Steve Ruddock inside CA poker online bill AB 2863

Just hours before a legislative deadline on Friday afternoon, California Assemblyman Adam Gray, along with Assemblyman Reggie Jones-Sawyer, introduced the state’s latest online poker proposal, AB 2863.

The bill shares many of the characteristics of previous efforts to legalize and regulate online poker, but also includes some new, alternative proposals, as it attempts to solve the core issues that have led to an eight-year online poker stalemate in the Golden State.

Taxes and fees still need to be ironed out

Despite some preliminary numbers coming to light last week, AB 2863 doesn’t possess any specific licensing fee or taxation numbers. AB 2863 has marked licensing and tax rates as TBD (to be determined) but earlier drafts indicated a one-time $15 million licensing fee and a 15 percent tax rate, which is well above some of the more recent California online poker bills that have seen licensing fees of $5 million and $10 million, with tax rates as low as 5 percent.

There is likely a method behind the madness, as these aggressive rates could be needed because of AB 2863’s concession for the state’s horse racing industry.

The $60 million question

The potential game changer in AB 2863 is the bill’s allowance to the horse racing industry. In exchange for the horse racing industry capitulating on possessing operator licenses, AB 2863 would provide it with an annual subsidy of up to $60 million.

Here’s how AB 2863 explains this process:

“This bill would require the payment of an annual regulatory fee, for deposit into the Internet Poker Fund, to be continuously appropriated for the actual costs of license oversight, consumer protection, state regulation, and other purposes related to this bill. The bill would require each licensee to pay a one-time license deposit into the General Fund in an unspecified amount.

The license deposit would be credited against quarterly fees equivalent to an unspecified percentage of the licensee’s gross gaming revenue proceeds, as specified. The bill would require an applicant for an operator license to provide documentation establishing that the applicant is qualified to pay the one-time license deposit through its own net position or through credit directly to the applicant, as specified.

The bill would require the first $60,000,000 collected each fiscal year pursuant to the license deposit and quarterly fees provisions to be deposited into the California Horse Racing Internet Poker Account, which the bill would establish in the General Fund. The bill would continuously appropriate 95% of the funds in the account to the California Horse Racing Board for distribution, as specified, and would transfer 5% of those funds to the Fair and Exposition Fund, a continuously appropriated fund.”

In simpler terms, the state will set up a general fund into which revenue from online poker operators (both licensing fees and tax revenue) will be gathered. Within this general fund will be a second fund, the California Horse Racing Internet Poker Account. Once licensing and regulatory costs have been subtracted from the general fund by the state, the first $60 million of licensing fees and tax revenue collected from online poker operators each year would be set aside for the racing industry.

It’s unclear how much of the upfront licensing fees can be used each year to augment the tax revenue collected to reach the $60 million number, as it could be a set number not to be exceeded, otherwise the fund could dry up very quickly.

For instance, even with a 15 percent tax on gross gaming revenue, the state’s tax revenue cut would be about $32.25 million in Year 1, based on analysts’ estimates of the potential market size in California.

At some point, even with a $15 million one-time licensing fee, this seed money will run out. Even with 20 licensees at $15 million a pop, the general fund would be running on fumes within a decade, and virtually all of the tax revenue gathered by the state would be going to the horse racing industry.

I’d be surprised if this number was anything more than a high-end starting point meant to move racing off of its hardliner license position and bring the industry to the table for discussions. If an annual payment is how the issue will be solved, I suspect the final annual allotment to racing will likely be a fraction of $60 million.

Bottom line: This issue seems far from solved.

Bad actor issue unaddressed

AB 2863 is long on suitability requirements, but doesn’t contain specific “bad actor” language that would prevent entities (namely PokerStars) who accepted wagers from U.S. residents after December 31, 2006 from applying for a service provider license.

Opposition to bad actor clauses has diminished over the past year and a half, as a number of previous bad actor advocates have flipped on this issue, including Caesars Entertainment, and four powerful California tribes: Rincon, Pala, San Manuel, and United Auburn.

However, even though opposition to PokerStars has been eroded, it hasn’t completely evaporated. Earlier this year a coalition of politically powerful tribes led by Pechanga and Agua Caliente reiterated its belief that suitability was still a primary concern.

In a joint letter sent to Assemblyman Gray on February 12 the tribes wrote:

“We also appreciate your commitment to work with us to draft meaningful Suitability Standards for Prospective Applicants. However, to proceed with the suitability language in your current Draft – which our Coalition would otherwise vigorously oppose from the outset – we could not agree to the process you outlined as it would place us at an unfair disadvantage in the process given your request for neutrality.

As we agreed to do concerning the operator fees, we believe your bill at introduction should, as a matter of fairness, contain truly impartial language on Suitability Standards for Prospective Applicants so as not to prejudice our position on this very significant – if not pivotal – aspect of the bill.”

Bottom line: Bad actor clauses could still be more than enough to derail online poker in California, particularly if Pechanga continues to oppose any bill without bad actor language.

Steve Ruddock
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