U.S. Sports Betting: June 2024

James Kilsby, Matt Carey

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June 27, 2024

Since it became apparent that Illinois would follow Ohio in doubling (and then some) its tax rate on sports betting, industry analysts and investors have been asking the obvious question of potential contagion risks from what has proven to be a high-profile policy change.

In this blog, we zero in on tax risk contagion in U.S. sports betting, as highlighted in our June U.S Sports Betting Outlook report.

Contagion Risks?

Ultimately, it is hard to imagine a world in which tax increases are entirely contained to those two midwestern states. At the same time, however, it is also easy to misinterpret and overstate the risks of contagion, in our view. Potential future moves to raise tax rates are instead set to be driven by a range of state-specific factors that include at least the following:

  • The current tax rate in each state and whether the state was among the earlier movers of the post-PASPA era that generally imposed more lenient tax rates than later adopters post-pandemic
  • Each state’s general budgetary situation
  • Whether legislative leaders and other key political leaders are sympathetic or otherwise to the gaming industry and its related stakeholders, including sports teams
  • Overlapping state policy agendas related to gaming issues; whether state governments and legislatures are more generally pro-business or minded to raise taxes generally
  • Whether states have (like Illinois) historically looked to raise tax revenue by increasing taxes on different forms of gambling.

Below are some specific issues to watch and consider as the industry contemplates the prospect of other states following the lead of Illinois and Ohio on the tax front.

Further Tax Rises Not Imminent

It should be noted that both Illinois and Ohio increased their tax rates on sports betting through annual budget laws rather than via standalone legislation, and that it is more likely

than not to be the vehicle that further states would use for any similar moves in the future, especially if past precedent regarding casino taxes (see below) is also brought into consideration. States have different processes and deadlines for adopting their annual or biennial budgets, but states’ fiscal years typically begin on July 1 (with a few exceptions) and budget laws are generally approved by the end of June or earlier in most instances. Although budget processes can and often do run into overtime and key jurisdictions such as New Jersey, Pennsylvania and Michigan are among states where budget laws remain pending items on lawmakers’ 2024 to-do lists, further tax increases on sports betting are unlikely before at least 2025, in our view. The next key phase to watch is likely to be early 2025 when governors in various states will release executive budget proposals for consideration and approval prior to 2026 fiscal years beginning next July 1. It was in February of 2023 and 2024 that Governors DeWine of Ohio and Pritzker of Illinois laid their cards on the table; whether their counterparts follow suit next year will be one of, if not the key policy point to watch in 2025.

Governors, Legislative Leaders Hold Whip Hand

The experiences of Illinois and Ohio are also instructive as to the pivotal role that governors and/or legislative leaders, such as House Speakers, Senate Presidents and potentially budget committee chairs, play on state fiscal policies, including over gaming taxes. Inevitably, there will be standalone bills proposed in various states to increase tax rates on sports or online gaming, such as Bill S.3064 as currently pending in the New Jersey Senate. A bill or budget amendment proposed by one individual senator or representative is one thing; a tax increase pushed by a governor, speaker or senate president is another matter altogether that comes with a far higher likelihood of approval. Going forward, it will be important to evaluate the clout of those proposing tax increases on sports wagering and differentiate between standalone bills with limited support and low likelihood of approval, and the clearer and more present danger presented by a governor-backed budget package, for instance.

Industry Advocates A Victim Of Their Own Success

One reason why the U.S. sports-betting industry is somewhat susceptible to tax increases is the general success that industry advocates had in establishing relatively low tax rates in the first place, particularly in those earlier state laws that were enacted between 2019 and 2021. Industry advocates at the time made a convincing case as to the low-margin nature of sports wagering and successfully secured headline tax rates of 10 percent or less, and often on net rather than gross revenue, in various markets including Arizona, Colorado, Indiana, Michigan and Ohio (although not Illinois). Those rates now look particularly low when compared to not only the outlier market of New York, but also later adopting states, such as Massachusetts (20 percent on gross gaming revenue) or North Carolina (18 percent). It has also since become apparent that U.S. sports betting is able to operate on higher margins than the historic 5 percent hold rate of Nevada – undermining one of the key arguments that was used to support those lower tax rates in the first place.

Promo Deductions Another Tax Raising Route

Increases to headline tax rates are not the only card that states have to play when it comes to raising revenue from licensed sports-betting operators. An alternative approach, depending on the current regulatory status quo, is to remove or reduce the ability of operators to deduct bonuses and other promotions from taxable revenue. Virginia is perhaps the best example of a state that has already made such a move via a 2022 budget law, while Colorado similarly has capped the amount that operators can deduct from their taxable revenue on a phased basis. Promo deductions are not allowed in Illinois (or in New York, Massachusetts or various other states), but it would not be a surprise if other states beyond Virginia and Colorado reconsider their policies in the years ahead either as an alternative to or alongside a change to their headline rates.

After Illinois, Where Next?

As things stand, it is difficult to predict with certainty which state(s) will be most likely to follow Illinois in increasing their tax rates for sports betting, even though, as we highlighted in our March Sports Betting Outlook, Illinois would have been the runaway favorite to follow Ohio’s earlier lead, based on its historic budgetary needs and past precedent of raising taxes on other forms of gambling. The more likely contenders would be those states with a low or below average current tax rate (or at least a notably lower rate compared to neighboring states), a current or pending budgetary gap to fill, as well as a historic track record of applying higher taxes to gaming in general. Larger U.S. markets that tick one or more of those boxes include Michigan, Maryland, Indiana and potentially Pennsylvania — but it should be noted that a counterargument can also be made against tax increases in each of those cases as well.

Want to keep reading?

This blog is just a small glimpse of what’s inside our June 2024 Sports Betting Outlook, a monthly report which maps out how the U.S. sports betting landscape is being redrawn after the May 2018 Supreme Court ruling allowing all states to regulate wagering. It allows Vixio customers to compare state laws and key pending bills, identify policy trends and accurately forecast the size and scope of the market both in terms of anticipated legislative developments and projected revenues by participating states.

Get in touch or book a demo with a member of the Vixio team, who can show you how your organisation can use the Vixio GamblingCompliance platform to stay abreast of the U.S. Sports Betting’s regulatory landscape.

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