Betting on New Jersey

#67 © Copyright 2011, I. Nelson Rose, Encino, California.  All rights reserved worldwide.  Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com.

While everyone else has been talking about how to keep state governments from going bankrupt, New Jersey State Senator Raymond J. Lesniak (D.-Union, NJ), has acted.  He wrote, rounded up co-sponsors, and, most amazingly, got his bill to legalize Internet gaming passed in both houses of the State Legislature.

Note, I said “passed.”  As a columnist, with a deadline, for iGaming Business, I do not yet know whether Governor Chris Christie (R.-NJ) will sign, veto or allow Lesniak’s bill, S490, to become law.

But you do.

Since at the time of this writing, Christie had already gone more than a month without saying anything about the bill, my guess is that he will let it become law without his signature.

The decision will be entirely political.  The bill passed with overwhelming, bipartisan support in both houses: The New Jersey Assembly approved by a 63-11-3 vote, while the Senate vote was 34-2 in favor.

But, Christie has political ambitions.  And when you are already governor, that means only three things – no, only one thing with three ways to get there: U.S. Senate to President; Vice President to President; or directly to President.

We know that Christie wants to be President, because he spends so much time traveling around the country telling people he is not running.  That’s the way it is done in the U.S.

And Christie’s political problem is he is a Republican, while his party has been whipped to the far, far right by the Tea Party and similar extremists.

To see what any Republican thinking of voting in favor of Internet gaming is facing, you need only look at the U.S. House of Representatives.  The Republicans won a stunning victory in the November 2010 elections, taking back control of the House after the disasters of the George W. Bush years.  They won because the U.S. is still digging out of the worst economic recession since the Great Depression, with unemployment at staggering heights.  The Republicans claimed that it was not just unemployment, but also growing federal government deficits that got them votes.

Whatever the reason, once they got back into power, the first thing the House Republicans did was try to undo President Obama’s reform of health care.  Then they spent their time fighting against abortion rights.

Christie understands that health care and abortion have nothing to do with jobs or the deficit.  But that is the Republican Party today, the Party whose nomination he has to win if he is going to be President.

So, what do you do if the most motivated members of your party are religious and other right-wing extremists?  Do you come out in favor of Internet gambling?  Or against?  Or say, “It just happened; I didn’t sign the bill”?

Whatever Christie does has enormous consequences for whether Internet gambling will be made legal, state by state, in the next two years.  Christie is a very smart politician and he will see which way the wind is blowing in the Republican Party.  And the Republicans control a majority of state legislatures and even a larger share of governors.  (Politicians in Democratically controlled California are among the few who won’t care if Christie vetoes the bill).

If, while you are reading this, you know that Christie did veto the bill, then there won’t be much expansion of online gaming in the U.S. until 2013, and then, only if Obama is reelected and the Democrats recover some state houses.

If, however, Christie let the bill become law, or, better yet, signed it, then it is a signal to Republicans that, yes, you can raise much needed state revenue through more legal gambling, even on the Internet.

My money is on that position prevailing, because legal gaming is no longer seen as a political career killer.  And the Tea Party, and Republicans, have convinced much of the nation that the major problem is getting governments to balance their books without raising taxes.

Christie is already going to be seen as the governor of Atlantic City.  He wouldn’t be able to run for dog-catcher, if this were 1950.  But this is 2011, when every state except Utah and Hawaii have commercial gambling, and Hawaii legislators are discussing casinos in Wakiki and on cruiseships.

The election results from Iowa in November 2010 show why (I think) New Jersey will be the break-through that opens the door to state legislatures, authorizing online gaming, starting with state lotteries and poker.

In Iowa, religious conservative voters came out in such large numbers last year that they actually removed three State Supreme Court Justices, who had voted in favor of same sex marriage.  Yet, at the same time, they approved extending the lives of their state-licensed casinos by another eight years.  This happened not once, but by large margins in every one of the 17 counties where gaming was on the ballot.  They even approved casinos in a county where the riverboat casino closed in 2007.  They voted in favor of adding casinos in two additional counties.  Only in one tiny rural county did voters appear to not want a casino simply because it is a casino.

