“Online Poker, an Untapped Source of Tax Dollars”
Currently in the U.S., Internet gaming operates outside of our economic and revenue system. Despite this fact, it enjoys widespread popularity in the U.S. and has grew into a substantial industry. Within this industry, online poker has become the dominant factor for the significant growth in Internet gaming. It would appear that this growth would continue to dominate; however, in 2006 the U.S. government passed the Unlawful Internet Gambling Enforcement Act (UIGEA) in response to this online poker boom. In brief, the act prohibits any American poker player to fund an online poker site account in conjunction with a financial institution. The basic reasoning behind the UIGEA legislation is that companies that run offshore gambling sites, with large numbers of U.S. based customers, may be involved in other criminal activities. Also, unlike legal gambling businesses in the U.S., the government receives no tax revenues from offshore operations.
The act caused panic and frustration among many players and caused many internet poker companies to leave the U.S. market (most notably “Party Poker”). However, despite the legislation some sites saw this as a business opportunity to absorb the displaced players, and these companies continue to thrive today. For example, according to pokerscout.com in 2007 Poker Stars (one of the sites that stayed in the U.S. market) broke an online poker traffic record that was previously held by Party Poker.
So right now you may be asking: How can these online poker sites continue to be profitable in the U.S. with the enactment of UIGEA? Well first of all the UIGEA does not prohibit a person from playing online poker, it prohibits the transfer of funds from an U.S. financial institution into an online poker account. The answer is simply people and the poker sites have found alternative ways to transfer funds. For example services like ewallet; ewallet works just like PayPal does for EBay. Also some sites accept online phone cards that you can purchase with your visa card, and then you use the online phone card to fund the poker account. Basically these alternative ways disguise the direct transfer from a financial institution and have been very effective.
Rather than trying to prevent Americans from playing online poker, the Federal Government should embrace it. By taking an opposing position on internet gaming, including internet poker, the government has denied itself an important source of potenial revenues and the ability to regulate this industry. Before the enactment of UIGEA, there was no Federal legistation governing online poker. Instead of this prohibiton, the US should pass legislation to establish online poker as a viable US business activity and collect the tax revenues with that activity. Considering the magnitude of the Internet poker industry, the Federal Government could collect a significant source of revenue after incorporating this industry into our economy. Estimates of Federal revenues based on the existing Internet poker market, if regulated and taxed, would generate potentially over $3.3 billion annually in new taxes.
If appropriate legislative action were taken, potential sources of revenue would come from tax revenues from individual income taxes, user fees, and corporation income taxes. Revenue associated with individuals would simply be the income tax paid on their winnings. Conservative estimates suggest that individual income taxes alone would increase Federal revenues by approximately $2.5 billion each year. Revenue associated with corporations would result from those Internet gaming businesses that locate in the U.S., and as other U.S. corporations do they would pay income taxes on the net revenues associated with their business activity. Additionally, many industry analyses anticipate that such land based casinos as Harrah’s, MGM, or Trump would immediately enter the online market if legalized.
The UIGEA is causing the U.S. to miss out on billions of tax revenue that wouldn’t come from exisitng taxes or even increasing the federal deficit. The act prevents casinos and legal card rooms based in the U.S. from entering the online poker market that continues to grow and expand, supported in large by US activity. Also these Internet poker companies are located offshore, meaning all this potential tax revenue from American players is going off to other countries. According to a report from the Poker Players Alliance; to the extent that casinos based in the U.S. would enter the online poker market or that offshore companies would relocate in the U.S., income taxes on corporate profits alone would result in approximately $350 million in additional tax revenue. In addition to Federal revenues, it is expected that these businesses would be subject to state taxes as well. For most states income tax systems determine state tax liabilities based on the Federal tax base. As the Federal base increases, it is likely that state revenues would increase by approximately $1 billion.
Legislation to regulate and tax Internet poker should be passed, instead of trying to ban it all together. In these times of crushing federal deficits, a few billion dollars in new tax revenues would be helpful to the government.