McDermott: Don't ban Web gambling, tax it

WASHINGTON — It's a morality tussle, Congress style.

On Wednesday, Rep. Jim McDermott, D-Seattle, appeared before a House committee to push for legalizing Internet gambling. Specifically, McDermott wants to tax wagers and winnings to pay for improved foster care and early-childhood education.

His Democratic colleague Rep. Barney Frank of Massachusetts also testified in favor, arguing that if people want to blow their money playing Texas Hold'em online, it's their prerogative.

But one of the duo's most vociferous critics, Republican Rep. Bob Goodlatte of Virginia, warned the Ways and Means Committee that legalizing Internet gambling would pave a path to addiction and financial ruin.

At stake are tens of billions of dollars in potential tax haul — money that could be used by state and federal governments grappling with yawning deficits. What's more, poker aficionados and other online gamblers are practically begging to be taxed. They want to repeal a 2006 federal law that cracked down on Internet betting, prompting some devotees to keep playing through illegal channels.

"Prohibition hasn't prevented the millions of Americans who want to gamble online from doing it," McDermott told the members of the Ways and Means Committee, which oversees tax matters. "Driving Internet gambling offshore has been a policy failure."

McDermott testified on behalf of his bill, the Internet Gambling Regulation and Tax Enforcement Act. He is chairman of the Ways and Means Income Security and Family Support Subcommittee.

McDermott's bill is companion legislation to a bill introduced by Frank, of Massachusetts, to put licensing and regulation of online betting in the hands of the Treasury Department.

This is Frank's third and McDermott's second attempt at liberalizing and taxing online gambling.

Gambling is already a huge industry in the United States. Casinos operate in a dozen states and on tribal lands in 28 states. Forty-two states, including Washington, have state lotteries.

In all, the gambling industry did $92 billion in business in 2007, according to the Joint Committee on Taxation. Illicit Internet gambling is estimated to account for $5.8 billion of that, the biggest portion of which comes from online poker.

If online gambling were to become legal in the U.S., analysts project that the market could quickly explode to many times that size.

McDermott says his bill would generate $42 billion in new tax revenue over 10 years. Some 57 percent of that would come from income taxes on winnings — money that players are already supposed to declare, whether the gambling is illegal or not. An additional $8.5 billion would be raised by applying an existing 0.25 percent excise tax on online wagers.

McDermott has proposed one new tax, a 2 percent licensing fee on Internet gambling deposits.

McDermott, who used to work as a psychiatrist for children and adolescents, would earmark a quarter of the tax money to help states better care for 500,000 American foster kids.

McDermott said tight budgets have forced most states to release children from foster care at age 18 instead of 21.

McDermott defended targeting a specific tax for a specific cause, even as the nation is attempting to forge a comprehensive plan on tax policies and deficit reduction.

McDermott also dismissed those who say that online anonymity could lure minors into gambling. The critics, McDermott said, "are simply unwilling to admit the reality of what's going on."

So why not make it legal, tax it and use the money to help foster kids thrive and go to college, he asked.

"There are much bigger problems out there," McDermott said. "But this fixes one particular issue."

Kyung Song: 202-662-7455 or ksong@seattletimes.com