There are a lot of good reasons to regulate online gambling, from a harm reduction and customer safety standpoint. Inevitably, though, a lot of the political conversation comes down to dollar figures. How much revenue would a legal market for such products add to public coffers?
This series, therefore, wouldn’t be complete without an attempt to answer that question for Ontario. Unfortunately, the upcoming market has a number of unique features that make this even harder to project than usual.
Articles in this series
- I: The Canadian Status Quo
- II: The Goal And The Approach
- III: The Major Players
- IV: The Revenue Question
- V: Marketing Considerations
- VI: Legal Challenges
- VII: Canada’s Future
How much will Ontario gambling sites pay?
Not least among the sources of confusion is the fact that Ontario online gambling won’t have a tax rate, per se. It’s important to remember that despite being billed as such, Ontario won’t be a true private sector market. No one is obtaining a license to offer their products independently. Rather, the companies will be signing operating agreements with iGaming Ontario, which will “conduct and manage” the business in accordance with federal law.
Exactly how much of the revenue goes to the government depends on the terms of those agreements. At the moment, no one officially knows what those terms will look like. However, industry insiders have been batting around figures in the ballpark of 20%.
That seems like a reasonable guess. Using US white markets as a point of comparison, it would be middle of the road. Specifically, it would be:
- Higher than New Jersey and West Virginia (both 15%)
- Comparable to Connecticut (18%) and Michigan (sliding scale starting at 20%, up to 28%)
- Lower than Pennsylvania (17% on poker and table games, 54% on slots) and Delaware (65%)
Despite sports betting hype, online casino is king
Based purely on the amount of media attention it gets, it would be easy to assume that sports betting is the real cash cow for regulated gambling. This is far from being the case, however.
There are several good reasons it’s in the news so much more than online casino gaming, but its relative dollar value isn’t one of them. It’s a novelty, for one thing, having been illegal at the federal level in both the US and Canada until very recently. What’s more, mainstream sports media had a large audience to begin with, and has segued naturally into covering sports betting, as well.
Nonetheless, in US states that have both online casino gaming and sports betting, the former generates considerably more gross gaming revenue. Typically, it outperforms sports betting by a factor of two or three. In the retail sector, the difference is larger still.
What’s more, some states tax sports betting at a lower rate than casino games. That makes for even bigger discrepancies, in terms of tax revenue.
For instance, New Jersey and Pennsylvania each collected about $122 million in tax revenue from their sportsbooks in 2021. However, New Jersey online casinos contributed $205 million, and Pennsylvania’s paid a whopping $466 million in taxes.
Per capita iGaming tax revenue in US markets
There’s no other province in Canada trying to do what Ontario is doing. Nor is there another country in the world that has the same combination of legal, social and economic factors as Canada. This makes it hard to predict what the market will look like.
The best point of comparison, though it’s far from perfect, is with the US. Sports betting and online gambling are both new there; unlike in the UK, where they have a long history. Meanwhile, Canadians have more in common with Americans than they do with continental Europeans.
There are only six US states where online casinos operate, and all but two are less than three years old. Of the six, we’ll ignore Connecticut, as it launched so recently that we have only a few months’ worth of revenue data. Nonetheless, we can see some trends emerging in the other five.
Higher tax rates pay off
Firstly, states with higher tax rates do seem to experience a chilling effect on their markets relative to similar states with lower rates. However, the effect is weak enough that a higher rate does seem to increase the amount collected by government, albeit at the expense of a larger reduction in operators’ after-tax net revenue.
Pennsylvania’s massive 54% tax on slots revenue received a great deal of criticism when the bill passed, and yet it has by far the highest per capita iGaming tax revenue of the five, at $36.44 per resident in 2021.
If Ontario does go with a rate of around 20%, that should not work against it, despite being a little higher than average.
Secondly, population seems to be a much larger factor. Even on a per capita basis, Delaware and West Virginia, with populations of 1 million and 1.8 million respectively, are far behind the larger states.
This is presumably due to a combination of fewer brands to choose from in smaller states, and those markets being a lower priority for the operators, in terms of their marketing efforts.
This, too, works in Ontario’s favor. Its population of 14.6 million makes it larger than any of the US online casino states.
Michigan might be the benchmark
All things considered, Michigan might be the best point of comparison for Ontario. With 10 million people, it’s not quite as close to Ontario’s size as Pennsylvania, but it’s not too far off.
It’s also barely a year old, so it hasn’t had much time to grow, but it reached a stable situation very quickly, unlike Pennsylvania which took a while to ramp up. Most of its operators are still paying a rate that’s toward the bottom of its 20%-28% tax scale, which means they’re close to what we expect for Ontario.
