Shapiro wants to tax skill games. He must first navigate Pa.’s wealthy, warring gambling interests.

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HARRISBURG — As part of his budget pitch this year, Gov. Josh Shapiro says he wants to regulate and tax skill games to raise tens of millions of dollars in revenue.

In making this proposal, the Democrat wades into a years-old battle for dominance of the gambling industry, which last year contributed $2.3 billion in tax revenue to the commonwealth’s coffers.

The playing field involves three major interests. Casinos, which Pennsylvania legalized in 2004, are represented by a powerful lobby in Pennsylvania and last year earned $3.4 billion from slot machines and table games.

The 17 in operation are heavily taxed and regulated by the Gaming Control Board, with between 48% and 54% of their gross revenue from slot machines, for instance, going back to the state.

Another big player is the video gaming terminal industry. The devices, commonly called VGTs, were legalized as part of a gaming expansion bill passed amid a 2017 budget stalemate. Alongside approving online betting, the law allows a list of approved diesel fuel truck stops to operate up to five of these terminals and taxes them at a similar rate to casinos. As of the end of 2023, there are 71 approved VGT facilities in the commonwealth, run by five different operators.

Finally, there are the makers of untaxed and unregulated skill games, which resemble slot machines and can be found in bars, restaurants, and convenience stores across the commonwealth. The Georgia-based company Pace-O-Matic dominates the industry in Pennsylvania.

Pace-O-Matic claims its machines don’t count as gambling. The games “require interaction and predominate skill to play,” one company official said at a 2020 state House Democratic hearing. Conservative estimates place the number of such machines operating in Pennsylvania in the tens of thousands.

These interests all compete for the same customers. As Richard Auxier, a senior policy associate at the Urban Brookings Tax Policy Center, told Spotlight PA, “The more you expand [gambling], you're just going to be dividing up that pie, rather than growing it.”

Follow the money

As part of its quest to keep operating in Pennsylvania, Pace-O-Matic employs at least 20 lobbyists at seven different firms, which cost the company $1.8 million in 2023. It donated an additional $446,000 to politicians’ campaign coffers in 2023.

The skill games industry’s wooing of lawmakers doesn’t end there. In 2022, Pace-O-Matic sent state lawmakers on an all-expenses-paid trip to a Wyoming rodeo to learn how the industry operates there — a function both of the company’s influence and of Pennsylvania’s lax gift laws, which allow such perks.

Casinos were barred from making financial contributions to politicians until 2018, but still wielded political power before the ban ended and have since stepped up their spending.

As Spotlight PA previously reported, lobbyists and lawyers for Pennsylvania’s largest casino, Bucks County’s Parx, ghostwrote a state senator’s 2019 bill that would have banned skill games.

And in 2023 alone, a PAC funded by Parx executives and board members, such as Chair Robert Green and CEO Eric Hausler, contributed $160,000 to top lawmakers from both parties and chambers.

Proponents of VGTs have also courted lawmakers. Spotlight PA previously reported that Golden Entertainment, a company seeking to make VGTs available beyond truck stops, helped host a glitzy Las Vegas fundraiser for the state Senate’s then-top official, Republican Joe Scarnati. Afterward, the company put thousands of dollars into a campaign committee Scarnati controlled.

On top of those major spenders, Pennsylvania also has on- and off-track horse race betting and state-administered lottery machines. One of the Pennsylvania Lottery’s long-held concerns is that too much expansion of slots-style gambling will cut into its revenue, which is earmarked for services for older adults.

Bars, restaurants, and social clubs that have embraced gaming terminals as a way to drive customers also have a stake in the debate.

Jeff Sheridan, who worked as a spokesperson for former Democratic Gov. Tom Wolf and has since lobbied on behalf of both skill games and VGTs, said he has “spoken directly to bar and restaurant owners about this — it truly can make a difference between them keeping their doors open or not.”

There also remains a faction of anti-gambling lawmakers who must be considered, said Steve Crawford, a legislative liaison and chief of staff for former Democratic Gov. Ed Rendell who helped with the governor’s successful 2004 effort to legalize casino gambling.

