Israel Mulls Gambling Reform: 'This Is Tainted Money, We Don't Want It'

Panel urges higher taxes on lottery winnings in bid to rein in growth of legal gambling, increase state revenues.

Gambling machines in Israel
Ofer Vaknin

A government report on gambling in Israel has recommended limiting the growth of the industry, but not reducing its current scope.

The report stressed the destructive social effects of gambling, but did not act on expert opinion it had received that reducing legal gambling would not increase illegal gambling in Israel.

Some of the committee’s recommendations, submitted to Finance Minister Moshe Kahlon on Wednesday, are aimed at increasing state revenues from gambling, primarily some 1.5 billion shekels ($392.3 million) in unclaimed revenue over the next two years at the country’s two betting monopolies, Mifal Hapayis and the Sports Betting Council, known as Toto.

The report also questioned the efficiency of the two monopolies, demanding that they cut costs unrelated to prizes.

The committee’s work was based on a comprehensive study by a committee of officials from the police and various ministries, headed by the Justice Ministry’s Edna Harel. The team reviewed structural, professional and legal aspects of legal gambling in Israel, focusing on preventing its negative influences.

Kahlon said slot machines were the most liable to take money from the poor and to put it in government coffers. “This money is tainted, and we don’t want it,” he said. “It’s no coincidence that on the 28th of the month, the day people receive stipends, Mifal Hapayis revenues rise dramatically. There won’t be any slot machines or horse races in Israel starting next year. As long as I am finance minister, there won’t be a casino in Israel.”

Justice Minister Ayelet Shaked said: “Betting is an addictive illusion of a better life.” Consequently she said, she will examine introducing the report into legislation.

The committee, headed by treasury director general Shay Babad and Justice Ministry director general Emi Palmor, recommended that slot machines and horse races remain forbidden; that operating costs at the two monopolies be reduced; that 20 million shekels be allocated annually to the fight against illegal gambling; that the operation of addictive games be forbidden and that taxes on winnings be raised.

“Implementing the recommendations is expected to moderate the growth of the legal gambling market, reducing its negative impact on citizens and reducing operating costs so that more money will be available annually to meet public goals,” the report stated.

Opponents of gambling argue that it preys on weak populations and redirects income from their savings, according to the committee, while proponents assert that legalized betting replaces illegal gambling. The report concluded that “while the betting industry’s net economic contribution is dubious, its social impact is mainly negative.”

The report stated that the combination of the relative size of the Israeli gambling market and its inherent inequality makes it necessary to limit its growth, which has been 10% annually over the past five years. The committee proposed limiting annual growth to 2.7%.

Referring to the direct and indirect costs of betting to citizens and the state, the report said the Social Affairs Ministry puts the annual costs of treating people with gambling addictions at 9,500 shekels each per year. An estimated one-half of gambling addicts turn to crime.

1% of GDP

Hapayis and Toto are state-run betting enterprises, one general and the other sports-oriented, which enable the state to supervise legalized betting. The report found that their monopolistic nature leads to inefficiencies, such as high salaries, bloated organizations, exorbitant ad outlays and high marketing expenses, thereby reducing income for the public good.

Data presented to the committee showed Israel’s betting industry as inefficient relative to Europe. Improving efficiency by 1% would increase revenue for public use by at least 100 million shekels, it said. The committee recommended cost-cutting measures, including decreasing advertising and sales commissions to franchisees, as well as changing the method by which franchisees are compensated. The two monopolies will be obliged to cut costs by 2% in both 2017 and 2018.

Another recommendation is that 20 million shekels be allocated annually to increase enforcement against illegal betting by boosting the budgets of the police, the Justice Ministry and the tax authority. Israel’s illegal betting market is currently valued at 10-15 billion shekels, or 1% of GDP.

The report warns that gambling can serve money laundering activity, and recommends setting rules to limit this possibility. The lack of a clear regulatory system until recently allowed a secondary betting market to develop aimed at money laundering through a method called “rights acquisition.”

In this scheme, a lottery winner sells the winning ticket to a third party interested in money laundering, thereby cashing in without paying taxes. The other party redeems the winning ticket, obtaining legal coverage for funds that he obtained illegally.

Hapayis has a policy that has reduced reports by financial institutions of suspected money laundering by 80%, but the sports betting authority has no such policy. The report recommends regulations to limit money laundering in sports betting and making Hapayis rules stricter.

Another recommendation is to raise taxes on winnings, by lowering the tax-free ceiling from 50,000 shekels to 5,000 shekels and raising the tax rate from 30% to 35%. The report expects these changes to add 200 million shekels to state coffers.

The report noted a common argument that raising taxes raises the cost of legal betting relative to illegal betting, making the latter more attractive. However, police officials who testified before the committee rejected the claim, asserting that reducing the scope of legal betting might actually reduce illegal betting.

The committee further recommended the transfer to the treasury of 500 million shekels from Hapayis and 250 million shekels from the council annually for the next two years. These are funds that have been set aside for public projects and are normally disbursed as planned projects reach various milestones. At the end of 2015, such funds amounted to 4 billion shekels in Hapayis and one billion in the council.