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Michigan: A model for the future?

Insight | Analysis

As Representative Brandt Iden’s betting and gaming bills move closer to being ratified, iGB North America examines how the lawmaker has successfully balanced commercial and tribal interests in drafting the legislation. This originally appeared in issue 41 of iGB North America.

Gaming legislation tends to satisfy commercial operators while disappointing tribal entities or vice versa. But, as Paul Girvan says, a Michigan lawmaker’s efforts to balance both sets of gaming interests may provide a blueprint for other states to follow.

Michigan has for years been striving to confect online gaming legislation in a state where commercial and tribal gaming interests coexist. And this process has been arduous.

Efforts were initially led by Senator Mike Kowall, but after he reached his term limit at the end of 2018, Representative Brandt Iden has picked up the mantle. While his igaming bill progressed through both legislative chambers, it was vetoed by outgoing governor Rick Snyder in December last year. 

Undeterred, Iden returned with House Bill 4926, though its passage to law looks set to be blocked by new governor, Gretchen Whitmer. She remains concerned about the potential for legal igaming to cannibalize online lottery revenue and is unconvinced by what is perceived as a low tax rate. 

As to the former, Iden believes that in the face of mounting evidence, the cannibalization concerns will fade. On the latter, he believes a compromise can be reached. 

That, coupled with the state’s need for new revenue streams, a desire to protect consumers and perhaps most critically, the need for the state’s gaming industry to remain competitive, could see sceptics reassess their opposition. Iden believes this bill could pass the legislature and gain the governor’s approval by the end of the year. 

The fact that the bill passed the legislature is notable given the disparate interests in the state, in relation to gaming. 

To understand why, we need to look at H4926 itself. Some of its key points are:

  • It authorizes both commercial and tribal casinos in the state to provide online gaming
  • Licenses are valid for five years, renewable for a further five.
  • There is a dual track application process in which commercial and tribal gaming entities are required to provide differing documents. Tribal applications require the Tribal Gaming Ordinance and latest certified National Indian Gaming Commission (NIGC) audit. 
  • A license application fee of $100,000 is required, with a further $200,000 payable upon issuance of the license. Annual renewals fees are set at $100,000. 
  • Michigan would receive an 8% tax on commercial operators’ revenue, with tribal entities to pay the equivalent to 8% of revenue. 
  • One “skin” per license. 
  • The legislation contained a timeline which essentially delayed implementation for 15 months. This was in part to allow mostly smaller tribal operators the ability to catch up to the larger players in their preparation for online gaming. Iden has indicated that this could be drastically shortened as many of the casinos
    it was designed to assist have moved forward in their preparations in the meantime. 
  • The legislation also contains a ‘hold harmless’ clause for Detroit whose city bonds are backed by gaming receipts. Detroit is guaranteed gaming receipts of $179m annually. This was done due to concerns that online gaming would cannibalize brick-and-mortar facilities. This, of course, has been shown to be not the case. 
  • The bill allows municipalities that levy a 1.25% fee on land-based operations to do so online. 
  • It should be noted that for the commercial operators in the City of Detroit, there will be an additional 3.5% tax on GGR levied by the city. 

The bill creates a balance among numerous competing interests including tribes, commercial operators, cities and the state. 

The most consequential component of the legislation is how tribes were addressed. Ultimately the success of the bill hinges on persuading the tribes to grant a limited waiver of tribal sovereignty as reflected in the bill’s language: 

The person provides a waiver of sovereign immunity to the division for the sole and limited purpose of consenting to both of the following: 

  1. The jurisdiction of the division to the extent necessary and for the limited purpose of providing a mechanism for the division to do all of the following: 

(A) Issue, renew, and revoke the person’s internet gaming license
(B) Enforce the payment obligations set forth in this section and section 14

(C) Regulate and enforce the provisions of this act described
(D) Inspect the person’s internet gaming operation and records
(E) Assess fines or monetary penalties
(F) Enforce the payment of internet gaming license fees

(ii) The exclusive jurisdiction of the courts of this state, and expressly waiving the exhaustion of tribal remedies. 

This limited waiver of tribal immunity applies to online gaming only. As such, it mirrors agreements between Michigan tribes and the state in regards to liquor licenses. 

However, the legislation also recognizes the supremacy of tribal gaming compacts, requiring the governor to negotiate “in good faith” any changes to the state compacts to conform with the legislation that may be requested by tribes. The legislation explicitly states that the limited authority the tribes confer on the state are to be used only for the regulation and enforcement of online gaming only, and cannot be used in an arbitrary or capricious manner. Furthermore, they are not to extend to any regulatory or enforcement authority over Indian gaming operations. 

