Online Gambling and Crony Capitalism

Online Gambling and Crony Capitalism

Everyone claims to hate crony capitalism, but Congress's legislative hopper is overflowing with rent-seeking corporate-welfare proposals written by high-powered lobbyists.

Sen. Mike Lee (R., Utah) recently pointed out the corrosive nature of such cronyism, saying, "Policy privilege corrupts the free market by rewarding political connections over competitive excellence. It subverts the rule of law by codifying inequality." He rightly argued that "to fix what's broken in Washington and our economy, a still-distrusted GOP first must end cronyism in our own ranks. The GOP has to close its branch of the Beltway Favor Bank and truly embrace a free-enterprise economy of, by, and for the people."

It is precisely the truth and power of Senator Lee's arguments that make his support for federal legislation to prevent states from legalizing online gambling within their own borders so troubling.

For nearly a decade, the Department of Justice ignored a Fifth Circuit Court of Appeals ruling declaring that the Wire Act covers only sporting events, not games of chance. (The act's text is somewhat unclear, first referring to "bets or wagers on any sporting event or contest" but in subsequent references saying only "bets or wagers."). The DOJ reversed itself in 2011, returning to states the right to regulate online gambling.

This was an excellent move for states' rights. Though the federal government is constitutionally authorized to regulate interstate commerce -- and the Wire Act applies only to transmissions that cross state lines -- federal regulation is simply not needed in this area. Legal gambling sites use technological methods to restrict their business to the states where online gaming is allowed, so states that don't permit such gaming are not affected. And the DOJ's previous interpretation of the Wire Act was incredibly broad -- it effectively banned all Internet gambling, even within a single state. (Internet transactions typically involve data crossing state lines behind the scenes.)

Nevada, Delaware, and New Jersey have legalized online gaming and nearly a dozen more states are considering following suit. Seeing this trend, Sheldon Adelson tried -- unsuccessfully -- to build an online gaming business. Since failing to capitalize on the market, his company, Las Vegas Sands, has been arguing that online gaming represents a competitive threat to the profitability of brick-and-mortar casinos. With more states looking to legalizing online gaming, the threat appears to be growing. So Adelson is asking his friends in government to ban his competitors. He launched the Coalition to Stop Internet Gambling and hired lobbyists to write legislation.

States'-rights advocates and most in the casino industry welcomed the new DOJ interpretation. Adelson, however, vowed to spend "whatever it takes" to overturn these states' rights to conduct their own affairs. This is a promise that politicians know to take seriously. In 2012 alone, Adelson spent over $100 million supporting Republicans. So it was no surprise that within months of his proclamation, Adelson got his bill introduced into Congress.

Adelson is waging an all-out campaign to ban online gaming by tapping into his wide portfolio of political relationships. There is little doubt that the likes of Sen. Lindsey Graham (R., S.C.), who has long survived Washington by keeping the right political allies; Gov. Rick Perry (R., Texas), who has presidential aspirations; and Gov. Rick Scott (R., Fla.), who is facing a tough reelection fight, have all signed on to Adelson's effort in hopes of collecting the promised bounty.

Is it a stretch to suggest that Adelson's support is tipping some politicians to oppose online gaming? Senator Graham had been silent on Internet gambling right up until he introduced federal legislation to ban it, and the legislation was announced after Adelson dropped $15,000 into Graham's election coffers. Governor Perry -- last seen with Sheldon Adelson at a gala in New York this past Sunday -- has received Adelson support, but more importantly, the governor knows full well that Adelson single-handedly kept alive Newt Gingrich's failed 2012 presidential bid. Since 2010, Gov. Rick Scott's political agenda has received $750,000 from Sheldon Adelson.

Still think it's a stretch? How's this? The legislation, introduced in March by Senator Graham, was drafted by Darryl Nirenberg, one of Adelson's lawyers.

Others, such as Senator Lee and Rep. Jason Chaffetz, likely have other motives for supporting this legislation. Lee and Chaffetz both hail from Utah, one of only two states that allow no form of gambling -- not even a lottery. It is more likely that they are acting on personal conviction and personal opposition to all forms of gambling.

But personal conviction doesn't make the Adelson legislation any less crony or any more justified. Just as states' rights permit Utah to outlaw gambling, they should permit other states to allow it. This fact was painfully evident in the twisted logic and rhetorical gymnastics Lee and Chaffetz offered at their press conference announcing the introduction of the Adelson bill.

Chaffetz repeatedly attempted to position the new DOJ interpretation as an overreach intended to allow unfettered, unregulated online gambling. In reality, the exact opposite is true. The new DOJ interpretation is a correction of a past overreach that usurped states' rights. Rather than allow for unfettered gambling, the decision actually sets up regulatory protections for gaming where none currently exists. Senator Lee also bizarrely argued that the Adelson legislation trumping state's rights was somehow necessary in order to protect states' rights.

A coalition of almost a dozen leading conservative organizations, led by FreedomWorks and the Competitive Enterprise Institute, recently sent a letter to Congress opposing this crony legislation. These groups not only point out not only the federal overreach of this legislation, but also argue it sets a dangerous precedent for future censorship of the internet.

The reality is that this legislation isn't about the existence of online gambling: It exists, and Americans spend billions annually on unregulated overseas gaming sites. This legislation also isn't about safety: Foreign sites operate without child safeguards or financial protections. The Adelson legislation is about usurping states' rights so that one billionaire can shield his business from competition -- the epitome of cronyism.

Republicans have railed in opposition to Obama's federal overreach as vociferously as his cronyism. Just as Senator Lee argues, the GOP must practice what it preaches and rid its own ranks of crony capitalists.

They can start doing both by opposing Adelson's power grab.

Jerry Rogers is vice president at the Institute for Liberty, and the founder of Capitol Allies, an independent, nonpartisan effort that promotes entrepreneurship, economic growth, and free enterprise.

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