Federal vs. State Governments

Internet gambling is exposing inherent weaknesses in some of the world's largest governments; they are conflicts that cannot ever be completely resolved.

In the old days (around 1996), it appeared that the "Great Divide" was between the large countries in the Northern Hemisphere and everyone else. The United States Congress was considering bills that would have made even making a bet online a crime, while island nations and countries south of the equator were issuing licenses.

By 1998, the United States appeared to be standing alone. Proposals in Congress to outlaw Internet gambling were modified to be a little more realistic: Bettors would no longer fear the police knocking down their doors, but operators might not be able to accept credit cards.

Meanwhile, more than 50 jurisdictions – tribes, states, territories, and relatively smaller countries – were either authorizing or operating gambling websites.

Today, the fight is between federal governments and smaller governmental bodies. The national legislatures of the United States and Australia are trying to impose a go-slow attitude. States, on the other hand, are rushing to either prohibit or legalize gaming websites. Some are trying to do both: prohibiting Internet gambling for everyone except their own state-licensed gaming operators.

At least one city considered trying to grab a piece of the virtual pie: The Las Vegas City Council debated licensing the city's name for use on an Australian-based Internet casino, VegasOne.com.

The City Council was told this online casino might have an annual net win of $360 million by the year 2003, giving the city about $90 million a year. Las Vegas has an annual budget of only $320 million. Of course, the project's advocate believes this single site could grab 10 percent of the entire world market in just two years.

Nevada, Louisiana, Michigan, and Illinois have passed laws outlawing Internet gambling, while similar bills are pending in many other state legislatures. But most of these laws contain significant loopholes, allowing legal local operators to take bets online.

Even the most broadly worded ban is often worded in such a way as to actually legalize Internet gambling for a select few.

California's A.B. 2179, for example, attempts to outlaw, by name, every form of gambling imaginable. But, the proposed statute defines "a prohibited online gambling game" as including "lottery games, other than games lawfully conducted by the California State Lottery."

State anti-Internet gambling laws take one of two courses: They all start as sweeping prohibitions of every form of online betting. If they can be formally adopted quickly enough, as is the case with attorney general opinions, they are published as absolute bans on all Internet gambling.

But other proposals are subjected to months of hearings and amendments. Many of the prohibitions use language so broad that it would outlaw existing legal gaming, for example by outlawing all use of computers. Lobbyists for legal gambling operations like state lotteries and parimutuel racing have no choice but to ask the legislature to carve out exceptions for their clients.

Federations – governments of governments – are trying to stop the entire political process while they consider the issue. But, while federal governments have great power, states have almost always been the chief guardians of morality, including the control of gambling.

States have what is known as "police power," the right to protect citizens' health, safety, and welfare. Police power is a power virtually without limits.

Federal governments, on the other hand, sometimes forget that they only have the power given them by the states that created them.

The result is constant tension and endless disputes over who has the final say.

This would not be a problem if everyone agreed on the solution for any particular political problem. But, as the fight over Internet gambling shows, a state may want to do something that is completely contrary to the wishes of its federal government.

In Australia, a moratorium on state Internet gambling licenses failed by a tie vote in the federal Senate. It was never clearly explained exactly how the federal government could stretch its power over communications to overrule the states when it comes to the control of gambling.

Nations that joined the European Union agreed that they would not keep out the goods and services of other nations of the EU. But, the European Court of Justice has consistently ruled that members of the EU do not have to allow in legal gambling from other members. Gambling is one of the unique areas where local customs and morals trump the law of this new federation.

The United States, the oldest constitutional federation in the world, may be the ultimate test. If states decide to allow limited gambling on the Internet, especially if the wagers do not cross state lines, what right does the federal government have to tell them no?

Professor Rose can be reached at his website: www.GamblingAndTheLaw.com.