Treasury: Online gaming legislation could cost schools $28M

Beth LeBlanc
The Detroit News
What the gambling industry calls “igaming” is legal in a handful of states, such as Nevada and New Jersey, and other states including Michigan are considering doing the same.

Lansing — The proposed legalization of online gaming in Michigan would cost Michigan's public schools $28 million annually in revenue, a state Treasury Department official testified Thursday.

The Treasury estimated that online gaming options would draw some customers away from brick-and- mortar casinos, which are taxed at a higher rate than the 8% rate proposed for online gaming. Michigan has 26 casinos, with most owned by Native American tribes but the three in Detroit run by private firms. 

“Even if you have that small level of substitution” from brick and mortar to iGaming “it’s a relatively large revenue impact,” Chief Deputy Treasurer Jeff Guilfoyle told the House Ways and Means Committee Thursday.

Committee Chairman Brandt Iden started the committee warning members they would hear “a lot of flash, a lot of bang” and “a little bit of fear mongering” regarding revenue projections. But the Kalamazoo area Republican later said that he’s open to working through some of the fears raised by treasury.

“I think there’s a lot of speculation that they have,” said Iden of Oshtemo Township. “Because the market’s so new, I think they’re basing their assumptions on things that may not necessarily be valid in the long run.”

The package of eight bills discussed Thursday would allow and regulate online casino games, online fantasy sports contests, third-party facilitators for horse race betting and change the state’ charitable gaming rules.

The package was vetoed by Republican former Gov. Rick Snyder last year because of “unknown budget concerns,” including the potential impact on Michigan Lottery revenue that supports K-12 schools.

The latest version also includes a repeal of a 21-year-old rule banning casino licensees and their employees from making political contributions. The prohibition was approved in connection with voter approval of the three Detroit casinos in the late 1990s.

Treasury officials noted it was difficult to know how the legislative package would affect Michigan's revenues because no other states have the same slate of legalized betting activities. The closest would be New Jersey, but even the Garden State lacks options such as the iLottery and tribal casinos.

The tax rates between the gaming options vary significantly. Lottery sales are taxed at 27%, all of which go toward the School Aid Fund; tribal casinos have a 14% tax rate, none of which goes toward the School Aid Fund; and Detroit casinos are taxed at a 19% rate, some of which goes to Detroit and roughly 8% of which goes toward the School Aid Fund.

iGaming options through tribal and Detroit casinos would be taxed at 8% and 9%,  respectively. A small fraction of iGaming and sports betting tax revenue at Detroit's casinos would toward public schools, but none of the revenue from iGaming and sports betting at tribal casinos.

While the School Aid Fund revenue may dip, the Treasury Department estimated that all other tax revenue dedicated to other state funds and the city of Detroit would increase.

The estimated $28 million cost is simply  prediction, some lawmakers have said.

“There’s not a lot of hard data yet,” said Democratic Rep. Rebekah Warren of Ann Arbor.

GOP lawmakers have argued it’s difficult to know how much additional tax revenue would be generated or how the different gaming options would affect each other. They've also argued that the customers who would use iGaming differ from those who visit the existing casinos on which the School Aid Fund relies.

While the short-term effect may amount to a $28 million loss for schools, the long-term damage to the overall betting system shouldn’t be overlooked, Guilfoyle said.

“For some of our games in the lottery, they’re very much at risk if we legalize iGaming,” he said.

Representatives from the Detroit casinos argued otherwise. The cost of creating and maintaining an internet gaming system through casinos is steep because it requires a third party provider, making brick-and-mortar businesses more attractive, said Mike Neubecker, president of Detroit’s MGM Grand.

“The internet is more expensive to do business,” Neubecker said. “It’s a tool to drive a little more revenue. But the ultimate goal would be to get them into the brick-and-mortar casino.”

The state said it's expected that most of the money generated by iGaming, an estimated $225 million, would be new. But the Treasury Department also expects some would come from existing gamblers already courted through the state’s iLottery system.

The Treasury Department's opposition to the legislation came at the last minutes, as the House Regulatory Reform Committee was poised to vote on it in mid-March, said Rep. Jason Webber, R-Rochester Hills. Still the legislation passed through the committee with largely bipartisan support.

The legislation allows the state to better regulate iGaming, which in many cases is happening illegally anyways, and lets the state's gaming facilities update and compete in a changing market, Iden said.

“With 23 tribal casinos in the state of Michigan and three commercial casinos, and one of the most robust lotteries in the country, there’s no doubt that gaming is a big business here in Michigan,” Iden said.

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