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HARRISBURG — An effort to tax a lucrative and legally iffy gaming sector appears to be in jeopardy amid Pennsylvania budget talks, potentially threatening a funding stream that could have been a bargaining chip during negotiations.
At the center of the dispute are skill games, untaxed and unregulated devices that resemble slot machines and can be found in bars, restaurants, and convenience stores across the commonwealth.
Gov. Josh Shapiro, a Democrat, threw his weight behind regulating the games in his budget proposal as a way to boost state revenue. His administration projected that legalizing and taxing the machines’ revenues at 42% would bring in $150 million this coming fiscal year, and that the amount would double in the future.
But the effort appears to be veering off track as lawmakers get caught between the powerful skill games and casino interests, which have spent millions of dollars on lobbying and campaign contributions over the years.
That money is deepening existing divides over the role gambling should play in the state. Beyond debates over whether gambling is a social ill or an important revenue source, lawmakers disagree over how to distribute licenses and where to allow casinos.
The push to regulate skill games is also complicated by ongoing litigation over their legal status. Last week, the state Supreme Court agreed to review a lower court ruling that allowed the games to remain available in Pennsylvania.
In light of the court’s decision, state House Appropriations Committee Chair Jordan Harris (D., Philadelphia) told Capitol reporters that “there are some in the building who are now pausing at the moment.” His remarks came after the committee stripped skill games legalization language out of a budget bill.
While skill games go untaxed and get no oversight, casinos pay a roughly 50% tax on slot machine winnings to the state and follow a slew of other rules.
The casino lobby has argued that if skill games are legalized, the devices should be taxed at the same rates as slot machines. State Sen. Frank Farry (R., Bucks), whose suburban Philadelphia district is home to a casino, has introduced a bill with such language, and the proposal has bipartisan support. (There is also a bill, backed by three Senate Democrats, to ban skill game devices outright.)
All of that is a nonstarter for the skill games industry. Manufacturers and their allies argue that comparing the mom-and-pop shops that host the devices to giant casinos — which also can offer online gaming — is like comparing apples to poker chips.
“Skill games are designed to provide supplemental income to businesses,” state Sen. Gene Yaw (R., Lycoming), whose district includes a skill games manufacturer, said in an op-ed this week. “They are important to these establishments for one very unique reason — they must be played in person, on-premises.”
Bills friendly to the skill games industry, including one proposed by Yaw, have called for tax rates as low as 16%. The bill, which also has bipartisan support, offers some regulation. It would ban any locations from offering more than five machines.
Gambling regulation, insiders note, has always split the legislature in unusual ways. The 2004 law that opened the state up to casinos was opposed by a mix of rural Democrats and Republicans.
That divide was evident again in 2017, when the state legalized online sports betting and truck stop slot machines as part of a deal between the GOP-controlled General Assembly and Democratic Gov. Tom Wolf to end a budget impasse. But almost half of state Senate Republicans voted against the deal and the proposal passed the state House by a handful of votes despite Republicans' nearly 40-seat advantage.
Still, pressure to act on skill games is rising. Addressing fears that the machines attract crime, Philadelphia recently restricted them to businesses that have a liquor license or space for at least 30 patrons to eat.
In public remarks last week, state Senate Majority Leader Joe Pittman (R., Indiana) echoed those concerns.
“The parlors that we see opening up are essentially mini-casinos that are unregulated, untaxed, not secure,” Pittman said. “I think that we're sitting on a public safety powder keg if we don't address them.”
He sees this year's budget talks as an inflection point for skill games.
“If we don't get our arms around this in the next couple of weeks, I don't know how we ever really functionally revisit the topic,” he said.
The tax revenue from legalizing skill games, he added, could help solve another thorny issue: providing additional funding for public transit. The skill game tax was one of the few revenue-increasing ideas in Shapiro’s budget plan, and using the funding for transit would address a top priority for Democrats. Agencies across Pennsylvania have warned of a coming fiscal cliff as pandemic stimulus dollars expire that could lead to cut services without additional state aid.
While the commonwealth sits on a $14 billion surplus, Pittman has said he’s concerned about approving spending that can’t be sustained. Putting a “framework” around the games, would lead to revenue that “can help us unlock a couple of those other conversations,” he said.
Without those new dollars, Pittman suggested that an increase in public transit aid could be tied to more state dollars for roads and bridges.
“They have to be done in tandem,” Pittman said. Otherwise, he said he’s “hard pressed to figure out where that revenue stream comes from.”
Shapiro has declined to wade into the specifics of policy debates ahead of the deadline, only saying that there has been “a very productive and a very honest dialogue.”
State House Majority Leader Matt Bradford (D., Montgomery) also declined to comment on tying together the fates of skill games and mass transit, saying he was waiting to see “what the Senate can produce.”
“I have my own personal ideas, but obviously the Senate’s going first,” Bradford said, adding: “If it comes to a point where they're unable to reach consensus in their chamber, we may act.”
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