#166 © Copyright 2010, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I Nelson Rose, www.GamblingAndTheLaw.com

The Great Recession may mark the beginning of the end of the U.S. ban on Internet poker.
On May 28, 2010, State Senator Roderick (“Rod”) D. Wright (D-Inglewood) introduced SB 1485, inartfully named, “The Internet Gambling Consumer Protection and Public-Private Partnership Act of 2010.” At the very least, the IGCPP-PPA will undo the UIGEA, the Unlawful Internet Gambling Enforcement Act, at least for California.
SB 1485 would authorize intra-state online poker and other “authorized games” in The Golden State.
And it is gold that is making its passage possible, or actually, the lack of gold and other forms of money in the state budget. The only reason Internet gambling is being considered is because California is desperate for anything that will bring in state revenue.
How desperate? We will be voting in November to legalize marijuana, for the tax revenue.
Ironically, California’s budget deficit was so great last year that a movement to legalize Internet poker could not get off the ground. State legislators felt they did not have the time to worry about a controversial issue that might raise a few hundred million dollars, when the budget deficit was in the tens of billions of dollars.
So, instead, sales taxes were raised to the highest in the nation, and all government services were cut.
But, this year, the public won’t stand for more taxes, and there is nothing left to cut. By law, California must have a balanced budget. But there is literally no way to raise the $26 billion the state needs, this year alone, without causing a lot of people a lot of pain. So every idea, no matter how far out, is being considered.
As Sen. Wright responded to a critic who contended online poker would raise only $25 million, not the projected $250 million for the state, “That’s $25 million that we don’t now have.”
The budget crisis has changed the political fight.
The California Legislature used to decide gaming disputes based on which of these players had the most influence: horseracing interests, the few large and many small licensed cardclubs, and federally recognized tribes. Over the past few years, the tracks lost their voice; tribes became tremendously powerful, but split; small cardclubs disappeared by the dozens; and large cardclubs rode the poker wave, to prevent being washed out by Indian casinos.
But Sen. Wright does not care that much about gambling, and he is uniquely not subject to the political influence of California’s powerful and rich gaming tribes. An African American in a safe district that takes in Inglewood and Watts, Wright was elected three times to the State Assembly. He recently moved up to the State Senate, defeating an opponent funded by some casino tribes opposed to Internet gaming.
Sen. Wright, Chair of the Governmental Organization Committee, which oversees gaming, is an influential part of the Democratic Party, with overwhelming majorities in both houses. The Great Recession, and wild overspending when the economy was strong, has created a crisis for Democrats. The Legislature is now faced with cutting necessary services and pay to teachers and other government workers, which means hurting their constituents – labor unions and social program beneficiaries. So, Wright does not care if the tribes or anyone else is upset, if legalizing intra-state Internet poker brings in additional revenue to the state.
Politics also helps explain some of the more unusual aspects of SB 1485. For example, the power to grant three five-year contracts for Internet gaming hub operators was given to the Department of Justice, not to the California Gambling Control Commission, the government agency that already regulates gaming. The Department is headed by the Attorney General, Edmund G. (“Jerry”) Brown, Jr., a Democrat, and the party’s likely nominee for Governor. The Democrats in the Legislature wanted to give this power to Jerry Brown, rather than to the Commission, which was appointed by the current Governor, Arnold Schwarzenegger, a Republican.
Under SB 1485, there will be three competing hub operators, who can make agreements to share players to increase liquidity. The odds are stacked in favor of California’s presently licensed cardclubs and compacted gaming tribes, but anyone willing to incorporate and operate from the state, has a shot.
Criteria for licenses and work permits is the standard “person of good character, honesty, and integrity” “prior activities, criminal record, if any, reputation, habits, and associations do not pose a threat to the public interest,” etc. But the bill requires a scoring system, with factors including “quality, competence, experience, past performance, efficiency, reliability, financial viability, durability, adaptability, timely performance, integrity, security, and the consideration promised to the state.”
The last means this will turn into an auction, with the company offering the most money getting one of the licenses.
The other two will be California based. Preferences are to be given to cardclubs and tribes, but also to small and micro businesses; disabled veterans; and locations of hub facilities in distressed areas or enterprise zones or closed military bases.
Losing bidders are not locked out. SB 1485 provides lots of opportunities for experienced Internet operators and entrepreneurs to participate as subcontractors and suppliers. Since California has a population larger than Canada, a lot of people are going to be looking at this very closely.
California cardclubs and gaming tribes will be operating skins through these hubs. A player signing up at the Bicycle Club, for example, will see that club’s name on his screen’s poker table, even though he will be playing against players who see Commerce Casino and Morongo Casino on their “felts.”
The major problem with the proposal is the tax rate, which the bill carefully declares is not a tax. Hub operators have to pay the state 20% of “gross revenues.” But this is not gross gaming revenue (“GGR”). “Gross revenue” is defined as “the total amount of money received by a hub operator from registered players for participation in authorized games” – which sounds like deposits. This is much higher than the bills pending in Congress. In fact, this would be the highest gaming tax in the country.
It is difficult to compare a tax on deposits with one on GGR, and a non-banking game like poker with a casino banking game like blackjack. But the easiest way to see the problem is that SB 1485 is a 20% tax on deposits, while a casino only has to pay taxes on the amount of the deposit it wins. Since it is common for a casino to have a net win of about 20% of deposits (the drop), it is clear that a tax of 20% of deposits would take 100% of a casino’s GGR.
The bill has a few other quirks. It makes it a crime for anyone in California to play any unlicensed gambling game over the Internet. But Californians are not going to like the idea of police raiding peoples’ home to see if they are playing poker on foreign sites.
Players must be registered, physically present in California and at least 21. Since the main purpose of the bill is to gain revenue for the state, including income tax on winners, players have to give their Social Security numbers to register. And operators have to withhold 5% of tournament winnings for state income taxes, if the prize is more than $600 and at least 300 times the tournament charge.
There are lots of player protections: no credit, self-exclusion, and setting their own limits on daily deposits and on losses and hours of play. But players can play more than one game at a time.
This shows one of the major problems with SB 1485: The bill has page after page of stuff that should be in regulations, not legislation. No one knows how all this is going to work. But instead of empowering an agency to make the rules, SB 1485 requires approval from the California Assembly, Senate, and Governor, every time a minor procedure needs to be changed.
I expect SB 1485 will pass, though with amendments. It will also immediately be challenged by a few tribes that fear the competition, rightly or wrongly. Their legal argument will be that their tribal-state compacts give them exclusive rights to operate gaming devices. If they do not have exclusivity, they no longer are obligated to share gaming revenue with the state.
Legally, the argument probably won’t work. The State Constitution did not give the tribes the exclusive right to have gaming devices, only slot machines. Betting on a home computer does not turn it into a slot machine. And even if it does, California already allows it, with bettors able to wager on horseraces from their homes through advanced deposit wagering.
Politically, these tribes have to be careful that they might win this case, and lose the war. If the state is not going to get any share of the tribes’ gaming revenue, what is to stop the California Legislature – desperate for money – from legalizing commercial casinos throughout the state?
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© Copyright 2010. 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.