States seeking revenue could spark a boom in Internet gaming

By Jamey Dunn

Illinois paved the way for states selling lottery tickets online. Now some experts believe that the U.S.  Department of Justice ruling that allowed for such online sales will open the door for other forms of online gambling to sweep across the nation.

 “We’re going to have Internet gambling that everybody acknowledges is Internet gambling, and it’s going to be in less than 10 years,” I. Nelson Rose, a law professor and gaming consultant, said today at the National Conference of State Legislatures' legislative summit in Chicago. Rose said the Justice Department ruling, which Illinois and New York requested, allows for many new forms of online gaming — such as poker and even versions of popular games such as the Internet Phenomena Angry Birds, with added wagering components.

Rose said that state lotteries could offer online versions of scratch-off tickets that would be “indistinguishable from a slot machine.” He said that the new interpretation of the 1961 Wire Act gives states substantial leeway when it comes to gaming. Rose said the interpretation found that the act only restricts sports wagering. Anything states opt to do must be legal under state law, or it may fun afoul of federal statues meant to target organized crime, he said, “which means that states can now do anything they want with some limitations.”

Senate President John Cullerton has already floated the idea of online gaming to the Illinois General Assembly. In May, he introduced House Bill 4148, which would create a Division of Internet Gaming within the Illinois Lottery. Cullerton estimated that online gambling could bring in hundreds of million of dollars in revenue for the state. “Certain forms of iGaming, especially poker, rely on large pools of potential players, and states that move swiftly to design a system that captures the widest audience of participants will have an advantage in terms of long-range success,” Cullerton wrote in a letter to legislative leaders and Gov. Pat Quinn. “As a result, it is necessary that Illinois create a legal template that is flexible enough to allow an organized approach to maximizing revenue in an ethical and socially responsible manner, while also establishing logical standards and regulations.”

The bill was never called for a floor vote. Quinn reluctantly supported the legalization of video gaming in bars and restaurants across the state to fund Illinois’ first capital construction program in a decade. However, his administration was slow to implement the plan, which was approved in 2009. The first machines are reportedly arriving in bars and restaurants this week. Quinn has not been receptive to recent gaming expansions passed by the legislature. He has yet to act on a gambling bill that lawmakers approved at the end of May.

Rose and others believe that many states will take the opportunity to delve into online gaming, either through offerings from their lottery programs or by granting licenses to private companies. Rose noted that the popularity of gambling has gone up and down in the country over time. Lotteries were prominent in the colonies and early years of the nation, only to shrink during the mid 19th century. Gambling enjoyed a resurgence in the South after the Civil War and in the western territories, which is why it is associated with the Wild West today. State lotteries began in the 1960s and began to pop up across the country. After one state in a region created a lottery, nearby states often followed suit to avoid losing revenue to their neighbors. “Lotteries exist for a very simple reason: because states and their residents need the revenue,” Margaret DeFrancisco, president and chief operating officer of the Georgia Lottery, said at the summit. The recent recession and the budget shortfalls in many states means that they country may be primed for another. “When there’s an economic downturn or some other motivation it springs up again.”

De Francisco and Rose said the online shopping habits of young people contribute to making the Internet the next frontier for gambling. “Twenty-two-year-olds do not want to go and sit in front of a little metal box with wheels going around,” Rose said. De Francisco said that bricks-and-mortar lottery vendors have “been the bread and butter of our industry and will continue to be.” However, she said online lottery ticket sales give states a chance to target consumers who otherwise might not play.

Some in the gaming industry say the Justice Department ruling leaves the issue too open and that Congress should pass a basic regulatory framework that states must adhere to. “Given the inherently interstate nature of the Internet, we believe there has to be some level of regulation by the federal government,” said Whitaker Askew, vice president of government affairs for the American Gaming Association, which represents casinos, racetracks and several gambling vendors. He said that states should have the power to regulate and tax Internet gaming. He added that state legislatures should have to vote to opt in to legalizing Internet gambling, and those that do not should have the option of keeping it illegal within their borders. Askew said the federal government should only set a bare minimum of regulation that states must uphold to avoid a “regulatory race to the bottom” among states seeking to accommodate gaming operations. While the members of Askew’s association are likely to find themselves in competition with Internet gambling sites, it is also possible that existing casinos may be granted licenses to run online operations.

De Francisco said she and other state administrators are wary of federal regulation. Rose said that the gridlock in Congress means that a federal law is probably not coming any time soon. “I think the federal boat has sailed,” he said. “It just isn’t going happen. It certainly isn’t going to happen this year.”

But some experts believe that states that turn to gambling may make their economies worse. “Gambling’s effect on our economy is like reverse pump priming. It is taking money away from consumer spending and dumping it basically into electronic gambling machines,” said John Kindt, a professor of business and legal policy at the University of Illinois Urbana-Champaign. Kindt said the Justice Department went too far in its interpretation of the Wire Act. “[The Justice Department’s legal opinion is] an amazing document because the net impact is that a bureaucrat has issued a new controversial interpretation of the 1961 Wire Act, which was designed to attack organized crime. It’s a law that has withstood legal challenges for over 60 years. But this one bureaucrat in the Department of Justice has changed 60 years of precedent, reversing it 180 degrees overnight,” he said in a prepared statement. “The effect this legal opinion will have is that it is slowly removing almost all regulatory oversight of gambling. And once gambling is on the Internet, it’s in every living room, office, school and mobile phone.”

 Kindt said that Congress should evaluate the ruling and consider banning Internet gambling. "States are going to do whatever they think they can get away with to expand gambling simply because they need the revenue. The only way to prohibit it is for Congress to completely ban it again because states need more than a little oversight when it comes to certain things that have the potential to destroy their economies. Internet gambling is public enemy No. 1 in that regard. It’s an incredible economic danger that cannot be overstated."