Lawmakers in Michigan have reached an agreement with stakeholders to legalize internet gambling, including online poker.

According to Sen. Curtis Hertel Jr., the industry and the administration came together on a tax increase that will ensure the signature of Gov. Gretchen Whitmer. Substitutes with the Senate changes were voted out of the Senate Regulatory Reform Committee early Tuesday.

Hertel expects the package of bills to be approved on the Senate floor early Wednesday, getting concurrence in the House later in the day. The Michigan Legislature hopes to adjourn its session for the year by the end of the day on Wednesday.

“This was a very difficult process,” Hertel said, “so I’m really happy to be able to get it this far and excited for the voting the next two days.”

Tiffany Brown, spokesperson for Whitmer, confirmed that the governor is on board with the changes made in the Senate, saying in a statement:

“The governor is pleased with the progress made on gaming over the course of this year, particularly once Sen. Hertel and Rep. Warren were able to engage and resolve key issues to get this package across the finish line. … This is a good, bipartisan solution made possible by working together on a complex issue, and the governor looks forward to closely reviewing this package once it hits her desk.”

The price of Michigan online gambling

Hertel indicated that Michigan’s 23 tribal casinos and three commercial casinos have agreed to a hefty tax rate in order to get internet gambling legalized.

The tiered tax structure is as follows:

20% on revenue less than $4 million

on revenue less than 22% on revenue from $4 million – $8 million

on revenue from – 24% on revenue from $8 million – $10 million

on revenue from – 26% on revenue from $10 million – $12 million

on revenue from – 28% on revenue of $12 million+

This is a substantial increase of 12% at the lowest tier from the bill passed by the House in October. At the highest rate, the increase is 5%. The House bill also started operators out 4% lower, increasing the rate by 2% until it reached maturity in Year Three.

Commercial casinos in Detroit have to pay a 1.25% city tax, although legislators have said the effective city tax rate is 3.25%.

“The governor’s top priority when getting this done was to protect the School Aid Fund, and Sen. Hertel and Rep. Warren helped make that happen and addressed a number of other concerns she had,” Brown said.

Compromise addresses governor’s concerns

During a House committee hearing in May, members of the executive branch expressed that the governor opposed the internet gambling legislation due to fears it could cannibalize revenue from Michigan’s online lottery.

As one of six states with an internet lottery, Michigan presented a unique obstacle for iGaming legislation. Similar concerns caused previous Gov. Rick Snyder to veto legislation that would have legalized online gambling around this same time last year.

Believing that online slots, in particular, would be too close to some iLottery products, the current administration originally requested that slots be removed from the legislation, and the tax rate peak at 40%.

According to Hertel, the state’s tribal and commercial casinos agreed to the tiered structure to get slots included in the package.

“That’s what it took to get the governor’s support,” Hertel said of the tax rate. “The state takes in $90 million in internet lottery for schools, so it’s important to protect that in this process. The goal is to make sure the School Aid Fund didn’t have any loss.”

At the request of the administration, $2 million a year from the state’s tax revenue from iGaming (and another $2 million from sports betting) will go to the First Responder Presumed Coverage Fund to support firefighters undergoing cancer treatment.

Michigan casinos get some breaks

Michigan casinos did receive one concession that will help them deal with the higher tax rate, at least for the first five years operating online gambling.

In defining adjusted gross receipts, the Senate substitute allows for internet gaming operators to deduct free-play money given to customers as a promotion for a limited time. The deduction is limited as follows:

For years one through three , deductions are not to exceed 10% of gross receipts.

, deductions are not to exceed of gross receipts. For year four , the deduction is capped at 6% .

, the deduction is capped at . For year five , the deduction tops off at 4% .

, the deduction tops off at . For year six and beyond, no deduction.

License fees also are kept at $50,000 for the initial application, $100,000 for the initial license and $50,000 each following year. The administration originally proposed an initial licensing fee of $1 million renewable at $500,000 for the largest casinos.

MI tribes assured of online gambling opportunity

To offer internet gambling outside their reservations, Michigan’s Indian tribes are entering into commercial agreements with the state.

At the request of the tribes, the Senate added a clause to the bill to ensure that commercial casinos won’t get a head start on offering internet gambling. Commercial may not begin offering iGaming until a tribal casino is licensed, and vice-versa.

“There was a concern among tribes that casinos would have an edge getting licensed by the state since they already are licensed,” Hertel said. “So we had to give some insurances to the tribes that they would have equal footing when it comes to licensing.”

This could delay the commercial casinos from commencing internet gambling offerings if tribal casinos aren’t prepared to enter the market as quickly.