On May 19, 2010, Congressman Sander Levin (D-MI) held a hearing of the powerful House Committee on Ways and Means to discuss the tax proposals related to proposals to federally legalize i-gaming in the United States. The Ways and Means Committee hearing principally focused on the tax law aspects of legislative proposals to establish a federal i-gaming regulatory framework in the United States. Long-standing congressional supporters of i-gaming, Congressman Barney Frank (D-MA) and Congressman Jim McDermott (D-WA), testified at the hearing, as well as the ardent opponent to federally legalizing i-gaming, Congressman Bob Goodlatte (R-VA).
As has been widely reported in prior issues of Dickinson Wright's Gaming Legal News, Congressman Frank introduced the "Internet Gambling Regulation, Consumer Protection, and Enforcement Act" ("IGREA") (H.R. 2267) on May 6, 2009. Congressman McDermott introduced companion legislation, Internet Gambling Regulation and Tax Enforcement Act of 2009 (the "I-Gaming Tax Act") (H.R. 2268), which would establish a federal tax on i-gaming.
Congressmen Frank and McDermott Challenge the Policy of the Status Quo
The House Ways and Means hearing elicited a succinct assessment of the current state of i-gaming in the United States from Congressmen Frank and McDermott. I-gaming was ostensibly made illegal by the enactment of Unlawful Internet Gaming Enforcement Act ("UIGEA") in 2006. UIGEA mandates financial institutions to develop procedures to identify and block payments to i-gaming sites. Congressman McDermott stressed that UIGEA has not been effective to achieve its ultimate policy goal of eliminating i-gaming in the United States. Rather, Congressman McDermott testified "[d]espite current U.S. laws aimed at preventing Internet gambling, every day millions of Americans gamble on the Internet." Effectively, UIGEA has pushed i-gaming to become a massive, unregulated black market.
Congressmen Frank and McDermott identified two consequences of the current unregulated United States i-gaming market. First, Americans are exposed to i-gaming that may not provide adequate safeguards against fraud, identity theft, and player protections. Second, billions of dollars of potential revenue are sent offshore.
Congressman McDermott's I-Gaming Tax Proposal
Congressman McDermott offered testimony explaining four contours of a new federal tax regime on i-gaming encompassed in the I-Gaming Tax Act. First, the I-Gaming Tax Act would impose a tax on winnings individuals receive from i-gaming. Second, the existing federal wagering tax would be expanded to reach all wagers made with federally licensed i-gaming operators. Third, a 2% tax would be imposed on player deposits with i-gaming site operators. Finally, tax revenue would be increased by more businesses being subject to United States income tax.
Gazing at the Crystal Ball
The House Ways and Means committee hearing offered some insight with regard to policy arguments favoring legalizing i-gaming. Gazing into the crystal ball, what can be gleaned from the House Ways and Means hearing? Initially, at least, the answer is not much. The hearing was merely a fact-finding exercise relative to potential changes in federal tax law. There remain substantial obstacles to enacting IGREA and the I-Gaming Tax Act in 2010, including: an unpopular Congress; the mid-term elections fast approaching, which will both limit the legislative session days and cause Congress to shy away from controversial legislation; and, the majority Democrats still have several high priority legislative agenda items awaiting action.
As the dust settles, there was, however, at least one ray of sunlight that shined through. Congressman Goodlatte, an ardent opponent of establishing a federal i-gaming regulatory regime, stressed the point that "[UIGEA] only applies to transactions that violate state and federal gambling laws, thus continuing to leave the decision of whether to allow or prohibit gambling primarily with the states." Hence, Congressman Goodlatte emphasized the point the states can carry the torch to regulate i-gaming in the United States. In summary, gazing at the crystal ball really reveals that state legislative chambers hold the key to authorizing i-gaming in the United States in 2010.
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