Finally, Ontario and Michigan are neighbors, and the launch of sports betting in Michigan was one factor that contributed to the increased willingness of Canadian politicians to look at expanded gambling.
Over its first year, Michigan’s iGaming tax revenue – which includes a small contribution from online poker, as well as casino – was just over $20 per resident, very close to New Jersey’s.
Scaling up for population and converting to Canadian dollars at the current exchange rate, we might very optimistically project around $375 million (CAD) for Ontario per year.
Multiple grains of salt needed
That said, it’s important to keep in mind that Ontario is uncharted territory. Even in the US, we can see considerable differences from state to state, in terms of how the markets are performing.
The differences between Canada and the US will likely be even larger. Most of them would suggest that we should revise that $375 million estimate downward, at least a bit. Exactly how much is anyone’s guess.
Gambling compliance company VIXIO projects nearly $1 billion (CAD) in gross revenue for iGaming and sports betting combined in the first year. At a 20% rate that implies $200 million to the government, of which at least two-thirds ($135 million or so) would probably come from online casinos.
That, in turn, implies only a third as much per capita as we see in Michigan, which is not unreasonable, though perhaps a bit pessimistic.
Here are a few reasons we might expect weaker performance in Ontario than in Michigan and other US states. The first two are addressed in more detail elsewhere in this series.
Ontario is likely to face legal challenges when the market launches. Those are covered in Part VI of the series.
However, even if the market withstands those challenges, news about them may taint the public’s perceptions of the safety of online gambling. Some may hold off on signing up for a site that they feel might end up getting shut down.
Marketing challenges for US operators
European operators currently serving the Canadian gray market may fare alright with the transition. However, not all of them will see Ontario as a priority, geographically removed as it is from their core markets.
US operators may have bigger ambitions for Ontario, but they won’t have the same advantages they do at home. Neither the daily fantasy sports companies (DraftKings, FanDuel) nor the brands associated with retail casinos (BetMGM, BetRivers, etc.) will have customer databases that are as extensive as the ones they’ve used in the US.
There are other marketing challenges as well, like the prohibition on advertising dollar amounts for signup bonuses. These are covered in Part V.
These issues may not impact the ultimate size of the market very much, but they may mean it takes longer to get up to speed. VIXIO’s projection has the market size almost doubling in the first five years, and that may be why.
Household income and income distribution
Ontario has a median individual income of around $55,000 (CAD). Michigan’s works out to around $41,000 when converted into Canadian dollars.
In theory, that works in Ontario’s favor. However, the distribution of wealth in the US is much more polarized than in Canada. Although there’s a serious shortage of good data on gambling demographics, there’s some indication that those above and below the median income tend to gamble more, while those in the middle gamble less.
The cost of living in Michigan is also below the national average, while the Greater Toronto Area – home to about 40% of the province’s residents – is very expensive. That cuts into disposable income, which should in turn reduce gambling activity.
Converting US tax revenues to Canadian dollars may be an optimistic assumption. Canadians may bet more than Americans based on the lower value of their currency, but they may not.
Psychologically, there’s a tendency to fixate on certain bet sizes, like $1, $5, $10 and so forth. Someone who would bet $10 per hand of blackjack in the US is unlikely to bet $13 in Canada, even if given the option to do such fine-tuning. We’re assuming that some percentage will move up to $20, such that the average bet increases in keeping with the exchange rate. However, that assumption may not be warranted.
Likewise, some online casino operators may increase their minimum bet sizes in Canada for currency related reasons, but others may not.
Whereas Canada has been a gray market throughout the history of online gambling, US states without online casino regulations have been a clear black market since 2006.
That means that many offshore operators do not serve the US at all. Those that do cannot advertise their play money products the way they do in Canada. Getting money on and off those sites is also slow, difficult and risky.
In other words, Canadians have already had almost unimpeded access to online gambling for over two decades. Some may not have known they had that option. However, by and large, online gambling will probably be much less of a novelty for Ontarians than it has been for residents of Michigan and other US states where it has become legal.
Black market competition
Relatedly, Ontario will have less power to keep black market operators away from its residents. AGCO has said that it will blacklist anyone still serving Ontarians in an unregulated fashion after Apr. 4. However, that’s about all it can do.
For those companies holding US licenses – or who plan to in future – that will be enough. However, sites that already serve the US illegally won’t care about being blacklisted in Ontario. Unlike the US, Canada does nothing to prohibit financial transactions with such sites.
Therefore, Ontarians who are already playing on such sites, who prefer them to the legal options, or who don’t know the difference, may stick with the offshore market. That will, in turn, cut into the revenue for regulated operators.
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