Study from New Jersey considers iGaming to be “harmful” despite tax benefits.

The research was conducted by the National Economic Research Associates (NERA). It was previously commissioned by the Campaign for Fairer Gambling (CFG).

Online gambling has been legal in New Jersey since 2013. Sports betting was legalized in the state following the repeal of the Professional and Amateur Sports Protection Act (PASPA) in 2018.

NERA’s research found that the iGaming industry was “net negative.” This is because the increased tax costs of problem gambling largely offset its high tax contributions.

The study also found that compared to land-based casinos, significantly fewer people are employed specifically to provide igaming services and that the resulting decrease in employee wages is reinvested in New Jersey’s economy.

NERA: Igaming does not contribute to the pay cycle

The study says New Jersey’s iGaming sector revenue has grown “exponentially” since 2016, with quarterly highs for iGaming ($469.6m/£368.2m/€428.4m) in third quarter of 2023.

According to NERA, despite this growth, the lack of human resources required to run an online gaming business results in revenues not flowing back into the economy through wages and subsequent income expenditures in New Jersey.

NERA used a model that breaks down every dollar spent on iGaming, land-based casinos and non-gambling leisure activities. These sectors were found to contribute 4¢, 12¢ and 39¢ to wages, respectively.

NERA found that the low number of employees in iGaming is linked to significantly lower economic activity per dollar of revenue because wages are not reinvested back into the local economy. When consumers gamble online, NERA estimates they generate 0.9 cents per dollar in new spending. With alternative recovery, this value increases to 8.3¢.

In 2022, NERA estimated that iGaming brought in $110 million in total wages. However, the report estimates that $1 billion could have been generated if consumers’ money had been spent on other leisure activities.

Money donated to iGaming also means less is spent on other, more labor-intensive industries where a higher percentage of revenue goes to wages, whereas for IGaming it is less than 5%.

Tax contributions are offset by costs of problem gambling

NERA recognized iGaming’s strong tax benefits and praised its “positive impact” on the level of Category One Income Tax (FCIT) that the New Jersey government collects annually from the industry.

The research firm also cited three main reasons for iGaming’s tax benefits. The first was that New Jersey imposes certain taxes, some of which apply only to iGaming. Secondly, iGaming is a particularly high-margin business due to its low costs.

The final reason is the efficiency of igaming compared to land-based casinos when it comes to getting winners to pay their tax liabilities. While land-based casinos are not required by the Internal Revenue Service (IRS) to report table game winnings, igaming reports players’ winnings via Form 1099 if the amount exceeds $600 over a year, net of losses.

But despite the tax benefits of igaming, NERA used the UK as an example to show how the tax costs of problem gambling could wipe them out.

It used the results of another study of problem gamblers in the UK and examined the subsequent value of costs such as health and social care. NERA said these accounted for £1.4bn of the UK’s £9.9bn gross gambling revenue.

Translating these numbers to New Jersey, it is estimated that the $350 million in social costs of people suffering from gambling problems in the state are “of a similar magnitude to the additional tax revenue paid by the sector.”

Land-based casinos are not considered harmful

While iGaming doesn’t contribute much to the wage cycle and takes money away from more labor-intensive industries, land-based casinos provide New Jersey with additional revenue it wouldn’t otherwise generate.

The NERA concluded that it could not classify land-based casinos as harmful to New Jersey’s economy, like iGaming. This is due to their long-standing attachment to the country and increased financial contribution.

This is mainly due to the much higher number of employees required to run the casinos. Employees then spend their wages and the money flows back into the state’s economy.

NERA also noted the appeal of Atlantic City’s casinos to gambling-addicted tourists. Out-of-state tourists donate money to New Jersey’s economy that they otherwise would have spent elsewhere.

Land-based casinos in New Jersey also have close ties to local hospitality businesses that “depend on the existence of the local gaming industry.”