BJ's Early Analysis of Harry Reid's Lame-Duck Online Poker Bill

It's been rumored for weeks, but the Wall Street Journal confirmed on Thursday that an online-poker bill backed by U.S. Senate Majority Leader Harry Reid is floating around the halls of Congress. Reid apparently hopes to attach it to another bill and pass it during the current lame-duck session of Congress. (A similar tactic was used to pass the UIGEA in 2006.)

Wall Street Journal: "Sen. Reid Seeks to Legalize Internet Poker" by Alexandra Berzon

There are still some serious obstacles, not the least of which is a promise by Senate Republicans to block all legislation during the lame-duck session unless George W. Bush's tax cuts (set to expire) are extended across the board. Democrats may be willing to negotiate, because they had hoped to pass a few non-poker bills before the new Congress convenes in January, including a repeal of the military's "Don't Ask, Don't Tell" policy.

Of course, there are still some members of Congress strongly opposed to online gambling, including Alabama Representative Spencer Bachus, the ranking Republican on the House Financial Services Committee. Bachus and two other Republicans wrote a letter to the Senate leaders saying they oppose the bill. "Congress should not take advantage of the young, the weak and the vulnerable in the name of new revenues to cover more government spending."

If poker's opponents are reduced to writing a strongly-worded letter, I like our chances.

Other lawmakers who are more neutral when it comes to gambling may be swayed by the promises of tax revenue. If this online-poker legislation is attached to another bill, it could be viewed as a funding clause, making it more palatable to members of Congress who are on the fence.

The Wall Street Journal article only gives the broad details of the bill, and implies that none of this is set in stone yet. But here is what we know so far:

  1. Unlike Barney Frank's online gaming bill debated in Congress over the summer, Harry Reid's bill would legalize online poker and nothing else. I think that's a best-case scenario for the poker industry, because we want to spread the word that as a skill game, poker is different than most other forms of gambling.

  2. This bill would overturn the UIGEA. Obviously, players would need to be able to fund their online poker accounts.

  3. For the first two years, online poker sites would only be licensed to existing brick-and-mortar casinos, horse tracks, and slot machine makers. This obviously excludes Full Tilt, PokerStars, PartyPoker and most of the sites we're familiar with -- they'd all have to wait two years to get a license, intended to negate the huge market advantage they've built in recent years. (If this passes, instantly becomes the 800-pound gorilla in the online poker industry.)

  4. Gaming control would be handled by the states, not the federal government.

  5. "Taxes on wagers" would be collected at both the state and federal level. We'll need to see more details on this point, but ... yuck. It would be much better for the players if they were only taxed when they cashed out winnings.

  6. Harry Reid is pushing this bill at the request of brick-and-mortar casinos, which invested heavily in his tough re-election campaign. This is why the bill will be geared more toward live casinos than the current online poker sites.

That's what we know at this point. But as they say, the devil is in the details. If and when Harry Reid's bill is fully posted online, these are the questions that I'll be looking to answer:

  1. Are there any provisions (like a "bad actor" clause) specifically aimed at online poker sites that served U.S. customers during the UIGEA? Or will Full Tilt, PokerStars, and UB be treated the same as sites that avoided the U.S. market?

  2. What happens to sites like Full Tilt and PokerStars during the two-year waiting period? As foreign companies, what's to stop them from continuing to serve U.S. customers? Does the bill just assume that they'll voluntarily sit out of this market for two years so they can enter the market legally? Or will there be a provision about enforcement (going after rogue, unlicensed sites)?

  3. What are the details on the state and federal taxes? How are the taxes computed, and when/how are they collected? Are the state taxes standardized across the country or set by each state?

  4. Are the state taxes collected based on the player's location, the company's location, or (gasp) both? If taxes are collected based on the company's location (and not standardized), it could create a competitive environment allowing a multi-state company like Harrah's/Caesars/ to "shop around" for the best value.

  5. Will individual states (like Washington) be able to opt out? Or will this bill reopen that market?

  6. What, exactly, happens after the two-year waiting period for sites like Full Tilt, PokerStars, and PartyPoker that want to legally enter the market? Do they just pick a state and apply for a license?

  7. Finally, look for the loopholes. Will Full Tilt or PokerStars be able to merge with (or purchase) a company that has a brick-and-mortar license to avoid the two-year waiting period?

Those are the legalities to consider, but there will also be a lot of interesting strategy issues in play. I'm curious to see if PartyPoker would hold back the powerful WPT brand for two years, or try a brand-licensing agreement with a company like MGM Resorts International (which owns Bellagio and Aria, among others) to keep from cornering the market with a two-year head start.

Also, if (when?) becomes the leading online poker site in the United States, how would that change the biggest event in the poker world -- the World Series of Poker? For one thing, I'd expect WSOP Main Event registrations to break the 10,000 mark in a year or two, with a first prize of $10+ million. But would the WSOP try to leverage that power by (for example) changing the rules for players wearing sponsorship patches for other sites?

Unlike most of the hopes and promises of legalization, this one will be resolved one way or another by January 3rd, because it's all about getting it passed during this lame-duck session. If it doesn't pass this month, then the dynamics change dramatically with the Republicans controlling the U.S. House of Representatives. That doesn't mean that online poker would have no chance of being legalized in 2011, only that the process would have to start over from scratch.

What are the odds that Harry Reid can get the bill passed this month? I have no idea, but I know it's greater than 0%. And that's enough to get me excited. (As evidenced by the fact that I stayed up late the night before WPT Bellagio to write 1,317 words about it.)