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By Stephen Caruso | Spotlight PA
Top lawmakers in the Pennsylvania Senate have released a memo calling for the regulation and taxation of so-called skill games, signaling that the issue will be high on the agenda for the second session in a row.
Skill games are the tens of thousands of slot-like machines that have proliferated in Pennsylvania bars, restaurants, and convenience stores in recent years. They are currently unregulated — and untaxed — and many lawmakers believe the state should change that.
However, the issue is convoluted, heavily lobbied, and defies party and ideology. It has festered in the halls of the Capitol for almost a decade.
Senate President Pro Tempore Kim Ward (R., Westmoreland), Senate Majority Leader Joe Pittman (R, Indiana), and two key committee chairs released the memo Wednesday afternoon. Memos from leaders typically get closer attention in the chamber.
The push is about more than just regulation. Taxing skill games would bring in revenue that state Senate Republicans say is sorely needed — both to bolster Pennsylvania’s slowing tax returns, and to cover specific new spending needs.
In particular, they have linked the issue to financial woes in public transit agencies, saying skill games could bring in the steady funding they need to responsibly earmark more money for agencies like SEPTA.
“I continue to default to this issue because, at least in concept, it’s the only revenue stream I’m hearing about that seems to have broad interest,” Pittman told Spotlight PA in December.
In order to come to a deal, leaders will need to reconcile powerful competing gambling interests, all of which have bases of support within the legislature.
Skill game operators and manufacturers say they are a lifeline for small businesses and social clubs. The machines’ legality was in question for years, but operators now point to a 2023 appeals court ruling that found the machines’ payouts are not dictated solely by chance, meaning that they are not covered by existing state gaming law.
However, casino operators, a politically potent lobby, have attempted to restrict if not outright ban the machines, which they view as unregulated competition.
They aren’t the only stakeholders. The horse racing industry, the state lottery, and the owners of the slot-like video game terminals that fill truck stops also have a deep interest in the debate.
Pittman added last month that he was “hoping that we can get something on paper, in front of members” in the new year to start off negotiations with the Democratic-controlled state House and Gov. Josh Shapiro.
Shapiro, a Democrat, called for legalizing and regulating skill games in last year’s budget address. He offered few details at the time, except that the games should be overseen by the state’s gaming control board and that they should be taxed at 42%, a slightly lower rate than what casinos pay on their slot machine revenue. That push failed.
The memo from state Senate Republicans also includes few details. Like Shapiro, they propose having the gaming control board regulate the machines; restricting the devices to “a limited number…at certain liquor-licensed and lottery-licensed establishments across the Commonwealth”; and requiring that “fair and appropriate taxes are collected.” The exact rate goes unmentioned.
Much of the above will likely be opposed by skill game operators.
Industry lobbyist Mike Barley told Spotlight PA last year that 42% was “higher than the industry can sustain.” A soon-to-be reintroduced industry-friendly proposal championed by state Sen. Gene Yaw (R., Lycoming) put the tax rate at 16%. Yaw’s Williamsport-based district houses a skill game manufacturer.
Barley also said he wanted a “fair and impartial regulator” instead of the state’s gaming board. As Spotlight PA previously reported, the board members privately met with casino lobbyists before moving to ban skill games in 2020.
In a statement Thursday, Barley said only that the skill games industry “looks forward to engaging and working through the legislative process to find a solution that truly works for all Pennsylvanians.”
Meanwhile, casinos are pushing for a tax rate on skill games equal to the roughly 50% rate placed on their own slots. They have also lobbied for stricter regulations on businesses that operate skill games, such as requiring video monitoring of the devices and limiting the number in each establishment.
In a statement, Pete Shelly, a spokesperson for the casino-backed Pennsylvanians Against Gaming Expansion, said that without strict rules, the proliferation of skill games “provided cover for underage gambling and no help for compulsive gamblers.”
Once gaming talks start, other groups — such as the producers of video gaming terminals (VGTs) — are quick to jump in. State law currently restricts the devices, which work differently than skill games but are similar to slots, to truck stops and taxes them at 52%.
In an October interview with Spotlight PA, Matthew Hortenstine, chief counsel for VGT producer J&J Ventures, argued that allowing all gaming devices to compete in a free market would provide more tax revenue and a bigger boost to small businesses’ bottom lines.
“What we advocate for is device parity, regulatory parity, [and] tax parity,” Hortenstine said. “I don’t want a leg up on them, but they shouldn’t have a leg up on me either.”
Settling the debate now falls to the divided General Assembly, which just finished a tumultuous and largely unproductive session.
Pennsylvania House Democrats have been quiet on the issue, arguing it is incumbent on Senate Republicans to come to an agreement first. The lower chamber may also struggle over the bill, however. Philadelphia lawmakers, for instance, have previously called for their home city to retain the right to regulate the games at a higher level than the state.
Still, the desire for extra cash come budget time may incentivize the legislature to figure out a deal.
While Pennsylvania has roughly $3 billion in leftover surplus dollars, budget projections expect that to run out by 2026 — and the state’s tax revenue is already slightly below projections this year.
Without balanced budgets in the coming years, the state would be forced to tap its rainy day fund, cut spending, or raise taxes to right the fiscal ship.
Shapiro projected that taxing the games at his preferred rate would bring in $150 million in the first year and that annual revenues would climb after that.
Asked about skill games at an unrelated news conference Thursday afternoon, Shapiro said the taxation and regulation of the machines is “unfinished business” from last session and that he was encouraged by the Senate GOP memo.
A Shapiro spokesperson added that the governor again intends to propose the item in his budget address on Feb. 4. The details of the proposal, the spokesperson added, are pending.
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