Look to the World Trade Organization for the reason behind this. The US was allowing domestic Internet gambling but locking out foreign-based games. Many countries cried foul and won their case before the WTO. What was up in the air was sanctions against the US and the leading penalty under consideration was suspending Intellectual Property rights. The choice was open up gambling completely or shut it down completely. Congress chose the latter course of action.
I agree with your assessment.
Plus, I'm thinking they mught not have been able to tax off shore winnings. I would appreciate someone who KNOWS for SURE whether the U.S. has/had the ability to tax off shore winnings to comment on this.
Haven't heard that. Got any links? I think that you have the real reason right there.