Device debate: Gov. Shapiro's proposed tax rate gets pushback from skill game operators

Operators and manufacturers of electronic skill games say they’ve been anticipating Pennsylvania might soon take a tax bite from their revenue, but they protest that Gov. Josh Shapiro’s proposed 52% tax is excessive.

“It would kill all of us,” Jordan Scanlan said. “We would never be able to stay open. If it was 10% or 15%, that would be reasonable.”

Based in Johnstown, Scanlan operates skill games at 10 sites, branded as The Vault Game Room, that includes one in Unity. Each location has an average of a dozen games.

The percentage the governor is suggesting wouldn’t be sustainable for businesses like his, Scanlan said.

He began his venture into skill games in 2021 and is looking to add five more sites.

Software-supported skill game terminals have been popping up in recent years at bars, convenience stores, fraternal clubs, malls and other places like Scanlan’s. The games offer cash payouts to players who are able to line up three like images or complete other challenges.

The games are unregulated, but Shapiro wants to change that.

His 2025-26 state budget presentation suggested there are as many as 70,000 skill games throughout Pennsylvania. According to his proposal, that number initially would be slashed to 30,000 for both skill games and other video gaming terminals, gradually increasing to 40,000 by 2029-30.

There would be a maximum of five game machines allowed per establishment.

“There’s nothing wrong with game rooms,” Scanlan said. “They don’t hurt anything.

“If the business is working, why should there be a limit on how many games are allowed in the space?”

Though his Unity location is among The Vault sites that are open round-the-clock and are unattended, Scanlan said he employs about 30 people among his other sites.

“It’s a very easy job,” he said. “It’s benefited a lot of seniors who want to make extra money to meet a car payment, but they can’t stock shelves at the store.”

Lottery impact?

Shapiro has argued skill games indirectly are stealing resources from Pennsylvania seniors.

He has suggested the games divert people away from playing Pennsylvania Lottery games, thus cutting into revenue that supports property-tax rent rebates and helps seniors afford prescriptions.

He said his proposal to regulate and tax skill games would help provide quality control for the games, which would fall under the jurisdiction of the state’s gaming control board.

He indicated it could generate $8 billion in state revenue over five years — through a 5% tax benefiting the lottery fund with the remaining 47% going to the state general fund.

Annual reports show state lottery net revenue increased from $818.6 million in 2003-04 to slightly more than $1 billion in 2013-14 and up to $1.2 billion in 2023-24.

The combined funds the lottery generated for senior center programs, prescription assistance, shared and free ride programs and property tax and rent rebates increased from $810.9 million in 2003-04 to $902 million in 2013-14, dropping back to $891 million in 2022-23.

Pace-O-Matic, a major manufacturer of skill games, has issued a statement indicating it is eager to work with the governor and legislature to negotiate a fair tax rate and regulatory structure for skill games.

It said the proposed 52% rate would hurt bars, restaurants and volunteer and veterans organizations that count on supplemental income from the games. It cites 16% as what it termed a commonsense tax rate, estimating that could generate $250 million in revenue for the state.

The manufacturer disputed Shapiro’s claim skill games cut into lottery sales, maintaining the only link between the two is locations say their lottery sales go up when they also operate legal skill games.

Scanlan likewise is not convinced his games have any impact on demand for lottery tickets, but he said the games are an alternative to gambling at casinos.

“There are tons of people who haven’t played a lottery ticket in their life, but they will pay the skill machines five days a week,” he said. “We get thousands of people a month visiting our places. We get elderly people who can sit and enjoy themselves for two hours; they don’t have to drive to a casino.”

‘Fair for everybody’

Derry Borough resident Angela Moore is among the regulars at The Vault in Unity. Setting a spending limit of $20 per visit, she also has played the machines at another nearby game room in Unity and at a similar venue near New Alexandria.

She said the more intimate game rooms allow her to avoid the crowds and smoking sections at casinos.

Moore isn’t opposed to the state taxing the games.

“If the big casinos have to pay tax, the little ones should have to pay tax, too,” she said. “It should be fair for everybody.”

Advancing a similar argument, major casinos in Pennsylvania have been pushing for the state to tax skill games. The 52% rate proposed by Shapiro is close to what casinos are taxed for slot machines.

Opponents of taxing skill games and slots at similar rates point to court rulings that have differentiated the two, as skill games may require players to call upon their memory or formulate a strategy.

Tax has chance

The proposal to tax skill games isn’t the first such effort in Harrisburg. But, this time, there’s a good chance such a levy could become a reality, as Daniel J. Mallinson sees it.

“It’s probably not a bad bet,” said Mallinson, who is associate professor of public policy and administration at Penn State’s Harrisburg campus.

He said such a tax is a likely candidate for shoring up Pennsylvania’s budget at a time when federal pandemic recovery funding is running out.

“Given that the state is going to need to raise more revenue or significantly cut spending, these types of very specific funding mechanisms, like taxing skill games, are a common go-to for politicians of both parties,” he said. “It’s a lot more controversial and difficult to raise broader-based taxes like income or sales tax.”

Pennsylvania’s Independent Fiscal Office recently warned the state’s budget deficit was on track to climb to $6.7 billion by the 2029-30 fiscal year.

Details of a skill game tax plan, such as how the state would distribute licenses for the machines, have yet to be revealed.

If the tax is too burdensome, Mallinson said, “It could lead to more centralization (of game locations), if smaller businesses are pushed out.”

In a Jan. 15 memo to fellow state senators, four Republican members — including Kim Ward and Joe Pittman —announced their intent to introduce legislation authorizing the Gaming Control Board to license and regulate “a limited number of (skill game) machines for operation at certain liquor-licensed and lottery-licensed establishments,” along with collection of “fair and appropriate taxes.”

The memo doesn’t specify a proposed percentage for the tax.

“I believe that everyone involved in the skill game industry, from distributors to operators and retailers, agrees that regulation is both necessary and welcomed,” said Elias Hanna, who operates nine Just Spin and Win skill games at Monroeville Mall. “It is our fondest hope that any regulations and taxation applied to skill games will be reasonable and fair for all parties involved, enabling the industry to thrive while meeting the needs of Pennsylvania residents and fostering local economic growth, particularly for small business owners.”

Scanlan said he hopes the governor “can come up with something to keep everyone in business.”

Local ordinances vary

As state officials consider regulating the increasingly ubiquitous skill games, some communities are grappling with the issue on the local level.

Scanlan’s unattended Unity game room wouldn’t fly in neighboring Latrobe, where city council recently approved an ordinance amendment setting forth guidelines for all local gaming devices —including slots and skill games.

Under the new rules, at least one employee must be present in a facility with gaming machines. Venues with a club liquor license may have no more than five gaming devices while those having another type of liquor license are limited to three devices.

Anyone under 18 is not permitted to play a gaming device in the city or to enter the area of an establishment where the games are to be segregated. Such establishments must be located at least 500 feet away from each other and from any school, day care, park, church, hospital or other place where children regularly gather.

A violation would carry a fine of up to $600 or up to 30 days in jail.