The Experts Speak—Incorrectly—on Internet Gambling in New Jersey

By Bennett Liebman
Government Lawyer in Residence
Government Law Center
Albany Law School

In 2013, the New Jersey state legislature passed a bill authorizing Internet gambling in the state through casinos physically located in Atlantic City.[1] The legislature authorized Internet gambling only for intrastate transactions within New Jersey,[2] and the law required “that all hardware, software, and other equipment that is involved with Internet gaming will be located in casino facilities in Atlantic City. All that is needed by a customer is a “computing or similar device of general application and a communications connection through a common carriage or similar medium.”[3] The entire gambling “transaction will take place entirely on the servers and computer equipment located in the casino based in Atlantic City.”[4] By this action, the legislature authorized New Jersey residents—physically located in New Jersey—to bet on virtual slot machines and a host of table games such as baccarat, craps, blackjack, roulette, and poker.

The legislation has a long history in New Jersey. Legislation authorizing in-state casino wagering was introduced as early as 2001,[5] and continued to be offered into the 2010-2011 legislative session. Basically, no action was taken on Internet gambling bills until 2010. In 2010, seven senators introduced S. 490. The bill provided that “all games, including poker, which may be played at a casino, as well as variations or composites thereof, may be offered through Internet wagering.”[6] The servers for the games were required to be located in Atlantic City. The initial tax on the wagers was set at 20% of gross revenue,[7] and a portion of the revenue would be provided to the State’s ailing horse racing industry.[8] The Office of Legislative Services refused to issue a fiscal estimate on the bill, finding that much of the information on future wagering was unknown.[9]

Nonetheless, the bill pass passed the legislature easily in January 0f 2011. The Assembly passed it by a vote of 63-11, and the Senate concurred in a vote of 35-2.[10] The bill, however, was vetoed by Governor Christie on March 3, 2011.[11] The Governor, through an absolute veto,[12] agreed with the intentions of the bill’s authors. Christie said, however, he was worried the bill would expand gambling “in a manner that is contrary to the public’s sentiment with regard to these activities.”[13]
The New Jersey State Constitution requires casino gambling to be restricted to the territorial limits of Atlantic City. Christie rejected the argument that by placing servers in Atlantic City, the bill would satisfy constitutional requirements. However, nothing contained in the legislation would prohibit commercial establishments outside of Atlantic City, such as nightclubs, bars, restaurants, cafés and amusement parks, from offering Internet gambling opportunities in order to attract patrons or customers, potentially leading to the creation of commercial gambling locations outside of Atlantic City.[14] The Governor was concerned that simply locating the servers in Atlantic City would be a legal fiction that would not be authorized under the State Constitution. The Governor wrote, “Senate Bill No. 490 seeks to avoid this requirement by deeming all Internet wagers as being placed in Atlantic City, even if the person placing the bet is outside of the boundaries of the City. In my view, the creation of a legal fiction deeming all wagers to have ‘originated’ in Atlantic City cannot overcome the clear and unambiguous language of the State Constitution.”[15]

The governor was also concerned that moneys from this expansion were to go to the horse-racing industry, and it was his contention that the horse-racing industry should no longer receive subsidies from the State.[16]

In the next legislative session, the legislature went about trying to craft an Internet gambling bill that would meet the governor’s requirements. The legislature was also aided by an opinion issued by the United States Department of Justice that the federal Wire Act

The legislation proposed in 2012[20] was largely similar to the legislation that was previously vetoed. However, the bill made no allocations to the horse-racing industry, and the tax rate was increased to 20% of gross revenues. The bill passed the Assembly by a vote of 48-25 and the Senate by a vote of 33-3. It was sent to the governor for his approval in December of 2012. The Office of Legislative Services would not estimate the increased State revenue that would come from the bill.[21]

This time, Governor Christie did not absolutely veto the bill. Instead, on February 7, 2011, he issued a conditional veto.[22] The conditional-veto power allows a governor to “recommend that an amendment or amendments specified by him be made in the bill, and in such case the Legislature may amend and reenact the bill.”[23] In this instance, Governor Christie submitted a number o recommended amendments, including additional support of problem gambling treatment programs, new ethics provisions, and a ten-year sunset on the law. He basically supported the bill, writing, “I have concluded that now is the time for our State to move forward, again leading the way for the nation, by becoming one of the first States to permit Internet gaming. I authorize this step towards modernizing Atlantic City’s entertainment attractions cautiously, with carefully constructed limitations that will ensure the highest integrity and the most robust oversight.”[24] The legislature swiftly agreed to the governor’s proposed changes. On February 26, 2013, the Assembly passed the bill by a vote of 69-5, and the Senate voted 36-1 in support of the bill. Internet gaming would come to New Jersey with the fiscal year commencing on July 1, 2013.[25]