“It's not just Republican, Democrat,” said Crawford, who since leaving government has worked as a lobbyist for casinos and the horse racing industry. “Within the Republican caucus, for instance, you have people that are very much opposed to gambling. … How willing are those members of the caucus going to be to allow their leadership to have conversations with the governor's office and the others in the legislature about letting a bill pass?”

Competing agendas

Because skill games aren’t explicitly legal in Pennsylvania, the question of whether the games should be allowed to operate has led to State Police seizures and sparked years of litigation over their status.

“It's the Wild West. There's no other way to put it,” Crawford said of the regulatory status quo.

In this atmosphere, Pace-O-Matic has said it welcomes regulation. Sheridan explained the stance this way: “If I were Pace-O-Matic, I would not want to have to keep having my equipment being seized and having to go to court to get my equipment back.”

In the meantime, Pace-O-Matic has racked up legal victories. Last year, Commonwealth Court affirmed that the games are permissible because gameplay involves some level of skill, rather than pure chance, and also that they are not subject to regulation or taxation under Pennsylvania’s existing Gaming Act. The state appealed the ruling in January to the Pennsylvania Supreme Court.

The commonwealth is leaving tax dollars on the table by not regulating these games. In his budget, Shapiro pitched a 42% tax on daily gross revenue from skill games, which he estimates would yield about $150.4 million for the state in the next fiscal year, and grow thereafter.

Pace-O-Matic has conditions for its embrace of regulation. The company doesn’t want skill games to be overseen by the Gaming Control Board, as Shapiro has proposed. Pace-O-Matic lobbyist Mike Barley argued in a statement earlier this month that the panel won’t be a “fair and impartial regulator.”

As Spotlight PA previously reported, the Gaming Control Board a few years ago aligned with Parx and others in a court fight to declare skill games illegal. It did so after members privately met with casino lobbyists.

Barley added that the 42% tax is “higher than the industry can sustain.”

Still, “we stand ready and willing to discuss these issues in the General Assembly and the Shapiro Administration,” he concluded.

VGTs, which do not include an element of skill and are therefore legally distinct from skill games, are regulated and taxed (at 52% of gross revenue), and are currently confined to truck stops. VGT stakeholders want to be allowed to expand to other locations, though Shapiro’s initial budget proposal doesn’t include them.

Crawford said regulating skill games is a relatively easy proposition for lawmakers, simply because they already exist but are going untaxed. By contrast, he said, when he began working on casino legalization, “there were no casinos,” and the first casinos “had to spend $50 million just to get a license. … It’s an entirely different kind of conversation.”

The Pennsylvania Licensed Beverage and Tavern Association said it favors the expansion of both skill games and VGTs, calling it “a win-win situation” for taxpayers and taverns. But the association added that a 42% tax on skill games is high and “might not work” because it could make the games less appealing to install.

Casinos take a different stance on legalizing skill games. They broadly oppose the expansion of slot machine-like devices outside of their own walls because they fear they will lose revenue as a result.

In a statement, Parx CEO Eric Hausler told Spotlight PA that he considered Shapiro’s skill game tax proposal to be a “good start.”

Parity between the taxes on skill games and casinos is important, he said, because the former industry “does not support the thousands of jobs and invested capital that the casinos do, and we are confident they can operate profitably at the same tax as casinos.”

But he noted casinos also have conditions: If skill games are legalized, casinos want the licensing and supervision rules they follow to protect minors to also apply.

Shapiro’s initial budget proposal doesn’t include such conditions.

Speaking to reporters Thursday, the governor didn't offer any additional specifics on his plan to legalize skill games, but added he was open to "anything else lawmakers would like to bring to us in that space."

"I’d like to see lawmakers stop talking about this issue and start working on it and see what we can do to bring in more revenue for the commonwealth," Shapiro said.

Lawmakers, meanwhile, aren’t necessarily rushing to take firm positions.

One member who asked for anonymity to speak candidly joked to Spotlight PA: "I gotta get a check from both before I make a vote, thanks for the reminder.”

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