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Top executives for New York’s two highest-grossing sportsbook operators made their case on Tuesday (January 31) to New York legislators that the state’s 51 percent tax rate is unsustainable.
A joint hearing featuring members from both the New York Senate and Assembly’s Racing, Gaming and Wagering committees reviewed the status of the Empire State’s mobile sports-betting program after its first year of operations.
FanDuel president Christian Genetski and DraftKings CEO Jason Robins both took the opportunity to warn lawmakers that without a decrease to the tax rate, the companies will have to make changes to their New York operations.
New York mobile sportsbooks brought in almost $1.4bn in gross sports wagering revenue in their first year of operations, with the state collecting more than $709m in taxes due to the highest competitive sports-betting tax in the United States, plus an additional $200m in upfront licensing fees.
Operators, however, say that the market cannot continue to thrive at the 51 percent tax rate.
“There are clear signs that the New York market has already peaked, while other states remain on a solidly upward trajectory,” Genetski said. “Despite an inordinate level of investment in the first three months post launch, the New York market is not growing handle nor customer base like every other state.
“There's a direct causal link from the high tax rate to this lack of growth,” the FanDuel executive added. “We believe lowering the tax rate even to one commensurate with the next highest state in the country could recharge growth and set the state on a much healthier path in future years.”
Robins added that the high tax rate combined with the inability to deduct promotional credits from taxable revenues led to operators paying an effective tax rate of more than 70 percent, and said that if the state did not reduce the tax rate, DraftKings would need to offer lesser odds and reduce its promotional offerings.
“We have believed for the last year that there is a chance that policymakers in New York will look at the analysis and decide that it is in the state's best interest to lower the tax rate,” Robins said.
“However, if that does not happen … in a nutshell, we will be likely be forced to offer a significantly worse value proposition for customers that are placing bets in New York.”
Several legislators from both chambers pushed back at the executives, arguing that all of the operators knew the score when they applied to enter the state to begin with.
“The 51 percent was no secret, it was something that the previous administration spoke about, everybody on the planet knew about, there was no sunset, so you knew it was 51 percent,” said state Senator Joseph Addabbo, a Democrat and chairman of the Senate Committee on Racing, Gaming and Wagering.
“You negotiated it, you agreed to it,” Addabbo said, referring to an applications process in which operators were invited to offer different tax rates based on the number of licensees in the market.
“In my opinion, there’s no real foundation to say, these numbers are suffering at this point, so we need to change this,” Addabbo added. “It’s a very hard argument to make.”
Robins said that when DraftKings elected to enter the New York market, it essentially expected a fork in the road within the first two years, and made a decision to be aggressive despite the unsustainability of the fiscal regime, with a fallback plan of offering a lesser value proposition if the tax rate remained in place.
“What we said is it will be an absolute shame and we'd certainly be kicking ourselves if you folks decide a year from now after the market launch to lower the tax rate, and we had assumed it was going to be 51 percent forever and we were more conservative than everyone else on customer acquisition and promotions and we ended up not realizing the market share that we thought we can achieve,” Robins said.
“So we made a choice to say look, we'll invest in a way that we know is unsustainable and we know is unprofitable in New York for the short term, because the consequences, if we do end up with a healthy, sustainable environment, of not having invested in those early days are so great,” he added.
“We'll take that chance, but we understand that at a point in time the legislature says look, everything's looking good, we're not going to change anything, that we're going to have to alter our game plan.”
Genetski added that New York’s unique competitive licensing structure also played a part, pointing out the consortium of operators that included FanDuel, DraftKings, BetMGM and Bally’s, which he added comprises more than 90 percent of the state’s current market share, suggested a 15 percent tax rate if nine operators were to be selected, whereas a second consortium that comprises the state’s other five operators suggested the 51 percent rate that the FanDuel consortium ultimately had to agree to.
He also added that FanDuel was already investing 50 percent less in New York than in other states and that its projected 2023 media spend for Louisiana is nearly twice that of New York.
“We’re not going to say no to the New York market,” Genetski said. “We should be spending more here, not spending less, it's just a direct result of the fact that we are going to be profitable in 2023 and we can't get there investing more money in New York with no return on that investment.”
Representative Gary Pretlow, a Democrat and chairman of the Assembly’s Committee on Racing and Gaming, argued that some of the “draconian” actions threatened by DraftKings could be jeopardized by competitors offering more favorable odds unless all of the entities were effectively colluding.
“You have to do this in concert with each other, and getting nine entities to collude to give worse odds in New York wouldn’t be really beneficial and that might get the attorney general involved in something like that,” Pretlow said.
“If I were a skin, and I’m offering one odds and you’re offering worse odds, I mean, look at Caesars [Entertainment], they paid $300m to buy the market, and they did,” he added, referring to Caesars’ heavy initial investment in the market at launch that included a $5,000 risk-free bet for new customers.
“Players that do participate in this do look at the odds, so I think it’d be difficult for one entity or the other entity to change their odds because you’ll not just lose them to the illegal market, there are eight other entities out there offering better odds than you if you make them worse.”
In response, Robins said the actions would not be collusive, but rather market driven.
“It wouldn’t be like day one, we just wipe out all the odds and make everything 20 percent more,” Robins said. “But we’re all looking at each other’s odds, we’re all making sure that we’re competitive.”
“As [Genetski] and FanDuel see others in the market are starting to adjust up, they’re going to do the same,” he continued. “Otherwise, it just doesn’t work, we have to; the other choice is just to lose money forever in the market, and I don’t think anyone’s going to do that.”
