Bills would legalize Internet gambling in Michigan, but only through casinos

CORRECTION: An earlier version of this article incorrectly stated that online gambling would only be allowed in Michigan casinos under proposed legislation in Lansing. In fact, the bills would allowed Internet gambling anywhere in the state, but only brick-and-mortar casinos could get a license to offer it, and bets would be legally considered to have taken place within casino walls. 

LANSING — The push to legalize Internet gambling has states betting on potential tax revenue, including in Michigan, where a bill in Lansing could face an uphill climb. 

That’s partly due to a quirk in a Michigan constitutional amendment that requires most gambling expansions to go before voters, and some analysts say the proposal on the table could limit the potential payoff to the state and siphon tax dollars away from the city of Detroit.

Backers of a plan to allow Detroit’s three commercial casinos and casinos owned by Native American tribes to legally offer online poker and card games say Michigan could net millions of dollars in new tax revenue. Today, companies that run gambling websites are unregulated in Michigan and pay no state or city taxes.

The legislation pending in the Senate would make Michigan the fourth state to legalize some form of Internet gambling, after New Jersey, Nevada and Delaware, with more states considering following suit. In Michigan, a player could place a bet from anywhere inside the state, though that wager would be considered to have been placed at the licensed casino running the site the player is using.  

That could be a way around a state constitutional amendment adopted in 2004, which requires a majority of voters statewide to approve any expansion of gambling in Michigan — unless it’s to be offered at Detroit’s three casinos or at casinos run by tribes. While it’s possible supporters of the idea could finance a ballot drive to permit Internet gambling anywhere in Michigan, it’s not certain they’d win, partly given opposition from a coalition that has support from casino mogul Sheldon Adelson.

About the gambling bills

Senate Bills 203-05, led by Sen. Mike Kowall, R-White Lake Township, would license Internet gambling in Detroit’s three commercial casinos, as well as tribal casinos.

Under the bills, the Michigan Gaming Control Board, which regulates casinos, would license casinos and Internet game vendors that could supply their products or services to casinos.

Internet gaming revenue would be taxed at 10 percent, though it could be lowered to match a rate agreed to by state administrators and tribes in their gaming compacts since tribes are considered sovereign nations and can’t be taxed.

A casino licensed under the bills would have to take security measures to prevent fraud, money laundering and unauthorized access. The state would be able to keep a database tracking people who were banned from creating an account or participating in online games.

The bills passed a Senate committee 7-1 in March, with Sen. Peter MacGregor, R-Rockford, the lone dissenter.

The bill also could set up a fight between Detroit’s casinos and those across the state run by tribes, because tribes contend the rules stack the deck against them by requiring them to give up their sovereign immunity to get licensed.

Sen. Mike Kowall, of White Lake Township, said the brick-and-mortar licensing requirement would bring stability and uniformity to a black-market system that offers little protection to users who turn over their personal information to unauthorized website operators, some of which are based offshore.

He said he also sees the legislation he sponsored as “a revenue source for a state that sorely needs it.”

Kowall is basing his forecast in part on estimates shared by Amaya Inc., a Quebec-based company that owns online gambling brands PokerStars and Full Tilt. Amaya contends Internet games at Detroit’s casinos alone could generate between $45 million and $59.4 million in revenue based on figures from New Jersey, according to testimony provided by former Michigan Attorney General Mike Cox. His Livonia-based Mike Cox Law Firm represented Amaya in Lansing.

An analysis conducted for Amaya by The Innovation Group, a consultant for the gaming and hospitality industry with offices in Colorado, Florida and Louisiana, estimated that the state could take in $32 million in tax revenue, given an average online gaming market that could top $319 million by 2019.

All figures used New Jersey as a model.

Senate fiscal analysts say Detroit wouldn’t benefit financially from any new tax on online games. And they’re far less convinced the state would see a windfall.

MGM Grand Detroit, MotorCity Casino Hotel and Greektown Casino-Hotel paid a combined $112.2 million in state tax revenue in 2016, and another $175.5 million to Detroit, according to data from the Michigan Gaming Control Board, which regulates casino gambling. The casinos’ net win, or revenue left over after winners are paid, is taxed at 19 percent and earmarked for the state School Aid Fund and the city.

Under the bills, internet gambling revenue would be taxed at 10 percent, all of which would go to the state. Because online gambling would not generate tax revenue for the city, Detroit could lose between $1.5 million to $4.5 million if online players siphon off the casinos’ traditional gambling revenue, analysts with the nonpartisan Senate Fiscal Agency estimated.

Kowall said he disagrees with Senate analysts’ projections and believes internet games would enhance casinos by attracting more gamblers.

Other states

The issue is another example of the clash between technology and government, which often don’t move at the same pace. Nevada offers online poker, while Delaware — a much smaller market — allows its three casinos to manage online poker and casino games. Nevada and Delaware also have created an online poker network for players from both states.

