Budget Briefing: New Jersey's Big, Unrealistic Bet on Internet Gambling

This is the fourth in a series of in-depth examinations of major issues in the recently enacted FY 2014 budget. Click on the links for the first, the second and the third.

New Jersey’s recently enacted budget assumes $160 million in revenues from the launch of internet gambling in the Garden State. While that assumption is down from the initial projection of $180 million, the change is just cosmetic. At $160 million the projection is still over five times larger than the $30 million estimate of the Office of Legislative Services (OLS). This represents 30 percent of the $441 total difference between OLS and administration projections for FY 2014, and may be the greatest percentage disagreement in a single revenue projection in any budget.

Assuming that internet gambling begins in late November as required by law, the budget is assuming an average monthly revenue of $23 million (a 12-month annual revenue of $276million). In order to generate that much revenue annually at the 15 percent tax rate, internet gamblers will need to lose over $1.8 billion. By comparison, all gamblers in Atlantic City will need to lose $2.6 billion to generate the $209 million anticipated from traditional gambling (which is taxed at 8 percent). In other words, gambling losses would need to increase by nearly 70 percent to hit the mark in the budget.

While this is clearly an unreasonable assumption, the numbers may be even harder to hit if internet gambling is not up and running by late November. The Division of Gaming Enforcement can delay the start date; its director says the agency will keep pushing to meet the deadlines but there are concerns this may not happen.

New Jersey does have one advantage. It can review the problems Nevada had getting its online poker systems up and running; those weren’t available until April of this year even though the regulations were approved in late 2011. The casino companies also have an advantage: Some of their other holdings in Nevada and Europe have already started internet gambling.

But there’s still a lot of work to do.

The state has to approve licenses for the casinos and their internet gambling partners (all 12 casinos met the initial July 1 deadline for securing a partner). By the end of this month, the state has to review applications for the casinos and their partners, as well as applications from firms that provide services like age verification, payment processing and geo-location technology. Software needs to be tested and glitches fixed before the systems can go live in late November.

The bottom line: It is unrealistic to think that internet gambling will generate $160 million for this year’s budget. The question is: Just how far off the mark will the projection be? If OLS is correct and the figure is only $30 million, that creates a $130 million shortfall – nearly half (43 percent) of the budget’s assumed $300 million surplus. Even if the actual revenue doubles the OLS estimate the shortfall would still be $100 million – a third of the projected surplus. When such an overly optimistic revenue assumption is coupled with such a small surplus, the fiscal ice we’re skating on is quite thin. Internet risks could be combined with other revenues being lower than OLS projections and the $164 million in housing funds being denied to the state to send the surplus into the lake.

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