Pennsylvania GOP Pushes for New Taxation and Regulation on Skill Games

Leading officials in the Pennsylvania Senate have disseminated a memorandum advocating for the oversight and taxation of so-called skill games, indicating that the matter will remain a priority for the second consecutive session.

Skill games refer to the tens of thousands of slot-like machines that have surged in popularity within Pennsylvania’s bars, eateries, and convenience stores over recent years. Currently, they operate without regulation — and without taxation — and many legislators argue that the state should amend this.

Nonetheless, the subject is complicated, heavily influenced by lobbying, and transcends party lines and ideologies. It has lingered within the Capitol for nearly a decade.

Senate President Pro Tempore Kim Ward (R., Westmoreland), Senate Majority Leader Joe Pittman (R, Indiana), along with two significant committee chairs, released the memo on Wednesday afternoon. Memos from leadership generally garner heightened focus in the chamber.

The initiative is not solely focused on regulation. Taxing skill games would yield revenue that state Senate Republicans assert is critically needed — to enhance Pennsylvania’s declining tax returns and to address specific new spending requirements.

Specifically, they have tied the issue to financial difficulties faced by public transit agencies, asserting that skill games could generate the consistent funding necessary to earmark additional resources for agencies like SEPTA.

“I continue to turn to this matter because, at least in principle, it’s the only revenue source I’m hearing about that appears to have widespread support,” Pittman conveyed to Spotlight PA in December.

To reach an agreement, leaders will need to mediate powerful conflicting gambling interests, all of which have robust support within the legislature.

Operators and manufacturers of skill games contend that they serve as a vital support for small enterprises and social clubs. The legality of the machines was questioned for years, but now, operators cite a 2023 appeals court decision that determined the machines’ payouts are not determined exclusively by chance, which means they are not subject to existing state gaming laws.

On the other hand, casino operators, a politically influential lobby, have sought to limit or even entirely prohibit the machines, perceiving them as unregulated competition.

They are not the sole stakeholders. The horse racing sector, the state lottery, as well as the proprietors of the slot-like video game terminals found in truck stops, also hold significant interests in the discussion.

Pittman mentioned last month his hope to have something documented and presented to members in the new year to initiate negotiations with the Democratic-controlled state House and Gov. Josh Shapiro.

Shapiro, a Democrat, advocated for the legalization and regulation of skill games in last year’s budget address. He provided minimal specifics at that time, only indicating that the games ought to be supervised by the state’s gaming control board and taxed at 42%, a slightly lower rate than that imposed on casinos regarding their slot machine income. That initiative was unsuccessful.

The memo from state Senate Republicans also lacks detailed information. Similar to Shapiro, they suggest having the gaming control board supervise the machines; limiting the devices to “a limited number… at specific liquor-licensed and lottery-licensed venues throughout the Commonwealth”; and insisting that “fair and appropriate taxes are collected.” However, the specific rate is not mentioned.

Much of the aforementioned is likely to be contested by skill game operators.

Industry lobbyist Mike Barley remarked to Spotlight PA last year that 42% was “beyond what the industry can bear.” A soon-to-be reintroduced industry-friendly proposition supported by state Sen. Gene Yaw (R., Lycoming) set the tax rate at 16%. Yaw’s district, based in Williamsport, houses a skill game manufacturer.

Barley also expressed his desire for a “just and unbiased regulator” instead of the state’s gaming board. As Spotlight PA previously reported, board members engaged in private discussions with casino lobbyists prior to proceeding to ban skill games in 2020.

In a statement on Thursday, Barley conveyed that the skill games industry “looks forward to collaborating and navigating through the legislative process to discover a solution that genuinely benefits all Pennsylvanians.”

In the meantime, casinos are advocating for a tax rate on skill games equal to the approximate 50% rate imposed on their own slots. They have also lobbied for stricter regulations over businesses that operate skill games, such as necessitating video surveillance of the machines and capping the number permitted in each establishment.

In a declaration, Pete Shelly, a spokesperson for the casino-affiliated Pennsylvanians Against Gaming Expansion, stated that without stringent regulations, the spread of skill games “provided a shield for underage gambling and offered no assistance for compulsive gamblers.”

As discussions about gaming commence, other factions — like the manufacturers of video gaming terminals (VGTs) — quickly enter the fray. Current state law limits the devices, which operate differently from skill games but are similar to slots, to truck stops and taxes them at 52%.

During an interview with Spotlight PA in October, Matthew Hortenstine, chief counsel for VGT producer J&J Ventures, argued that permitting all gaming devices to compete in an open market would yield greater tax revenue and significantly benefit small businesses’ profit margins.

“What we advocate for is device parity, regulatory parity, [and] tax parity,” Hortenstine stated. “I don’t seek an unfair advantage over them, but they shouldn’t have one over me either.”

The resolution of this dispute now rests with the divided General Assembly, which recently concluded a tumultuous and largely unproductive session.

Pennsylvania House Democrats have remained silent on the matter, contending that it is the responsibility of Senate Republicans to reach a consensus first. However, the lower chamber may also encounter difficulties concerning the bill. For example, lawmakers from Philadelphia have previously called for their city to maintain the authority to regulate the games at a more stringent level than the state.

Nevertheless, the necessity for additional funds during budget season may motivate the legislature to reach an agreement.

Although Pennsylvania possesses approximately $3 billion in surplus funds, budget forecasts anticipate this will be depleted by 2026 — and the state’s tax revenue is currently slightly under expectations this year.

Without balanced budgets in the upcoming years, the state will be compelled to use its rainy day fund, reduce spending, or increase taxes to stabilize its financial situation.

Shapiro estimated that taxing the games at his preferred rate would generate $150 million in the initial year, with annual revenues increasing thereafter.

When questioned about skill games at an unrelated news conference on Thursday afternoon, Shapiro remarked that the taxation and regulation of these machines is “unfinished business” from the last session and expressed optimism regarding the Senate GOP memo.

A spokesperson for Shapiro added that the governor plans to reintroduce the topic in his budget address on February 4. The specifics of the proposal, the spokesperson noted, are still pending.

90.5 WESA collaborates with Spotlight PA, a collective, reader-supported newsroom dedicated to producing accountability journalism for all of Pennsylvania. Learn more at spotlightpa.org.