New Jersey has the most robust system, with casino and card games run through its casinos. In the first year, the number of accounts rose from about 32,000 to more than 506,000. Last year, New Jersey’s legal internet gambling revenue topped $196 million.

Kowall said his legislation would allow Michigan to network with other states that also have authorized internet gambling to increase revenue.

The legality of internet gambling has been an open question after former President Barack Obama’s Justice Department in 2011 ruled that the federal Wire Act of 1961, which banned online gambling, only applied to sports betting.

There is some uncertainty over the future, however. New Attorney General Jeff Sessions has said he could revisit the Obama-era decision.

And competition for gamblers pits privately owned casinos against tribal casinos in their own states, other casinos in nearby markets — for instance, Toledo — and expanding state lotteries.

Online gambling made up much of the growth in U.S. gambling markets in 2015 and could offset losses that can happen as brick-and-mortar gambling operations steal customers from one another, the National Conference of State Legislatures wrote in December.

MGM Grand Detroit, MotorCity and Greektown have not publicly taken sides on the three-bill package, though it’s not a stretch to say they like the concept.

“We believe that internet gaming could offer a new and exciting product for Detroit casinos,” Gayle Joseph, vice president of communications for Jack Entertainment LLC, the Dan Gilbert-affiliated entity that owns Greektown, said via email.

Representatives for MGM Grand and the Marian Ilitch-owned MotorCity Casino declined to comment. Mary Kay Bean, a spokeswoman for the gaming control board, said the agency believes the impact of the bills is still uncertain and hasn’t taken a position.

Amaya stepped up its lobbying efforts in Michigan to more than $109,000 last year, a 56 percent increase over the $70,000 the company spent in the state in 2015 — and 279 percent higher than $28,800 in lobbying expenses in 2014, according to state records.

Tribes opposed

Although tribes would be allowed to apply for internet gambling licenses, they remain opposed to the bills in part because they first would need to waive their sovereign immunity — which means agreeing to be regulated by the Michigan Gaming Control Board and pay taxes, as Detroit’s commercial casinos do.

Tribes also could choose to negotiate internet gambling provisions in their state compacts, a process tribes say would take longer than it would take a Detroit casino to be licensed.

Leaders of the Saginaw Chippewa Indian Tribe, which runs Soaring Eagle Casino & Resort in Mount Pleasant, and Nottawaseppi Huron Band of the Potawatomi, which runs Firekeepers Casino Hotel in Battle Creek, argued in a letter opposing the bills that the current language “creates a licensing system that is inherently unfair to Indian tribes.”

Tribal leaders could decide that the introduction of internet gambling at casinos violates exclusivity provisions in their state gaming compacts, which grant tribes the right to be the sole casino operator in a given geographic area in exchange for making revenue-sharing payments to the state. Tribes are considered sovereign nations and can’t be taxed. Six of the state’s 12 tribes paid $60.4 million to the state in 2016, according to the gaming control board.

And rebellion by tribal casinos over gambling expansions has happened before.

The Gun Lake Tribe, which operates a namesake casino in Allegan County, stopped making its revenue sharing payments in the 2015 fiscal year after the state introduced online lottery games, claiming the state violated its exclusivity clause. It resumed payments in 2016.

Tribal casino payments are used to support the Michigan Economic Development Corp. The Gun Lake Tribe’s decision created a $7 million hole in the MEDC’s budget, leading to layoffs and other cuts.

About The Author

Lindsay VanHulle

Lindsay VanHulle covers business and Lansing for both Bridge and Crain's Detroit Business. She can be reached here. 

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Comments

Mary
Mon, 04/10/2017 - 8:35am

Just wondering how the state would make out on this if it brings in less than the Tribes are currently providing in revenue sharing? The estimates are between $49-$59 million from the online gaming and it currently receive over $60 million from Tribes. Tribes would eliminate and have to give up sovereignty to be licensed. I don't see how any of this works to the state's benefit. Am I missing something here?

Rich
Mon, 04/10/2017 - 1:51pm

Of course not figured in is the extra hardship encountered by the players. More welfare, more food stamps, higher medical costs. You don't think any gambling operation is going to be set up to lose money, do you. Why is it that expanded gambling affects the poor the most. Whoever sponsored this must be getting big bucks from the casinos.

Jack
Mon, 04/10/2017 - 6:36pm

And more embezzlements.

Michaelpat
Mon, 04/10/2017 - 3:15pm

Look to Colorado for real tax revenue increases. Legalize marijuana. 17.9% tax=big bucks.

Zeke
Tue, 04/11/2017 - 12:49am

Just another help the poor get poorer and the rich get richer.
Say while we are at it lets put pedometers on everyone and charge by the 100 steps with a discount per mile. This could make billions for the state to pay more to the congress in Lansing and allow them to go to a part time congress which would save the state millions.
That way everyone wins - right?