States Make Play for Web Gambling

(by Alexandra Berzon, The Wall Street Journal, WSJ.com) – Efforts to legalize online gambling in the U.S. are moving to the states as lawmakers roll the dice on bills that aim to steer around federal laws effectively prohibiting Internet wagering.

The first real test of the state efforts comes this week in New Jersey, where Gov. Chris Christie is expected to decide the fate of a bill that would let Atlantic City casino companies run gambling websites for state residents.

The bill would make New Jersey the first state to sanction online gambling. The Republican governor, who has until [today] to veto or sign the bill, hasn’t publicly stated his stance.

Regardless of Mr. Christie’s decision, gambling experts say momentum is growing behind states’ efforts to legalize online gambling for their own residents, known as intrastate gambling. Last week, Iowa lawmakers introduced a bill to legalize online poker, and California and Florida are among other states considering similar bills.

Once one state passes an online-gambling law, “you will see other states go ‘aha.’ It will spread very rapidly,” said Anthony Cabot, an expert in Internet gambling law.

The debates over online gambling come as states scramble to balance their budgets in the face of [enormous] deficits. …..

Backers of online gambling initiatives stress, in part, the allure of capturing new revenue [money] for statehouses. Casino gambling has been expanded in several states in the past few years-including Pennsylvania and Florida-based partly on that argument.

In New Jersey, however, under the bill passed by the legislature nearly all of the money would be allocated to the horse-racing industry, which had been receiving payments from casinos in exchange for preventing gambling expansion at racetracks. Other winners could include companies that provide software for online gambling, and they are backing the proposal.

The push to allow intrastate online gambling is a new tack in a long effort to legalize online gambling in the U.S. It was effectively outlawed in 2006 when Congress banned financial companies from processing gambling transactions across state lines.

Bills pushed by big casino companies to create a federal law legalizing online poker failed in Congress late last year, and prospects for such bills haven’t improved.

Casino gambling for much of the country’s history has faced loud opposition from those who considered gambling wrong either for moral or social reasons. Indeed, gambling addiction treatment providers said they were concerned that the easier access that online gambling provides could lead to addiction problems.

But in recent decades that opposition has been drowned out by [those who profit from gambling], which have succeeded in pushing casino expansion through state legislatures, often using the argument that states should benefit from revenue from residents who are gambling at casinos in nearby states anyway.

Now, people involved in online gambling discussions say some proponents are also turning efforts toward statehouses. “I think you’re seeing a shift in focus because the thought process is that if several large states legalize, that will put pressure on the feds to act,” said Nick Iarossi, a gambling lobbyist in Florida.

The state efforts, proponents say, would steer clear of the federal ban by limiting access to the sites to people using them from inside the state, which proponents say is technologically possible. But the legality of the proposals is murky under some state constitutions. The U.S. Department of Justice has long taken the position that nearly all forms of online gambling are illegal in the U.S. It hasn’t weighed in publicly on the state proposals.

Some key gambling interests, including some [overseas] Internet companies, some casinos and Indian tribes, oppose the state measures. On a recent call with analysts, the chief executive of Caesars Entertainment Inc., which has casinos throughout the country and also owns the popular World Series of Poker brand, said the company hadn’t given up on the possibility of a change in federal law and wasn’t ready to support the state-by-state approach.

Two websites that operate from [outside the U.S.] … have come to dominate the U.S. and international online poker scene, even though the Justice Department considers their actions illegal. Even though transactions are complicated for players because financial institutions are barred from accepting their payments, around 10 million people in the U.S. play poker online, according to the Poker Players Alliance, a group for online poker players in the U.S.

In New Jersey, the bill passed through both houses of the legislature in recent months with overwhelming support of both parties. But hurdles remain. Mr. Christie could conditionally veto the bill, which would send it back to the legislature with changes, according to a person familiar with the matter. The bill would likely be derailed if he said it required an approval by voters. A recent poll found that 67% of New Jersey residents polled oppose Internet gambling.

Proponents argue the state would benefit. “Revenue is leaving the state to offshore Internet gaming and we should recapture those revenues for New Jersey and create jobs in New Jersey,” said Raymond Lesniak, a [Democratic] state senator, who argued the state could become a hub for the industry if the state is the first to legalize Internet gambling.

Mr. Lesniak estimated the new law would bring the state around $30 million annually in taxes to New Jersey based on an estimate that it would produce $200 million in revenue.

The tax revenue wouldn’t necessarily be a boon for state coffers, though. New Jersey would dole out the tax money to the horse-racing industry to make up for the loss from casino subsidies that have expired. That tax would drop substantially after five years under the current proposal. An additional $12 million would be collected for the state’s casino fund that gives money to elderly and other health services.

For the state, that money is likely to be offset somewhat by lost revenue from New Jersey residents who now visit Atlantic City casinos. One study commissioned by supporters of the bill and conducted by Econsult Corp. estimates that online gambling in New Jersey would lead to a 5% reduction in Atlantic City casino revenue, which it estimates would represent a $48.8 million shift from casinos to Internet gambling. However, the casino companies would operate the online sites and the losses would more than be made up, according to the study.

The state Office of Legislative Services concluded state revenue would increase as a result of the bill but said there was too much uncertainty surrounding online gambling to predict the amount.

There have been previous efforts for online gambling at the state level. Nevada passed a law legalizing such gambling for betters nationwide in 2002, but it was shelved after the Justice Department advised the state against allowing it.

Illinois is waiting on a ruling from the Justice Department on whether a plan to allow wagering online through the state lottery would be allowed. Other states, including Minnesota, already offer limited online lottery betting.

-Lisa Fleischer contributed to this article.

Write to Alexandra Berzon at alexandra.berzon@wsj.com.

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved.  Reprinted here for educational purposes only.  Visit the website at wsj.com.