So, assuming New Jersey now has Internet gambling, what’s next?  Regardless of what Christie does, California is so desperate for money that it will almost certainly legalize online intra-state poker in the next two years.  The problem, as in almost all states, is how to do that while appeasing the existing gaming operations.

The New Jersey model will work for many states.  Sen. Lesniak’s bill is simple:  If you’ve got a license to operate a casino in Atlantic City, you now also can take the exact same type of bets from people who are physically located anywhere in New Jersey.

This approach solves a lot of political and legal problems.  The Bush Department of Justice (“DoJ”) made it clear that they thought any online gambling was illegal under the federal Wire Act.  They read that law differently from the judges who said it was limited to bets on sports events and races.  And, they said federal prosecutors would go after casinos for even intra-state wagers if a wire so much as crossed a foot into another state.

The Obama DoJ has carry-overs.  But the right-wing religious extremists have been cleared out of the top positions.

And ironically, it was one of the last acts of the Republican controlled Congress that justified the federal government letting the states do what they want.  After all, it was the Republican Majority Leader of the U.S. Senate, Bill Frist (R.-TN), who rammed through Congress, and got Bush to sign, the Unlawful Internet Gambling Enforcement Act, with its express exemption for intra-state wagers.

Sen. Lesniak had wanted to allow international bets, as well.  But that seemed to be too much, even for the Obama DoJ.  Intra-state is O.K.

Allowing present operators to open wagering accounts and use the legal fiction that the betting takes place in the casino has a well-established precedent.

In December, 2000, Congress amended the Interstate Horseracing Act to allow states to decide whether patrons can bet from their homes by phone and computers.  More than 30 states opted in.  The state legislatures merely amend their parimutuel wagering statutes to allow bettors to set up accounts by depositing money; it’s called Advanced Deposit Wagering (“ADW”).  ADW is legal, even though every state limits bets to licensed tracks and off-track-betting offices, because the legislature simply declares that an ADW bet is deemed to take place inside the track enclosure.

Most of the rest of the New Jersey bill is standard stuff.  It’s fun to look at the final version, which contain provisions like this:  “There is hereby imposed an annual tax on Internet wagering gross revenues in the amount of [20%] [15% ] 8% of such gross revenues…”  Interesting reading, for anyone who ever thought that important decisions like tax rates are set only after long, scientific studies.

But the big questions are what does this mean to existing operators, both those still taking bets from the U.S. and those who want to?

Few online operators will get licenses to operate in states like New Jersey.  There are political and legal problems in approving companies that took American bets at a time many considered that illegal.  More importantly, the operators are limited to existing licensees.  If you want to take bets online from residents of New Jersey, you have to own an Atlantic City casino.  And who wants one of those?

There may be more opportunities in other states.  California has dozens of card clubs.  Even if some are not any more successful that boardwalk casinos, at least they would not cost tens or hundreds of millions of dollars.

And the present operators, whether they are casinos, card clubs, tribes or racetracks, will need partners who know what they are doing.

How, for example, are they going to handle the problem of liquidity in a state with relatively few people, especially if there are competing online poker rooms?  The casinos in Atlantic City will probably end up with more online slot machines and blackjack, since you only need one player and a computer to have a banking game.

Will legal intra-state Internet gambling, whether first in New Jersey or California, be the beginning of the end for foreign operators who take bets from the U.S.?  No.  First, there are still legal and political obstacles to legal online sports wagers.

Second, while the Lesniak bill does expressly make it a crime to take bets without a license from New Jersey, there is no way to enforce it.  When Washington state passed a similar law, a few operators did pull out, but only after a lawyer told them to, after the statute was upheld by the State Supreme Court.  That same lawyer would probably tell operators they could wait until a New Jersey Supreme Court ruling.

More importantly, most of the population will still be living in states without legal intra-state betting.  And licensed operators have to take all sorts of information about players, which means winners on those sites will discover that they have to pay federal and state taxes.

On the other hand, licensed operators will be able to take credit cards and advertise freely, including marketing in their own casinos.

But the years of growth are over.  In the long-run, overseas sites will find that most Americans would rather play on a local, licensed site, if they can, than participate in something that they think might be illegal.

END

© Copyright 2011.  Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry.  His latest books, Internet Gaming Law (1st and 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.