Illinois House Greenlights Graduated Sports-Betting Tax

May 29, 2024
The Illinois House has voted in favor of a sports-betting tax hike that will see some operators pay up to 40 percent of revenues to the state, and investors showed concern that other states could ultimately follow suit.

The Illinois House has voted in favor of a sports-betting tax hike that will see some operators pay up to 40 percent of revenues to the state, and investors showed concern that other states could ultimately follow suit.

The House voted early Wednesday morning (May 29) to approve House Bill 4951, an omnibus budget bill which implements a new graduated tax structure for sports betting in the state ranging from 20 percent of adjusted gross revenues up to 40 percent on annual revenue of more than $200m.

The bill required three tries to receive a successful vote from the House Wednesday morning, as House Democrats struggled to gain the needed 60-vote majority despite holding a veto-proof supermajority in the chamber, but ultimately were able to secure the razor-thin 60-47 vote needed to adopt the legislation on a third vote at 5:30am.

The Senate voted to approve the bill Sunday. Following the House vote, the bill only needs Governor J.B. Pritzker’s signature and is expected to become law and take effect July 1.

The news of the potential tax hike was not received well by investors, as DraftKings stock tumbled more than 10 percent to $36.61 per share Tuesday and FanDuel parent company Flutter Entertainment saw a more than 7 percent drop to $188.33 per share.

Pending Pritzker's signature, companies will pay a minimum of 20 percent on annual adjusted gross revenues of up to $30m, compared with the state's current 15 percent tax rate.

Revenues between $30m and $50m will be taxed at 25 percent, with 30 percent applied to annual revenues between $50m and $100m.

Finally, all revenues between $100m and $200m will be taxed at 35 percent, and all revenues of more than $200m would be taxed at the highest possible rate of 40 percent.

The bill also includes a 1 percent increase on taxes on video gaming terminals (VGTs) to 35 percent of net terminal income. In 2023, VGTs brought in more than $2.8bn in net revenue, by far the most lucrative form of gaming in the state, with more than $980m being collected by the state in taxes. 

Some analysts expressed concern that the Illinois tax increase could be a harbinger of future tax increases to come that would significantly affect the most prominent sports-betting operators.

“It has been our contention for some time that tax rate increases were one of the primary risks for the [online sports betting] operators and with the recent decision to raise taxes in Ohio, and now Illinois, we believe others are likely to follow,” wrote Carlo Santarelli, an analyst for Deutsche Bank, in a note Tuesday.

“We have felt, for some time, that the New York tax rate and the taxes paid to the state were a risk factor for the sector and we believe that is proving true, especially in light of the proposed, though quickly dismissed, Massachusetts proposal for a 51 percent tax rate, identical to that of New York.”

Barry Jonas, an analyst for Truist Securities, also acknowledged the risks, but added that Illinois’ scheme could give companies other than FanDuel and DraftKings an opening to capitalize.

“The graduated tax scheme could present an opportunity for smaller players to gain some market share at the expense of the two large players while still maintaining lower relative tax rates,” Jonas wrote. “We’ll look closely at promo offers and relative odds once the new tax rates become effective. 

“That said, part of [DraftKings] and FanDuel’s dominance relates to their tech offerings and not just promos/odds,” he added.  “The wider risks, of course [are] if more states [start] increasing taxes which may or may not be progressive/graduated.”

Prior to Illinois’ move, executives and lobbyists for the two sports-betting leaders have maintained that they do not believe that the increases in Ohio and now Illinois are the beginning of a trend of states revisiting tax rates in order to capture more revenue.

“I think that states do understand that any sort of negative impacts to the consumer offering that companies would have to take where tax rates increase would really the counter to the notion that we're trying to drive activity from the illegal market to the legal market, which has enormous number of benefits, only one of which is generating taxes,” DraftKings CEO Jason Robins said on an earnings call earlier this month. 

“So I think states get that, and I expect that maybe there'll be one or two here and there that look to do that, but I don't think many of them will.”

Robins said that in the event that states do increase taxes, the company has steps it can take to mitigate the effect to the company’s bottom line.

“We're prepared either way. I mean in the end, the cost has to get absorbed by the consumer if the government raises taxes, so there's various levers to do that,” Robins said. 

“Also, we could lower external marketing, which I think will be also partially just driven by the fact that if taxes go up, we're going to have to create better margins and that will be a lever that we'll have to pull as well,” he said. 

Jeremy Kudon, president of the Sports Betting Alliance, which includes DraftKings, FanDuel, BetMGM and Fanatics Sportsbook, also added that he does not believe the recent actions to increase taxes are the beginning of a wave.

“The notion that a wave of states will increase their tax rate on online sports betting simply because 3 of the 38 states with legalized sports betting are or were contemplating tax rate increases at the same time is flawed and overly simplistic,” Kudon wrote on X last week as the debate continued in Illinois.

Kudon said that although there were states like Illinois that have always looked to “penalize” online sportsbook operators with measures like in-person registration and higher tax rates, many other states would have more difficulty or be less willing to consider increasing taxes.

“Other states, like Massachusetts and New Jersey will be hard pressed to raise taxes on sportsbooks that have offices or [headquarters] in the state,” Kudon said. “Others, like Indiana and Kentucky, have GOP controlled legislatures who are allergic to high taxes; and still others, like Colorado, Maryland, and Louisiana, set their tax rates in those states' constitutions.”

He also urged observers not to put too much stock into simple bill introductions, like a proposal from one Massachusetts senator to increase taxes to 51 percent that was swiftly voted down, but referenced by multiple analysts Tuesday when discussing a potential trend.

“Bottom-line: Never confuse a bill introduction with a bill passing into law,” Kudon said. “Tens of thousands of bills are introduced each year; only a small [percentage] ever become law.”

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