Policy Documents

Research & Commentary: Online Gambling Legalization

October 30, 2013

In 2011, the Unlawful Internet Gambling Enforcement Act (UIGEA) was used to shut down the three biggest poker sites in the United States. In the summer of 2012, however, the U.S. Department of Justice reversed its action and is now allowing the poker sites to reopen, thereby implicitly permitting states to legalize online gambling.

Since the decision, several states have done so, with significant oversight and regulations. New Jersey, Delaware, and Nevada have legalized certain forms of online gambling within their borders, and California, Illinois, and Colorado have legalization bills in development.

Online gambling was first publicly implemented in 1995, and it quickly grew in popularity in the United States and Europe, becoming an $830 million industry by 1998. In 2002 a RICO case against Mastercard inadvertently led to the outlawing of online gambling in the United States as a violation of the Wire Transfer Act, a decision that was solidified in 2006 with the UIGEA.

Opponents of online gambling argue legalizing it would facilitate gambling addiction and financial hardship. Many casino owners argue online gambling would diminish the demand for brick-and-mortar casinos, hurting their businesses.

Proponents of online gambling argue it is a generally harmless activity that stimulates the economy. Despite legal hurdles, the online gambling industry is worth more $30 billion worldwide, with U.S.-based players contributing a substantial portion of revenues via offshore vendors. Legalization would tap into this global market, to the nation’s economic benefit, and would provide much-needed new jobs and tax revenue to indebted states, legalization advocates state.

In general, government should not interfere with individuals’ entertainment habits. Gambling does pose risks, but most responsible adults can partake in it safely, and the legality of casinos, lotteries, and other gambling venues undermines the case against online gambling. Legalizing online gambling would enable more individuals to enjoy gambling, provide substantial economic benefits to the states, and increase competition in the domestic gambling industry, benefiting consumers and responsible domestic casinos while boosting tax revenues.

The following documents provide further information about online gambling.

Atlantic City’s Next Big Bet: Legalized Online Gambling
http://business.time.com/2013/06/28/atlantic-citys-next-big-bet-legalized-online-gambling/
Brad Tuttle examines the arguments for and against legalizing online gambling from the perspective of existing bricks-and-mortar casinos. Casino mogul Sheldon Adelson has come out against online gambling on the grounds that wagers will be unregulated and potentially more harmful. However, casino companies in Atlantic City have been eagerly forming partnerships with offshore online gambling outlets with the hope of cashing in on the huge online market. 

As Moral Criticism Fades, What’s Holding the US back on Internet Betting
http://www.theverge.com/2013/6/19/4444738/online-gambling-haters-mellow-out-but-federal-law-still-hung-up-on-special-interests
Adrianne Jeffries argues that despite increasing acceptance of online gambling individual states, a federal legalization bill is still very unlikely to pass. There are too many special interest groups attached to each side to move a national bill for or against online gambling. Some casinos, entertainment groups, and civil rights advocates support legalization, while other casinos, traditional values groups, and the National Football League are among the opponents. National legalization may only be possible in the distant future after widespread acceptance by the states. 

Online Poker May be Considered Illegal Gambling Whether Based on Skill or Not
http://www.forbes.com/sites/darrenheitner/2013/08/06/online-poker-may-be-considered-illegal-gambling-whether-based-on-skill-or-not/
Darren Heitner of Forbes describes the confusing legal categorization of poker. In US vs. DiCristina, a federal court ruled that the federal prohibition on online gambling only applied to games based on chance. Meanwhile, a lower court determined that poker was a game primarily determined by skill, and therefore appeared to be legal. Various online poker websites jumped on the opportunity to legally open their business only to be prosecuted months later as the court clarified that it would defer to state laws for gambling definitions, thereby rendering poker illegal in all states. 

Global Gaming Outlook: The Casinos and Online Gaming Market to 2015
http://heartland.org/policy-documents/global-gaming-outlook
This booklet from the world’s largest accounting firm, PricewaterhouseCoopers, provides a detailed projection of online gaming trends over the next few years. The firm projects strong growth in the industry, especially in Asia, but it notes the United States is still by far the largest source of online gambling revenues, at 49% of the global market in 2010. Regulation is considered to be one of the major hindrances for the industry, but the report suggests gambling regulations will erode in the United States and around the world in the coming years as the businesses becomes too large to suppress. Another major trend is the emergence of intense regional competition. 

How Safe is Gambling on the Internet?
http://www.onlinegamblingsafety.com/
This website is dedicated to providing tips to gamble safely online. The site acknowledges online gambling poses potential risks in terms of fraud and a lack of legal recourse for disputes (due to the sites being based overseas), but online gambling can be done safely with a bit of precaution. Before signing up with a site, a customer should research reviews for the site, especially noting its deposit method. Customers with the requisite knowledge should also investigate the encryption software to make sure it is strong enough to stand up to hackers. Ultimately, online gambling technology is still relatively new, and the infrastructure and security necessary for the websites are still being developed. 

Online Gambling: Tax Aspects
http://www.gambling-law-us.com/Articles-Notes/online-gambling-tax.htm
Gambling expert Chuck Humphrey reports on how online gambling is taxed in the United States, noting how confusing and vague online gambling taxes are today. Most online gamblers aren’t aware their income is technically taxable regardless of where the casino is located. Although the government has trouble keeping track of this income, audits could reveal it and lead to legal troubles for the gambler. It can also be difficult to deposit gambling earnings into a bank, especially if it is not reported as income. The article shows how convoluted online gambling laws are today, and by extension, why states should reform these laws. 

Research and Commentary: Online Gambling Regulations
http://heartland.org/policy-documents/research-commentary-internet-gaming-regulations
This commentary by Matthew Glans of The Heartland Institute documents the state of online gambling regulation in 2011. Glans notes opponents of online gambling claim it will lead to more addiction and possibly underage gambling, whereas advocates of the practice call for regulation instead of prohibition. State intervention can curb the negative effects of gambling without stopping safe gamblers from enjoying the service, he notes. Glans lists several sources for further research on the subject. 

Online Gambling Tax Could Hit the Jackpot
http://heartland.org/policy-documents/online-gambling-tax-could-hit-jackpot
Writing for the Heartland Institute, Eli Lehrer argues the social opposition to online gambling legalization is dead, and states should begin permitting and regulating the practice. He notes online gambling is already occurring in the United States, as Native American casinos create websites outside of federal jurisdiction. To ensure these and future websites are free from fraud, the federal government should regulate online gambling and collect tax revenues to pay for this service.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget & Tax News Web site at
http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

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