Pennsylvania’s unregulated skill-based games could be on their way out, sources tell Casino Reports. As the Pennsylvania state legislature and Gov. Josh Shapiro scramble to get a budget in place before the holidays, one proposal would eliminate at least half of the state’s gray-market skill-based games and pull the remaining 40,000 into a regulatory structure.

The idea — which sources say is in the discussion stages and not yet in the form of a written proposal — would allow for 40,000 regulated and taxed skill-based games at bars and taverns, fraternal organizations, and potentially lottery vendors, one source told Casino Reports. The machines would be taxed at parity with state-regulated casino slot machines, which they resemble, sources said.

Casinos pay a 52% state tax and a 2% local tax on slot revenue. Should lawmakers bring skill-based games into the mix, it’s not clear if the tax rate would remain for all slots and slot-style machines, or if the state would bring the tax down. Either way, one source told Casino Reports, industry support hinges on the skill-based games being taxed at the same rate as casino slot machines.

The idea is part of a bigger proposal that would help bridge a projected more than $3 billion budget deficit in Pennsylvania. In addition to taxing and regulating skill-based games, sources say lawmakers are considering increasing taxes on Pennsylvania’s iGaming and online sports betting. If a proposal moves forward, it would mark the first time that a state legislature has raised taxes on online casino and would be part of a growing trend of wagering tax increases. Just this year, lawmakers in Illinois, Louisiana, Maryland, and New Jersey raised wagering taxes.

Betting companies favor skill games tax

Sources say the gambling tax increases are a package deal and would be inserted into the state budget — which is well past a July 1 deadline — as a group. But sports betting operators are fighting against yet another tax increase by pointing to skill-based games as a way to raise money rather than a betting tax hike.

“The state should stop killing the golden goose and focus on a real revenue solution: legalizing and taxing the vast, unregulated skill game market instead,” a source at a company operating in Pennsylvania told Casino Reports.

“Now what’s being discussed to fill the budget gap is taxing skill-based gaming,” another source told Casino Reports. “As part of that discussion, they’re saying, ‘If we’re going to tax skill games, let’s help fill the budget hole and increase the taxes on other gambling, as well.'”

Pennsylvania lawmakers have been toying with the idea of bringing unregulated skill-based games into the regulated market for several years. Pace-O-Matic, the owner of most of the skill-based game routes in Pennsylvania, has traditionally pushed against taxation and regulation and has been in court with local casinos over the taxation issue.

Local businesses that have the skill-based games in their stores and restaurants say the machines provide much-needed revenue and that the 52% proposed state tax rate is too high. They propose a 16% tax.

Still several issues to solve

In July, the Philadelphia Inquirer reported that Pace-O-Matic “has spent millions of dollars in recent years funding politicians’ campaigns and lobbying lawmakers” to keep tax rates lower than what casinos are charged, and for regulations that benefit the company. But the company has also made some missteps, including accusing Senate Republicans of trying to convince lobbyists to drop the company as client.

In addition, according to the Inquirer, Pace-O-Matic’s former compliance officer has been charged with racketeering, though the company has not been implicated.

Regardless of Pace-O-Matic’s situation, lawmakers are still looking for a way to appease the casino industry while bringing the skill-based games under regulation. Casinos would prefer that there be no unregulated machines in the state, but appear to have backed off the idea of eliminating them in favor of limiting and taxing them.

Should stakeholders and lawmakers come to a consensus on how to handle the machines, they’ll still have to sort out how to spend revenue. The state’s Democrats want to use the additional income to fund new Southeastern Pennsylvania Transportation Authority projects, and the Republicans want to spend it on improving rural roads and bridges.

From a political standpoint, even if there is agreement on the regulation and taxation issue, the question of how to spend the funds could derail a bill.

As of late Wednesday, there was no news of progress on a budget out of the state capital, but pressure is mounting. Multiple news platforms reported that school districts could be facing closures because they have not received state funds, and GoErie.com reported that some of the state’s “most vulnerable” residents are struggling to pay for services due to the budget delay.