Sports betting
In September, Iden followed up the igaming bill with H4916, a proposal to legalize sports betting. 

This is another significant development. With a provision for online wagering, in tandem with H4926 this could create a highly competitive online market for tribal and commercial operators alike. 

There is a clear nexus between sports betting and igaming. Betting will account for a significant percentage of online revenue once live and, as we have seen in other states, this has a positive knock-on effect for online casino. 

Sports betting is an integral part of the overall online gaming offering and will boost revenues to other online segments. With the land-based tethering, the brick-and-mortar operators will find their positions strengthened too. 

So what does H4916 contain?

  • Mobile wagering is permitted, with no in-person registration.
  • State tax: 8% for commercial casinos only.
  • Annual license fee: $200,000, then $100,000 annual renewal.
  • It is legal to bet on college games.
  • Tribes can apply for sports betting licenses.
  • Casinos can enter into agreements with tribes to facilitate administration of multi-jurisdiction sports wagering, consistent with federal law. 
  • One year for promulgation of rules.
  • One skin per license.
  • Must hold online license to offer online sports betting.
  • No tax on tribal, governed by compact. 

Of course, there are concerns, mainly around the tax rate. The 8% GGR tax on commercial casinos has been criticized by lawmakers who want a higher rate, closer to that of New Jersey. Indeed, some adjustments may be necessary to smooth the bill’s passage. 

However, any such increase will create a disconnect with the online gaming bill, which sets out an 8% GGR tax for both tribal and commercial casinos. This creates a conflict—and some confusion—over mobile wagering. For example, it is unclear whether or not tribal online sports betting would pay 8% to the state, as called for in the online bill, or zero as suggested by the current sports betting bill. 

Indications from Representative Iden’s office suggest there will soon be another version of the bill, which will address these discrepancies. It is their intention to move the structure of the sports betting bill closer to that contained in the igaming bill. This suggests there may be a push to extend the limited sovereignty waiver to online sports betting. If this is the case, it remains to be seen how the tribes will respond. 

From the commercial casino perspective, these two bills enhance the competitiveness of the three Detroit facilities, which compete directly with out-of-state venues in Indiana, Ohio and the Canadian province of Ontario. 

For tribal operators, the concession of a limited waiver of sovereignty provides them a level playing field with commercial operators in the state and increases their competitiveness with out-of-state facilities, as well as providing a 15-month standstill period in which they can prepare for launch. 

With the combined effect of both bills, Michigan is now likely to realize greater revenue from online gaming, boosted by mobile sports betting. This, coupled with revenue from retail sports betting, represents a major upside for the state. Overall, Michigan benefits by creating a level playing field that provides the state’s casinos, both tribal and commercial, with the ability to operate online and sports betting thereby significantly improving their competitive position vis-à-vis out of state operators. In the long run, stronger, more competitive casinos translate into increased state revenue. 

Michigan has taken a comprehensive approach to online gambling and sports betting, in contrast to many other states. In addition, it had to contend with both tribal and commercial segments— something absent in the likes of Pennsylvania and New Jersey.

That Representative Iden was able to reach agreement with numerous disparate stakeholders is surprising— and commendable. The two bills are clearly aligned and may be even more closely aligned as subsequent versions are developed. If Iden is successful in passing both bills, Michigan would have successfully navigated the thorny issues of igaming and sports betting in a manner which maximizes revenue to the state while satisfying the needs of a diverse array of stakeholders.

These efforts have thrust Michigan into the national spotlight, and its innovative and cooperative approach, combining the interest of tribes and commercial operators, could serve as a template for other states seeking to address this thorny issue. 

Prospects for both bills appear bright given the state’s ongoing need to generate new tax revenue. Both commercial casinos and tribes are supportive of legislation – though the jury is still out on any limited waiver of sovereignty related to sports betting. The primary sticking point is likely to be Governor Whitmer’s concerns over the cannibalization of iLottery revenue, and the tax rates. 

As regards the former, this should be a relatively easy argument to make, as experience in New Jersey shows no impact on the internet lottery there (in fact it has seen increases since the advent of online gaming). Assuming the governor’s objections can be overcome, it is reasonable to expect that these bills could pass before the end of 2019.

That would likely see some form of online gaming and sports betting occurring sometime in the middle of 2020. Iden’s bills have succeeded thus far in balancing disparate interests and priorities—this approach bodes well for the sort of cooperation and compromise needed to shepherd them into law. 

Paul Girvan is chief executive of PKC Gaming & Leisure Consultancy. He has been involved in the US gaming industry since its development beyond Atlantic City and Las Vegas, conducting project-specific and statewide analyses for governments, tribes and commercial casino operators. Girvan has conducted numerous nationwide and state level analyses on igaming and its legislative development.