HARRISBURG — A court-imposed clock is now ticking for state lawmakers to regulate skill games after years of failure to come to a deal.
Lawmakers had said they were waiting for a ruling on skill games to act, and this week they got it: In a scathing decision Monday, justices said skill games are, in fact, slot machines subject to gambling laws.
In other words, the devices, which have long existed in a legal gray area, are now prohibited outside of casinos — and police can confiscate them from the bars, restaurants, and social clubs where they're often found. The court put a 120-day stay on that enforcement, however, giving lawmakers until October to come up with a regulatory scheme and avoid a wave of seizures.
Still, the decision won’t make it easier for the divided legislature to agree on how to structure a brand-new piece of Pennsylvania’s competitive gambling landscape.
Casino owners, horse racing interests, sports betting companies, and other wealthy players are all fighting over their slice of the multibillion-dollar pie. Adjusting one part of this regulatory regime could spark a legislative debate involving many special interests looking to protect their bottom lines.
State House Minority Leader Jesse Topper (R., Bedford) said trying to pass a skill games bill that doesn’t acknowledge the overlap with the commonwealth’s other forms of legalized gambling would be a mistake, and one that “people have made over the past few years.”
“They're simply looking at it as, ‘How do we regulate and tax skill games?’ They're not looking at it as, ‘How do we bring them into the overall gaming fold and make the industry better?’” Topper said. “I'm open to a lot of different ways to do it, but it has to be within that construct — not chasing revenue.”
So far, leaders in each chamber are keeping their cards close to their chests as far as specific proposals. But the debate will involve sorting out a tax rate, how many machines should be allowed to operate, who gets to benefit from them, what to do about addiction and public safety concerns, and where to direct new revenue.
Here’s a rundown of those issues:
Tax rate
Whether to tax skill games’ gross revenue at the same rate as casino devices has driven years of debate over regulation.
Gov. Josh Shapiro proposed a 52% tax rate earlier this year, in line with the state’s existing tax rate on slot machines.
At an unrelated news conference Tuesday, the Democrat said the ball is now in the state Senate’s court: “What I’ve encouraged the Republican leadership of the Senate to do is to work with the Democratic leadership in the Senate and see what kind of package can get 26 votes in their chamber.”
Republican leaders in the upper chamber previously backed a tax rate of 36%, and in a statement following the court’s ruling, reiterated their support of the legislation “as a basis for discussion.”
But that rate was too high for skill games developer and distributor Pace-O-Matic, whose working relationship with the upper chamber’s GOP leadership imploded last year. Pace-O-Matic executives and other industry allies poured millions of dollars into efforts to defeat the bill and to primary GOP lawmakers aligned with leadership.
Still, the industry has legislative allies. State Sen. Gene Yaw (R., Lycoming), whose district includes a company that manufactures the devices, has proposed a 16% tax rate.
Yaw and others have also suggested a flat per-machine fee. Supporters of that proposal include state Rep. Danilo Burgos (D., Philadelphia), a former grocery store owner who has spoken at rallies organized by the skill games lobby.
Under bipartisan legislation Burgos is sponsoring, the state would collect a $500-a-month fee on each device. Burgos said lawmakers need to “get somewhere in the middle” of the dueling proposals to ensure that enough of the industry is left to “provide a robust tax base.”
Number of machines
There are an estimated 70,000 machines in bars, gas stations, convenience stores, and other businesses across the commonwealth, according to the state Office of Attorney General. How many of these devices should be allowed to continue operating is a major point of contention.
Burgos’ and Yaw’s bills — backed by the industry — would cap the number of terminals statewide at 50,000, they say.
Shapiro’s budget proposal would cap the number of licensed skill machines and video game terminals at 40,000 and limit establishments to having five at any given time.
State Sen. Chris Gebhard (R., Lebanon), who sponsored the 36% tax rate proposal from his chamber’s leadership, said he wants the Gaming Control Board to oversee the machines and limit them to establishments already regulated by the Liquor Control Board. That approach would reduce the number of machines by roughly half.
“If you limit it to liquor license, you're maxing yourself out to maybe 35,000 machines,” he told Spotlight PA.
(Pace-O-Matic has previously opposed regulation by the Gaming Control Board, arguing it is biased against them.)
Businesses and social clubs’ bottom lines
Businesses and social clubs, like Veterans of Foreign Wars posts, work with either a skill games manufacturer or distributor to get devices. Those who host Pace-O-Matic skill games in their businesses keep about 40% of the profit, according to the company.
Spotlight PA could not identify an industry group that tracks business profits associated with skill games. Chuck Moran, executive director of the Pennsylvania Licensed Beverage & Tavern Association, said he’s anecdotally heard of single machines providing profits ranging from a few hundred dollars to thousands of dollars every month.
James Delisio has three terminals at his bar, the Racehorse Tavern in York County. He said the amount of money he earns from the games varies drastically. His bar can go weeks without seeing anyone play a game, he said, while other times he collects a few hundred dollars from them. Delisio said that unlike other bar owners he’s spoken with, he does not rely on the income to keep his business afloat.
The proposed tax rates still concerned Delisio, who is a member of the beverage & tavern association. Too high a rate, like anything near 50%, he warned, would push businesses to get rid of their terminals and effectively eliminate a source of income. He criticized lawmakers for considering the tax to offset Pennsylvania’s structural deficit.
“They can’t even balance their own checkbook,” Delisio said, “so they come out to the general public and look for more funds because they don’t know how to run their own business.”