The Data on New Jersey Internet Gambling

Given the logistical requirements of creating a regulated intrastate Internet gambling system for New Jersey, it took about nine months to put the system online. Internet gambling began in New Jersey on Thursday, November 21, 2013.[26] Thus, the figures for the 2014 fiscal year (which ended on June 30, 2014) only encompass 60% of that year. For that fiscal year, the Internet gaming win was $69.4 million. This resulted in state tax revenue of $10.4 million. Of the $69.4 million win, $19.8 million, or 28.5% of all Internet gambling revenue, was derived from Internet poker. The remainder was wagered on other authorized Internet games. Internet poker accounted for $3 million in tax revenue. In the 42 days that Internet gambling was operational in 2013, poker accounted for 49% of the Internet gambling win in New Jersey.[28] Poker revenue decreased significantly over the next six months.

For the 2014 calendar year, Internet gambling win was $122.9 million with poker accounting for $29.1 million of the win (23.7%). Total state revenue was $18.4 million with $4.4 million coming from poker.

In the 2015 calendar year, Internet gambling win was $148.9 million with $23.8 million from poker (16%). Total state revenue was $22.3 million with $3.6 million from poker.

In 2016, Internet gambling win increased significantly by 32% to $196.7 million. Poker only accounted for $26.5 of the Internet win (13.5%). Total state revenue was $29.5 million in 2015 with $4 million from poker. Internet gambling win was 9.4% of the gambling win at land-based casinos in New Jersey.

Media accounts for 2017 seem to show that there will be another increase in Internet gambling in New Jersey for 2017, with Internet win reaching in excess of $250 million.[29] At that level, state revenues would reach $37.5 million.

The Expert Predictions

Despite the pickup in the performance of Internet gambling in the past few years in New Jersey (so that Internet gambling can now be viewed as a net positive), the fact is that it has barely approached the lowest estimates that were predicted for it at the time of the enactment. The expert predictions were almost incredibly far off the map, making one wonder how much expertise the experts ever possessed. One might have anticipated that elected officials would hyperbolize the revenue estimates (both for the casinos and for state taxation) on legislation they were hyping. While that was certainly the case for Governor Christie’s office,[30] the fact is that the entire world of private financial firms vastly overestimated the revenues of Internet gambling.  If this had been an over/under bet on Internet gambling win, everybody was over. If they were contestants on The Price Is Right, they would have all been laughed off the show.

To review how far off the predictions were, the key numbers to remember are $69.4 million in win from Internet gaming in fiscal year 2014, $122.9 million in gaming win for 2014, the first full calendar year of Internet gaming, and $197.6 million in win for calendar year 2016. State tax revenues were $10.4 million in fiscal year 2014, $18.4 million for calendar year 2014, and $29.5 million for calendar year 2016. It is difficult to find any job-creation numbers for New Jersey as a result of Internet gambling.

The hyping started with the bill[31] that was vetoed by Governor Christie in the 2010-2011 legislative session. The one group estimating revenue for that bill was Econsult Solutions, a research firm in Philadelphia. Econsult Solutions estimated a gaming win of $210 to $250 million in the first year of operation.[32] Per State Senator Raymond Lesniak, perhaps the most vocal supporter of increased wagering opportunities in the New Jersey legislature, Econsult’s analysis found that “online gaming could produce between $210-$250 million in gross profit for casinos each year, resulting in $47 to $55 million in NJ tax revenue, and creating between 1,500 to 1,900 new jobs.”[33] Econsult Solutions estimated that at a 20% tax rate, New Jersey tax revenues would increase by $46 million to $55 million in the short run.[34]

For the legislation that was actually enacted in 2012, there were the following forecasts.

