Internet Poker Needs Federal, Not State Solution

The National Council of Legislators from Gaming States (NCLGS) has opposed Internet gambling for nearly as long as online betting has existed.

The organization wants states to continue to control gambling within their borders. Given the borderless nature of the Internet, this stance against online gaming is a natural one.

NCLGS might be changing its tune on Internet gambling, however, after hearing the testimony of William White, the CEO of Global Cyber, LLC, at its biannual meeting in Boston earlier this month.

White claimed he could block out-of-state residents from accessing a site that would allow Internet users to buy lottery tickets, bet on casino games and play poker. By creating an intrastate Internet gaming space, states would be able to control and regulate Internet gambling within their borders.

NCLGS members were very interested in White's testimony, and for good reason. According to Stateline.org, the 48 states that regulate gambling took in over $20 billion in tax revenues from lotteries, casinos, and racetracks in 2005.

If states had the ability to license and tax Internet gambling operators, the revenue produced would merely be a drop in the gaming revenue bucket, at least in the short term. In 2005, U.S. bettors sent an estimated $6 billion in revenue to offshore Internet gambling operators, and even a hefty 20 percent tax rate would only result in a six percent increase in gaming-related revenue for the states.

The growth of the industry, however, is of greater interest to state regulators. Last year, the American portion of Internet gambling revenue grew by 50 percent, up from $4 billion in 2004, and the total number of people gambling online is expected to grow at a 20 percent rate annually (four percent of U.S. residents made bets online last year). Several legislators are worried that gaming tax revenues will shrink as people choose to spend gaming dollars at offshore Internet sites, while others see Internet gambling as an opportunity to build the state's coffers.

Federal law on Internet gambling is anything but clear. It is clear, however, that states have the constitutional right to control gambling within their own borders. If a state could keep out-of-state residents from betting on Internet sites licensed within their borders, that state would most likely be able to regulate and tax in-state Internet gambling operations. Even Rep. Bob Goodlatte's (R-Va.) Internet Gambling Prohibition Act does not prohibit intrastate Internet gambling. The real question is would state regulation be effective?

The answer is mixed. Lotteries, which can be combined with land-based sales, and casino table games, which do not require multiple players, would operate just fine; games that require high player volume would not. Bingo and progressive jackpot games require high volume to build the size of the prize. Poker, the game that caused the Internet gambling boom, also requires a large player base. Unlike the lottery, blackjack, or slot machines, poker players match wits against each other, not "the house." In order to make the game work, players must be able to find other players who want to play the same game for the same stakes.

PartyPoker.com, the world's largest online poker room, boasts thousands of real-money players online at every hour of every day. Other sites share common software providers that enable the sites to share a network of players. Ongame Network, for instance, hosts players from PokerRoom.com, FullContactPoker.com, and 64 other poker rooms. Each of these sites contributes players to the network, boosting the number and variety of tables a player can join.

Poker networks are international, with the largest online poker rooms getting the vast majority of their business from U.S. players. (Eighty-four percent of PartyGaming's revenue came from the U.S. in 2005, while Americans represent approximately 80% of PokerRoom's player pool.)

While these networks are teeming with Americans, they would suffer a drastic blow without interstate play. Splitting the American Internet poker-playing population into 50 segments would eliminate, or at least severely hamper, the possibility of finding game variations and stakes that many players would like to play.

Our system of government, which grants each state the ability to regulate gambling within its borders, creates unique challenges for Internet poker. These challenges cannot be overcome if interstate Internet poker play is prohibited. Should states decide to license Internet gambling operators and keep out-of-state residents from participating, it is unlikely that a single poker network, let alone several competing networks, could survive in most states.

While NCLGS may choose to change its position when it meets again in January, the only real solution for Internet poker is to regulate at the federal level. Funds raised through taxing online gaming could be distributed to the states based on the revenue each state produces.

NCLGS will have to decide whether providing residents with a viable Internet poker option, and therefore providing the state coffers with taxable revenue, is more important than preserving the power of the state to "control" Internet gambling by relegating it to offshore entities that provide uncertain security and no taxable revenue.