Addiction and public safety
Lawmakers will have to weigh how to ensure the legalization of the machines doesn’t create more people addicted to gambling, said Josh Ercole, executive director of the Council on Compulsive Gambling of Pennsylvania. The council’s hotline and counselors already aid people whose response to skill games mirrors their reaction to classic casino games.
Complicating the regulation question is the lack of information about where the machines are located, who plays them, and how the revenue is split between the manufacturer, distributors, and operator.
“How do you go about regulating something if you don't even know what the reach is at this point?” Ercole said. “There's going to have to be this like, ‘left-foot, right-foot’ approach of enforcement and regulation that's going to have to be outlined.”
He called for legislators to consider requiring messages to appear on devices at set intervals to remind users to take breaks, training for operators to spot problem gamblers, ensuring the state’s existing gambling self-exclusion list applies to skill games use, and allowing the machines only in specific areas, away from where kids could see or access them.
“They shouldn't be at a pizza parlor where somebody could sit there while they're waiting for their slice to heat up,” Ercole said.
Opponents of skill games argue there is at least anecdotal evidence that the terminals are linked to a higher chance that the hosting business could experience crime.
Last year, a Philadelphia jury found Pace-O-Matic and Lycoming County-based Miele Manufacturing negligent in the murder of store clerk Ashokkumar Patel, after attorneys argued Pace-O-Matic ignored safety guidelines for handling cash created for casinos and truck stop gambling machines. The individual charged in Patel’s death had allegedly lost thousands of dollars on a skill games machine at the store where the clerk worked.
Skill games were also included on a list of “threats to our communities” that the Pennsylvania District Attorneys Association sent to Shapiro earlier this year. The officials urged him and state lawmakers to enact legislation to “ensure consumer protection, require security measures, and prevent underage gambling.”
Philadelphia Mayor Cherelle Parker celebrated the court’s decision in a statement, arguing the machines should not be so accessible in areas with “high rates of poverty, crime and violence” and that they perpetuate “seemingly intractable problems that we are challenged with solving.”
“You only find them concentrated in our most vulnerable communities,” Parker said. “You won't find these kind of stores … in wealthy neighborhoods. They aren't there. It's predatory, and it's not right."
(A study of state gaming taxes and the lottery by the state Independent Fiscal Office found they disproportionately raised dollars from lower-income individuals.)
One Philadelphia Democrat, state Rep. Ben Waxman, has introduced a bill that includes Gaming Control Board regulation alongside restrictions on the speed of play and limits on the losses a user can accumulate in a day before they must stop playing. He’d also allow any local government the right to restrict or outright ban the machines within its jurisdiction.
Burgos, who also represents part of Philadelphia, similarly wants municipal governments to have the leeway to set their own rules for the games, though his bill only gives that power to Philadelphia as currently drafted.
Overall, Burgos told Spotlight PA last month, the rules for the machines should be simple and effective enough to prevent any further extra-legal proliferation of the devices.
“We create all these regulations that indirectly support the black market,” Burgos said.
Directing the revenue
How much money the state could bring in depends on the tax rate, the number of machines, and regulations.
On the low end, Burgos projected his flat fee could bring in approximately $300 million annually. On the high end, the Shapiro administration estimated taxing the devices like slot machines could bring in as much as $2.1 billion a year by the end of the decade. (An IFO analysis of Shapiro’s plan produced a lower long-term projection of up to $1.2 billion in annual earnings.)
Those dollars could be used to accomplish any number of policy goals — from funding public transit, to backfilling federal healthcare cuts, to reducing the amount of money taken from the state’s rainy day fund.
In his budget pitch, Shapiro proposed putting the revenue into the state’s General Fund, which is effectively its checking account. It pays for everything from public servant salaries to low-income healthcare to state park operations. In Shapiro’s plan, this would offset proposed spending increases on education while keeping up with rising costs for low-income healthcare coverage.
In a statement Monday, state Senate Republican leadership said putting the money in the General Fund makes sense “with the fiscal realities facing our Commonwealth.” The state has struggled for years to bring in enough revenue to cover its expenses. This year, the commonwealth is on track to spend about $5 billion more than it is projected to take in tax revenue.
During previous budget debates, state Senate Majority Leader Joe Pittman (R., Indiana) suggested using skill games revenue to fund transportation projects like roads, bridges, and public transit. Figuring out a way to send more money to agencies like SEPTA and Pittsburgh Regional Transit, which had warned that deep service cuts were impending, was a major sticking point during last year’s budget negotiations. Eventually, the state allowed transit agencies to temporarily raid capital funding to keep bus routes and subways running in the absence of a full deal.
Democrats, including state Sen. Amanda Cappelletti (D., Montgomery), don’t see that as a long-term solution.
She said tapping skill games to fund transportation would be a good use of the funds, but was open to other ideas like healthcare or childcare funding.
She previously introduced legislation that would ban the devices, but told Spotlight PA this week, “The reality is there seems to be a will to regulate, and if that's what's going to happen, then I want to be a part of the conversation.”
State Rep. Ed Neilson (D., Philadelphia), chair of the House Transportation Committee, also supports putting skill games revenue into the general fund. Then, the state could increase the amount of sales tax revenue it diverts directly to public transit agencies.
But opening up the transportation debate again also has its share of Republican critics, like Topper.
“The issue was taken care of last year for two years,” Topper told Spotlight PA, adding: “We have enough problems we need to solve.”
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