  1. Wells Fargo estimated win at $850 million in the firsbt year picking up to $1.5 billion in five years.[35] This number was also echoed by Atlantic City’s largest casino union.[36]
  2. Prominent lobbyist William Passerell III estimated 2,000 jobs in the first year alone.[37]
  3. H2 Gambling Capital estimated first-year win of $370 million and $526 million by 2018. H2 also forecasted that 17 states will have approved Internet gambling by 2017.[38]
  4. Moody’s estimated gambling win of $250 million to $500 million in the first year.[39]
  5. Gambling Compliance, an industry publication which reviews the overall gambling industry, wrote, “Internetgambling in New Jersey will bring in nearly $262 million in its first year and nearly $463 million after four years.” The numbers “could go as high as $575 million after four years.”[40]
  6. Fitch Ratings forecast between $200 million and $300 million in the first year.[41]
  7. Deutsche Bank estimated win in the first year at $250 million.[42]
  8. RBC Capital Markets estimated a $450 million to $600 million market for Atlantic City.[43]
  9. Spectrum Gaming claimed $400 million in annual online win in New Jersey with online gaming becoming an $8.5 billion business in the United States within five years.[44]
  10. Gambling Data predicted $262 million in win in the first year based on an Italian market analysis.[45]
  11. Maquarie Capital predicted a first-year win of $260 million to $400 million.[46]
  12. The Innovation Group in 2011 predicted that Internet gambling would provide $500 million to $750 million in winnings after full ramp-up.[47]
  13. Eilers Research predicted that the New Jersey market would reach $226 million, within two to three years of its start.[48] Eilers predicted that about one third of the revenues would be from poker.[49]
  14. Goldman Sachs, at the time of the passage of the New Jersey legislation, suggested a $200 million win.[50] While this turned out to be the most realistic assessment (even for the 2014 calendar year), nonetheless, in 2009, Goldman Sachs had issued a report finding that the United States Internet gambling market was potentially $12 billion per year.[51] Extrapolating from the 2009 report, the New Jersey Office of Legislative Services suggested that Goldman Sachs’ estimate for New Jersey’s win from online gambling would be $600 million.[52] The Goldman Sachs report also believed that half of the online gambling market would be for poker.[53]
  15. The Chris Christie administration. The Christie administration, even faced with the unlikely prospect that online gaming would start at commencement of the 2014 fiscal year, took the position that for fiscal year 2014, Internet gambling would raise $180 million for the state. [54] With a tax rate of 15%, that meant $1.2 billion in Internet gambling win.[55] The administration basically took the highest potential levels of the Wells Fargo analysis and applied it to the fiscal year.[56] Before the fiscal year began, with it being obvious that Internet gambling would not start at the beginning of the fiscal year, the Christie administration lowered the state revenue estimate to $160 million, which meant an Internet gambling win of $1.07 billion over a shortened fiscal year.[57] Instead of $180 million or $160 million, New Jersey ended the 2014 fiscal year with revenues of $10 million from casino gambling.
  16. The Office of Legislative Services. While the office initially declined to offer financial forecasts, it eventually suggested State revenues of $40 million for the 2014 fiscal year.[58] That would have involved $267 in Internet gambling win in the shortened 2014 fiscal year.
  17. State Senator Raymond Lesniak. Senator Lesniak suggested that Governor Christie’s $160 million State revenue number was off by half. His prediction of $80 million in State revenues showed a forecast of $534 million in Internet gambling win in the shortened 2014 fiscal year.[59]
  18. State Senator Jim Whelan. Senator Whelan, like Lesniak a major proponent of Internet gambling, suggested that State revenues for the 2014 fiscal year would be “well under $100 million given the time constraints.” Assuming that his numbers align with Senator Lesniak’s numbers, that also projects to $534 million in Internet gaming revenues win in the limited 2014 fiscal year.

While not a revenue forecast, one of the most incorrect predictions was issued by casino and real estate developer Skip Bronson. Bronson said in September of 2011, “‘I’ll guarantee, a la Joe Namath, that in less than five years a majority of U.S. states will offer online gaming… “You’ll see a domino effect once the first state moves forward.’”[60] After nearly six years, the total number of states with online gaming is three, Delaware, Nevada, and New Jersey.

What Went Wrong With the Predictions?

The short answer is that everything was wrong with the predictions. Everyone overestimated the total market. Everyone overestimated the size of the poker market. There seemed to be little concern paid to the technology and the time it took to develop an effective Internet gambling system.

The bigger question was why every “expert” was so far off. Political cynics can easily suggest that the analysts wanted to curry favor with elected officials who supported Internet gambling, or that they were trying to assist their current and future potential clients who might be casino firms or firms engaged in supplying casinos with machines and technology. It could also be that the firms really possessed zero expertise or experience in predicting an Internet gambling market for individual states. Rather than admitting their lack of expertise—much as the Office of Legislative Services did in 2010 and 2012—they responded by giving excessive estimates of the potential revenue. In all respects, they were totally wrong, and while the New Jersey Internet gambling market has improved significantly since 2014, the overhyping by the financial firms of the potential of Internet gambling may have hurt the chances of Internet gambling coming to states beyond New Jersey, Delaware, and Nevada.

