Internet Gambling: The Keys to a Successful Regulatory Climate

Policy Study

Internet Gambling: The Keys to a Successful Regulatory Climate

How the government can embrace and regulate online gambling

As cash-strapped states explore ways to expand commerce and fill their coffers, many are considering increasing the reach of state lotteries through permitting online gambling. Indeed, Illinois and New York late last year received word from the Department of Justice indicating that as long as it does not involve sports betting, such gambling would not violate the federal Wire Act. Other states have taken note and are examining their options for this potential tax revenue stream.

Yet any discussion of gambling sparks controversy from citizenry and special interest groups, which legislators must address. This paper makes the principled case for legalized Internet gambling, and recommends a policy approach that would create win-win-win regulatory environments for consumers, game site operators and state governments. In keeping with American ideals of personal freedom, U.S. citizens should be free to gamble online, just as they legally can in casinos throughout the country. It is irrational and hypocritical for states that benefit from brick-and-mortar casinos or horse-racing to then attempt to ban Internet gambling.

From the consumer perspective, Internet gambling stands to offer better value for low-end players. It also offers states significant economic benefits:

  • It plays to American skill strengths and creates demand for high-paying IT jobs, which will help states stem the exodus of college graduates skilled in technology sector areas to other parts of the country. This aim works in tandem with other efforts to cultivate a business climate that welcomes tech industry entrepreneurs and start-ups, and the increase in jobs and tax base these enterprises bring.
  • It stands to be a major revenue opportunity for state governments. As Jeff Danielson, president pro tempore of the Iowa state Senate, pointedly said, “$30 million leaving the state economy is a problem.” He went on to say, “It’s an e-commerce issue. If Iowa has to compete, we have to come to grips with the fact it [Internet gambling] can be done safely and securely.”

Although states will likely differ in the particulars of how they structure license and tax arrangements, a successful climate for legalized Internet gambling is likely to derive from a number of fundamental principles. This report recommends several guidelines for state legislators:

  • Consumers are best served when there is ample competition. Regulation and licensing arrangements should reflect this.
  • Online gambling has a different cost structure than brick-and-mortar casinos. States must grasp the lower revenue and tax expectations and set up tax and licensing structures so they are compatible.
  • States should avoid creative new tax structures that place levies on players’ accounts or introduce “hand charges” that are paid directly to the state. Any taxes should fall on Internet gambling operators, not players.
  • Regulation should aim to protect players from fraud and promote fair games. It should not attempt to protect players from themselves. Such regulations have proved ineffective and easy to defeat.
  • States should not discount the market as an effective regulator. Independent game analysts have proved adept at identifying problem software and posting their findings, while online information sites, message boards and discussion groups all help players to make informed Internet gambling choices.