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Online betting, barred by U.S., gets a second look
By Sewell Chan
New York Times
Updated: 07/28/2010 08:34:21 PM CDT

WASHINGTON — With pressure mounting on the federal government to find new revenues, Congress is considering legalizing, and taxing, an activity it banned just four years ago: Internet gambling.

On Wednesday, the House Financial Services Committee approved a bill that effectively would legalize online poker and other nonsports betting, overturning a 2006 federal ban that critics say merely drove Web-based casinos offshore.

The bill directs the Treasury Department to license and regulate Internet gambling operations, while a companion measure, pending before another panel, would allow the Internal Revenue Service to tax such businesses. Winnings by individuals would be taxed, as regular gambling winnings are now. The taxes could yield as much as $42 billion over 10 years, supporters said.

The two measures — which are backed by banks and credit unions but have divided casinos and American Indian tribes — are far from becoming law. A bill to legalize online poker sponsored by Sen. Robert Menendez, D-N.J., has not had a hearing. The congressional timetable has little spare room before the midterm elections, and the Obama administration has not taken a position.



But the vote suggests a willingness by Congress to look for unconventional ways of plugging holes in the budget and comes as struggling states have been looking to extract revenue from the gambling industry, which took a hit as consumers cut back on travel and entertainment during the recession but continues to reap billions in annual profits. The committee vote Wednesday was 41-22, with seven Republicans joining most Democrats on the panel in favor of the measure.

Rep. Barney Frank, D-Mass., who leads the Financial Services Committee, has been the legislation's champion. "Some adults will spend their money foolishly, but it is not the purpose of the federal government to prevent them legally from doing it," Frank said.

The committee's top Republican, Rep. Spencer Bachus of Alabama, noting the passage of changes in financial regulation this month, said that "after all the talk last year about shutting down casinos on Wall Street," he was incredulous that members would vote to "open casinos in every home and every bedroom and every dorm room, and on every iPhone, every BlackBerry, every laptop."

Bachus said lobbyists had spent "tens of millions" to overturn the 2006 law.

Supporters of legalization said fiscal considerations played a role in their thinking.

"I was looking for the money," Rep. Jim McDermott, D-Wash., said in an interview.

He sponsored the companion measure to allow taxation of Internet gambling; he wants to tie the money to education.

Rep. Brad Sherman, D-Calif., said that the money was an attractive source of financing for other programs. "We will not pass an Internet gaming bill," Sherman predicted. "We will pass a bill to do something very important, funded by Internet gaming."

The legal status of online gambling has long been murky. The Justice Department asserts that the Wire Act of 1961 prohibits it, but prosecutors have largely left individual gamblers alone.

To crack down on the activity, a 2006 law — inserted at the last minute into an unrelated bill in one of Congress' last actions before Democrats took control — banned financial institutions from transmitting payments to and from gambling operators.

In the same year, authorities arrested David Carruthers, a British online-gambling executive, as he changed flights at a Texas airport. He was sentenced to 33 months in prison for racketeering.

Last year, authorities ordered four banks to freeze the accounts of online payment processors that owed money to some 27,000 people who had used poker sites.

But the enforcement actions have barely put a dent in the industry, experts say. Gamblers have used online payment processors, phone-based deposits and prepaid credit cards to circumvent the ban. By some estimates, U.S. online gambling exceeds $6 billion a year.

"Today, any American with a broadband connection and a checking account can engage in any form of Internet gambling from any state," Annie Duke, a professional poker player, testified in May on behalf of the Poker Players Alliance, which hired a former Republican senator from New York, Alfonse D'Amato, to lobby for the bill.

Michael Brodsky, executive chairman of YouBet.com, an online site for parimutuel horse racing, said, "As with Prohibition, illegal online gambling is thriving as an underground economy."

In 1999, the National Gambling Impact Study Commission urged the prohibition of Internet gambling.

Attorney General Eric Holder has said he would not support efforts to legalize online gambling, a view shared by most state attorneys general.

"Because Internet gambling is essentially borderless activity, from a money-laundering and terrorism-financing perspective, it creates a regulatory and enforcement quagmire," said James Dowling, a former special agent with the IRS.

The bill contains measures intended to protect minors and combat compulsive addiction. It would allow states and Indian tribes to "opt out," so players from those states and reservations would not be able to make online bets.

But those governments would have a potentially lucrative incentive to allow the activity since they could then collect taxes.

Before voting, the committee approved amendments to delegate enforcement duties to states and tribes, continue a ban on betting on sporting events and ban marketing aimed at children.

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