 

[1] 2013 N.J. Ch. 27.

[2] C.5:12-95.17.g.

[3] C.5:12-97.17.k.

[4] C.5:12-95.17.j. The New Jersey State Constitution requires that gambling houses or casinos must be located within the boundaries of Atlantic City. N.J. Const., art. IV, § VII, para. 2.D.

[5] Assembly, Bill No. 3150 by Assemblymen Anthony Impreveduto and Neil Cohen (2000-2001 Legislative Session).

[6] Senate State Government, Wagering, Tourism & Historic Preservation Committee, Statement To Senate, No. 490, June 3, 2010.

[7] It was reduced to 8% by subsequent amendments.

[8] Senate Bill No. 490 (2010-2011 Legislative Session).

[9] Legislative Fiscal Estimate [Second Reprint], Senate, No. 490, 214th Legislature, Dated: November 24, 2010.

[10] In its first vote on the bill—before amendments were made in the Assembly—the Senate passed the bill with a vote of 29-5.

[11] “Governor Christie Vetoes Internet Gaming Bill as Inconsistent with the Goals of Revitalizing Atlantic City’s Tourism and Gaming Industries,” http://nj.gov/governor/news/news/552011/approved/20110303b.html.

[12] Senate Bill No. 490 (Third Reprint). See N.J. Const., art. B, § I, para. 14 (b).

[13] New Jersey Governor Vetoes Online Gaming Bill, Las Vegas Review Journal, March 2, 2011.

[14] Gubernatorial Veto of Senate Bill No. 490, March 3, 2011, http://nj.gov/governor/news/news/552011/pdf/S-490%20AV.PDF.

[15] Id.

[16] Id.

[17] 18 U.S.C. § 1084.

[18] Virginia A. Seitz, Assistant Attorney General, “Whether Proposals by Illinois and New York to Use the Internet and Out-of-State Transaction Processors to Sell Lottery Tickets to In-State Adults Violate the Wire Act,” https://www.justice.gov/sites/default/files/olc/opinions/2011/09/31/state-lotteries-opinion.pdf, September 20, 2011.

[19] “DOJʼs Reversal on the Wire Act – What It Means for Internet Gaming,” National Law Review, January 3, 2012. https://www.natlawreview.com/article/doj-s-reversal-wire-act-what-it-means-internet-gaming.

[20] Assembly Bill No. 2578; Senate Bill No. 1565 (2012-2013 Legislative Session).

[21] Legislative Fiscal Estimate, Assembly Substitute for Assembly, No. 2578, December 28, 2012.

[22] Conditional Veto, Assembly Substitute for Assembly Bill No. 2578, http://www.njleg.state.nj.us/2012/Bills/A3000/2578_V1.HTM; see also Ryan Hutchins, “Gov. Christie Approves of Online Gambling with Caveats,” Newark Star Ledger, February 8, 2011.

[23] N.J. Const., art. V, § I, para. 14 (f).

[24] Conditional Veto, supra note 22. The governor did not mention his prior objection that Internet gambling would require an amendment to the State Constitution.

[25] 2013 N.J. Ch. 27, supra note 1.

[26] “Casinos Rolling Online Dice,” Asbury Park Press, November 22, 2013; Wayne Parry, “NJ Becoming 3rd State to Offer Internet Gambling,” Associated Press, November 21, 2013.

[27] All financial information is from the monthly Internet gross revenue reports issued by the New Jersey

[28] Many assumed that Internet poker would be the driving force behind Internet gambling in New Jersey due to the fact that there appeared to be unspent demand for the product. Internet poker with Americans playing poker through foreign operators had appeared to be an incredibly successful business whose operations had been largely halted by the Unlawful Internet Gambling Enforcement Act of 2006 and the 2011 prosecution and conviction of the main Internet sites that tried to circumvent the law by offering Internet poker. See United States v. Scheinberg, 10 Cr. 336 (LAK) (Apr. 14, 2011).

[29] Elaine S. Povich, “How Casinos, States Are Winning Big from Online Gambling,” Route 50, June 6, 2017.

[30] Governor Christie’s revenue estimates were so far off the mark that they gave cover to the legislature to have revenue estimates that were also excessive, but seemed modest in comparison to the Governor’s predictions.

[31] S. 490. See supra note 8.

