September 11, 2014

Flotsam and Jetsam in the Wake of New Jersey's New Sports Betting Scheme

As New Jersey’s latest plan to implement sports betting continues to play out this week, several news reports caught my eye and deserve brief comment.

I.  Will New Jersey Sports betting be “unregulated and untaxed”?

The Associated Press, covering Governor Christie’s Tuesday press conference, reported, “Gov. Chris Christie said the state government would have no role in either regulating or taxing sports books.”

No state role in regulating or taxing sports books? This seems inconsistent with New Jersey’s position in its motion to clarify and modify the federal district court injunction which currently prohibits New Jersey from implementing sports betting in violation of federal law (PASPA). In that filing, New Jersey clearly asserts that the state may regulate sports books via its established casino regulatory structure without running afoul of PASPA. Now, the apparent contradiction might simply be a factor of the looseness of the press conference setting. The governor may have meant that the state will not license sports books, but will still regulate them (which is consistent with the state’s court filing). But, if the governor truly means that the state will not regulate sports books (other than restricting them to licensed casinos and racetracks), that would be a significantly different proposition than what was contemplated by the Sports Wagering Act, and a change likely to create political discomfort for legislators and blowback from the public.

As for no state taxation of sports books, let’s just say it's doubtful the state will pass up such a tempting revenue stream. If sports books are limited to casinos and racetracks and subject to general gaming regulations, there is no obvious reason why sports book revenues would not be taxed like other gaming revenues. If sports books are exempted from gaming regulations (i.e., left unregulated) to avoid PASPA issues, then sports book revenues would almost certainly be taxed as business income, at least if such taxation is not deemed to violate PASPA. Either way, it’s always a safe bet that the tax man will get his cut of the action.

II.  Will there be a deal between New Jersey and the sports leagues to authorize sports betting?

Earlier this week, NBA Commissioner Adam Silver reacted to the New Jersey sports betting developments by suggesting that professional sports leagues will eventually get comfortable with sports betting because it increases interest in the leagues and provides an opportunity to enhance revenues:

“It's inevitable that, if all these states are broke, that there will be legalized sports betting in more states than Nevada. We will ultimately participate in that.”

Today, state senator Lesniak upped the ante further, suggesting that the professional sports leagues might be willing to drop their opposition to sports betting in New Jersey in exchange for a cut of the revenue, and even intimated that a deal was in the works because the leagues requested that New Jersey casinos and racetracks delay offering sports wagers for 45 days:

“It would not surprise me during this period of time if the leagues agreed to stand down for maybe a quarter point on the win for using their official statistics for sports betting purposes. We'll see if that comes to pass.”

Given the ubiquity of sports betting and the undeniable connection between sports betting and the popularity of televised sports, such a deal makes a ton of sense. But any grand deal, at least in the next few weeks, seems unlikely. The leagues have just spent two years fighting against expanded sports betting, defending the PASPA ban all the way to the U.S. Supreme Court. During that litigation, the leagues vigorously asserted that expanded sports betting would damage their public reputations. It is not clear whether the public would be comfortable with any endorsement of gambling by the leagues, and it is doubtful the leagues would take any chances on damaging their brands without extensive research and planning.

The better way to read the comments by Silver and Lesniak is as a pair of trial balloons. The fact Silver is open to exploring a business opportunity connected to sports wagering does not necessarily make his opinion the official position of the NBA. Rather, Silver’s comments simply acknowledge the obvious connection between sports and gambling, and serve to start a discussion—both publicly and within the NBA ownership—about whether the league should explore a business opportunity in that space. Similarly, senator Lesniak’s comments do not necessarily mean that any behind the scenes negotiations between the leagues and New Jersey’s casinos and racetracks are occurring or even imminent. Rather, the more likely explanation is that the senator's observation was simply an attempt to leverage Silver’s comments and float an idea for a negotiated financial settlement, or was just a byproduct of the senator's propensity for irrational exuberance when discussing sports wagering (see also Lesniak's claim today that “I would mortgage my house" on being able to place legal sports wagers in New Jersey within 45 days, or his claim that after Monday's legal maneuvering “This is all over but the shouting", not to mention promising legal sports betting at New Jersey casinos before this season's Super Bowl).

Of course, wherever the NBA might be on the issue, the other leagues simply don’t appear open to the idea of any expansion of sports betting. MLB has long been aggressive in stomping out any hint of gambling (think the Black Sox scandal and the still-barred-for-life Pete Rose). The NCAA is the embodiment of sanctimonious hypocrisy on financial issues. And the NFL is run by a commissioner who prides himself on imposing hefty penalties for player misconduct, and yet is currently embattled because he failed to be sufficiently harsh in doling out punishment in a domestic abuse situation. Frankly, even the NBA would need to be worried about public perception given its recent referee gambling scandal. None of these leagues seem likely to want to jump into a deal to directly license gambling on their games.

Of course, if the price is right, scruples have a way of disappearing.

III.  Why is senator Lesniak putting together yet another sports betting bill?

Today, senator Lesniak announced he is drafting yet another sports betting bill, his third on the topic (the prior bills being the Sports Wagering Act currently on the books, and his bill to explicitly repeal sports betting prohibitions which Governor Christie vetoed earlier this year). But New Jersey has argued to the federal court that the current Sports Wagering Act already has “repealed” sports betting prohibitions, so what purpose does Lesniak’s new bill serve? According to Lesniak:

“This [bill] will shore up the attorney general’s legal argument. His motion asks to court to parse my previous legislation, which it shot down by saying it implicitly repealed the state’s prohibitions on sports betting at casinos and racetracks. This bill will specifically abolish language on the books that prevents sports betting, which will give our legal motion more authority and will help withstand any challenges.”

In other words, Lesniak recognizes that New Jersey’s supposedly strong argument to the court actually has a major flaw—the current Sport Wagering Act has no language that explicitly repeals prohibitions on sports betting. As noted in my prior discussion of the state’s arguments, this flaw may well be fatal to the state’s efforts to have the injunction modified to permit New Jersey sports betting scheme to move forward. But, a new bill with clear repeal language, and possibly additional language to clarify what regulation, if any, will apply to sports betting, will undoubtedly strengthen the state’s case in court.

What the new bill really does, however, is underscore the awkward politics of the issue for Christie, who seems to lurch from position to position depending on the needs of the moment. Christie vetoed an explicit repeal bill on the grounds that the Third Circuit’s interpretation of PASPA was the law and must be respected. Then he suddenly reversed course and signed onto the plan to declare the Sports Wagering Act a “repeal” and moved to implement sports betting via some rather convoluted legal reasoning. Now, one can assume he will support and sign whatever new “repeal” bill Lesniak can get through the legislature. Apparently, Christie has decided that the failure of the Atlantic City casino industry is a bigger political liability than an explicit endorsement of expanded gaming. Christie must be gambling that more Republican presidential primary voters will vote on economic rather than social issues.

Which makes me wonder: When will senator Lesniak push for legal gambling on political races? I want to bet my mortgage against Christie being the Republican presidential nominee.


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