Policy Documents

Online Gambling Tax Could Hit the Jackpot

Eli Lehrer –
July 28, 2010

It’s time to regulate and tax Internet gambling. When a Congressional committee begins considering the issues Tuesday, conservatives should get on board. Current federal law concerning gambling imposes a significant economic burden and doesn’t jibe with Americans’ clearly expressed preference for legal gambling. The best and most practical alternative, for now, is federal regulation and taxation. Such a system deserves serious conservative consideration because it is consistent with a conservative conception of regulation and would help to avoid broad-based tax increases.

Quite simply, the current system of federal laws intended to prohibit nearly all online gambling doesn’t work at all. The most important law and recent law, the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) was pushed through the Senate in the dead of night (literally) and sets up a burdensome and expensive system that requires the monitoring of nearly every internet banking transaction to make sure that it doesn’t involve gambling. In addition to costing a lot – for every major banking group and it’s probably contributed to the recent end of free checking accounts for many — the law is impossible to enforce anyway. (Google “online gambling” if you don’t believe that.)

Were gambling still considered a disreputable activity or even a vice, “they’ll do it anyway” would be a weak argument. But 48 states allow their residents to place legal bets and nine of the ten largest have commercial or Indian-run casinos. Quite simply, the social debate over legal gambling has ended and the forces that favor it have won. The relevant social policy question is: “How does one regulate gambling?”

The opaque nature of gambling means that the government should regulate it in order in order to prevent fraud. Just as it’s fraud to sell insurance or lend out bank deposits without having the resources necessary to pay off claims or honor withdrawals, it’s fraud to take bets that one can’t pay or run a game with odds different than they appear. And government should prevent fraud. Gamblers, just like insurance policy or bank account depositors, don’t know much about the financial situation of gambling operators or the operation of gambling devices. The need for trade secrecy makes it undesirable for gambling operators to let them have this information. Particularly online, where operators have to provide few amenities and make few capital investments, it would be quite easy for a dishonest operator to drive out the honest ones away before people catch on. Even if it weren’t necessary, a critical mass of gamblers demand government regulation: even the seediest looking gambling website today at least claims to already have government or tribal regulation. Right now, Americans who gamble online pay the bureaucratic costs of foreign government regulation and the price of UIGEA but, if they have a problem, they can’t necessary avail themselves of a credible, nearby English-speaking court system. (The bill before Congress, in any case, lets states set up their own regulatory systems if the Federal government falls down on the job.)  Since American society approves of gambling and Americans gamble online in large numbers, it behooves the government to get into the gambling regulatory business.

If the government regulates gambling, therefore, it should also tax it for at least two reasons. First, regulated bodies have always paid the costs of their own regulation and online gambling shouldn’t be any different. Second, online gambling would provide a way to increase federal revenue without raising any broad-based tax. Even if strong economic growth buoys tax revenues, current deficits are so large that federal revenues just about match “mandatory” spending for entitlement programs and debt.  The cuts necessary to achieve a balanced budget without any source of new revenue would involve shutting down the national parks, ending healthcare for veterans, closing the federal courts, disbanding most of the military, and doing a lot of other things that only the most wild-eyed crazies of the left and right find desirable. Taxes on online gambling will reduce the inevitable need to raise other taxes to preserve the necessary core functions of government.

In short, sensible, minimalist, conservatives should support policies that tax and regulate online gambling.