[32] Hoa Nguyen, “Doubts Raised about Estimate for Internet Gambling Revenue in Atlantic City,” Press of Atlantic City, April 8, 2013; Raymond Lesniak, “Money Flowing out of N.J. Can Be Kept Here,” Courier Post, December 19, 2010.

[33] Raymond Lesniak, “Lesniak Set to Re-Introduce Online Gaming Bill,” States News Service, August 17, 2011; see also John Froonjian, Casino, Horse Racing Advocates Join to Support Sports Betting,” Press of Atlantic City, September 27, 2011; see also MaryAnn Spoto, “N.J. Scrambles for the Lead in Race for Online Gambling,” Times of Trenton, January 4, 2012.

[34] Legislative Fiscal Estimate, Assembly Substitute for Assembly, No. 2578, State of New Jersey, 215th Legislature, Dated: December 28, 2012.

[35] Heather Haddon, “New Jersey Starts Taking Bets Online,” Wall Street Journal, November 21, 2013; see also Chris Sieroty, “Internet Gambling Seen as Big Boost to NJ Casinos,” Associated Press, February 28, 2013.

[36] Hoa Nguyen, supra note 32; Donald Wittkowski, “Atlantic City Casino Union President Calls on Governor to Sign Internet Gambling Law,” Press of Atlantic City, January 31, 2013.

[37] Jennifer Bogdan and Donald Wittkowski, “Consultant to Help New Jersey Launch Online Gambling,” McClatchy-Tribune Business News, May 23, 2013.

[38] Id. See also Wayne Parry, “Casinos Brace for Impact of Internet Gambling,” Associated Press, Pittsburgh Post-Gazette, May 7, 2013. When the bill was first passed, H2 Capital estimated a win of $410 million for the first year growing to $590 million over a few years. Alexandra Berzon, “Internet Gambling Scores Its Biggest Win,” Wall Street Journal, February 27, 2013.

[39] Bob Jordan, “Online Gambling Marketing A Sure Thing,” Asbury Park Press, December 2, 2013.

[40] Wayne Parry, supra at note 38.

[41] Jennifer Bogdan, “Lawmakers: Online Gambling Won’t Make Expected Revenue,” McClatchy-Tribune Business News, December 6, 2013.

[42] “Atlantic City Casino Revenue to Increase with Arrival of Online Gambling,” Press of Atlantic City, March 4, 2013.

[43] Wayne Parry, “Wall Street: Online Bets Can Help AC Market Grow,” Associated Press, May 22, 2013.

[44] Donald Wittkowski, “Internet Gambling Set to Go Live on November 26 Following Five-Day Trial Period,” Press of Atlantic City, October 13, 2013. At an earlier point, Spectrum predicted a $250 to $300 million estimate for Internet gambling. See supra note 37.

[45] Hoa Nguyen, “New Jersey Treasurer Insists Internet Gambling Could Net $1.2 Billion,” Press of Atlantic City, April 20, 2013; see also John Brennan, “Studies See Far Less from Online Betting than State Predicts,” Bergen Record, April 23, 2013.

[46] Hoa Nguyen and Donald Wittkowski, “Christie Signs Internet Gambling Bill After Revisions by Legislature,” Press of Atlantic City, February 27, 2013.

[47] Bill Ordine, “N.J. Internet Gambling Bill Awaits Christie’s Signing,” Philadelphia Inquirer, February 10, 2011.

[48] John Brennan, Analyst Sees Less Gambling Tax than Christie,” Herald News, December 27, 2013.

[49] Id.

[50] Alexandra Berzon, “N.J. Gambles on Revenue in Online Bets,” Wall Street Journal, February 28, 2013.

[51] John Brennan, “Legislator Presses for Online Gaming,” Bergen Record, September 25, 2011.

[52] Legislative Fiscal Estimate, supra note 34.

[53] Id.

[54] See Hoa Nguyen, supra note 32. “Christie Bets Big on Web Gambling,” Atlantic City Press, March 3, 2013.

[55] John Brennan, “Online Gambling Could Start by Fall as Christie Gives OK,” Bergen Record, February 27, 2013; Kate Zernike, “Casinos Ailing, New Jersey Tries New Ways to Bet,” New York Times, February 28, 2013.

[56] See Brennan, supra note 45.

[57] Ryan Hutchins, “Every Casino in A.C. Plans to Offer Web Gambling, Newark Star Ledger, July 2, 2013.

[58] Bob Jordan, “Atlantic City Bets on Online Gambling,” Asbury Park Press, November 21, 2013.

[59] Id.

[60] John Brennan, Legislator Presses For Online Gaming,” Bergen Record, September 23, 2011.

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