernable from the various versions of the bill. Each successive version is longer, and contains more limiting language. The bill just introduced by Rep. Goodlatte is 37 pages long. The prohibition clause takes up only 8 lines. The penalties clause takes up 12.

The Goodlatte bill has been scaled back from the original bills in numerous ways.

• The original bill covered individual gamblers and gambling businesses. The current bill only covers gambling businesses.

• Small gambling operations are excluded. To be covered a gambling business must have been in "continuous operation for a period in excess of 10 days, or has a gross revenue of over $2,000 or more from such business during any 24 hour period".

• State run lotteries are exempted.

• Fantasy sports leagues are exempted.

• Pari-mutuel wagering is exempted.

• Gambling businesses which are legal under state law may use the Internet to advertise and transfer data.

The original cosponsors of Rep. Goodlatte's bill are fellow Internet enthusiast Rep. Rick Boucher (D-VA), two other Virginians, Rep. Frank Wolf (R-VA) and Rep. Virgil Goode (D-VA). The two other original cosponsors are Rep. Frank Lobiondo (R-NJ) and Rep. James Gibbons (R-NV).

Rep. Lobiondo represents Atlantic City. Rep. Gibbons represents Las Vegas and Reno. These three towns hold the largest concentrations of land based gambling casinos in the United States. These casinos, the local economies which depend on their presence, and the local taxing authorities which derive great revenue, do not want to see gamblers going to online casinos, rather than their brick and mortar casinos.

The one significant form of gambling not exempted from the latest Goodlatte and Kyl bills is these new online casinos. Hence, the brick and mortar casino gambling industry would be protected from competition from online casinos which provide virtual blackjack, slots, and other games.

Of course, the land based casinos argue to the contrary. The major land based and riverboat gambling companies are represented by the American Gaming Association. According to its President, Frank Fahrenkopf, online casinos do not offer the hotels, food, and entertainment that the land based casinos do, and hence, cannot compete.

"We support the right of each state to determine gaming policy," said Fahrenkopf. "Thus, we oppose unregulated and unapproved gaming, whether on land or in cyberspace, and support efforts in Congress to update the federal Wire Act to protect this preeminent state role. We are always concerned about maintaining the integrity of all forms of gaming. We are not concerned about losing business to Internet gambling. There is simply no comparison between playing at home on a computer and the broad entertainment experience our destination resorts offer. Wall Street analysts confirm that view."

However, there are also compulsive gamblers and others for whom gambling alone, and not the associated attractions available in Las Vegas, who might find virtual casinos a fungible activity.

Federal Election Commission records show that the political action committees (PACs) for companies which own brick and mortar gambling casinos, and the hotels associated with them, showered the Congress with contributions in the last election cycle, and have already been giving for the 2000 elections.

The PACs for the top land based casino companies gave over one million dollars for the 1998 Congressional elections.

The Internet is not just changing the way companies do business. It is changing the way state and local governments collect revenues. Internet based retailers not only threaten brick and mortar Main Street retailers; they also threaten the state and local taxing authorities which are heavily reliant on sales taxes.

But state and local governments collect money other ways too. One method is to heavily tax, or even operate, sinful activities. States derive great revenue from alcohol taxes, cigarette taxes, and gambling. Many establish themselves as gambling monopolies. In fact, 37 states, the District of Columbia, Puerto Rico, and the Virgin Islands all operate lotteries.

When sinful activities are geographically based, it is easy to run a state monopoly, or state tax. But the Internet threatens this. If a person can buy alcohol and cigarettes through out of state online retailers, and gamble through out of state Internet casinos, then he can often avoid the local taxes and monopolies.

Currently, there are bills working their way through the Congress that would make it harder for online retailers to sell alcohol (S 577 and HR 2031). Of course, the sponsors, Sen. Orrin Hatch (R-UT) and Rep. Joe Scarborough (R-FL), argue that they are trying to prevent minors from buying alcohol online. But the bill will also protect established liquor distributors from online competition, and protect local taxing authorities' tax revenues. The large liquor distributors and state governments support the bills.

Rep. Marty Meehan

Similarly, there are bills working their way through the Congress that would make it harder for online retailers to sell cigarettes (for example, HR 2914). While the sponsor, Rep. Marty Meehan (D-MA), has argued that the goal is to decrease cigarette sales to minors, his bills would also protect the tax revenues of state governments.

The gambling bills also fit into the same pattern. The stated purpose is to protect people from the social ills of gambling. However, the legislation, as it is now written, would also protect the gambling revenue base of localities.

State run lotteries provide little value other than the opportunity to gamble. They do not provide to hotel rooms, buffets, and Wayne Newton. Moreover, an Internet casino might have a lower cost of operation, and take less in profits than a state lottery takes to subsidize the state budget. The lotteries are thus more vulnerable to competition from out of state or off shore casinos or lotteries than are the Las Vegas casinos.

The Kyl and Goodlatte bills would go a long way to protect these state lottery monopolies, and the revenues which they generate.

Perhaps it is significant that two groups which oppose the Kyl and Goodlatte bills are the Interactive Gaming Council, which represents the Internet casinos, and Americans for Tax Reform, a group which supports lower taxes. In contrast, many state attorneys general support the bills.