Ohio Increase Shows U.S. Sports-Betting Tax Rates Not Set In Stone

July 13, 2023
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Ohio’s abrupt move to double its tax rate underscores a trend toward higher taxes on U.S. sports betting as some states re-evaluate their regimes, according to industry analysts.

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Ohio’s abrupt move to double its tax rate underscores a trend toward higher taxes on U.S. sports betting as some states re-evaluate their regimes, according to experts and industry analysts.

Governor Mike DeWine signed a state budget law on July 5 after the Ohio House of Representatives and Senate both eventually agreed to his proposal to raise the state’s sports-betting tax rate from 10 to 20 percent of gross revenue, which DeWine first unveiled barely two months after the launch of legal sports wagering on January 1.

Generally when a state increases gambling taxes it is motivated purely by a desire to raise additional revenue. But DeWine’s press secretary insists that is not the case in Ohio, with the governor instead responding to his own and state regulators’ concerns of “distasteful behavior and advertising in the marketplace” during the first few weeks of lawful sports betting.

“Governor DeWine proposed several reforms to send a message to the market that Ohio was not the Wild West of sports gambling,” press secretary Dan Tierney told VIXIO GamblingCompliance in an email. “The Governor is appreciative that the legislature maintained the proposed changes regarding the tax rate and regarding threats against athletes as the provisions help send this important message.”

Regardless of the motivations, Ohio’s move underscores two apparent trends in U.S. sports betting: that states are starting to re-evaluate their initial tax policies, while tax rates generally are moving higher.

In the first few years of the post-PASPA era, operators were largely successful in advocating for their recommended rate of around 10 percent, with accompanying deductions for promotional credits or bonuses.

Those states that passed sports-betting legislation prior to 2021 taxed mobile sports betting at an average rate of 18.5 percent, or 13.3 percent when discounting those states with monopoly markets served by an exclusive provider.

States passing laws since 2021 have set equivalent taxes at an average headline rate of around 17 percent, according to VIXIO research.

That average is certainly inflated by New York’s 51 percent rate. But three major newer markets in Ohio, Massachusetts and most recently North Carolina now all have tax rates at either 18 or 20 percent, without any bonus deductions, at least initially.

“I think there is a trend we're observing where the state gaming tax rates are creeping higher in many jurisdictions," said Bob Stoddard, a partner and head of the U.S. gaming tax practice for KPMG. “And I suggest that trend will continue.”

There may be different views among operators and state revenue authorities as to what the appropriate tax rate for sports betting should be, as not all states are seeing tax revenues from sports wagering that meet their original projection models, Stoddard said.

“It does always beg the question of where is that sweet spot from a sustainability standpoint — and that's both the sustainability of the operators that are seeking to make a profit, as well as growing the customer base by incentivizing players to move away from the offshore or black and grey market operators, which we know is still an issue.”

As far as sportsbook operators are concerned, tax rates above 15 percent are problematic because they cut into their ability to reinvest in marketing or in product innovation, said Brendan Bussmann, consultant with BGlobal Advisors in Las Vegas who was sharply critical of Ohio’s tax increase.

“Tax rates have a direct relationship to initial investment and long-term sustainability,” Bussmann told VIXIO. “Ohio’s year-two surprise hurts everyone in the market and shows how little stability the market may have in the future. The economics for sports betting changed overnight in a negative way.”

ohio market share

The Buckeye State is not the first to re-evaluate its tax regime for sports wagering, however.

In May, Tennessee changed from a 20 percent tax on mobile betting gross revenue to 1.85 percent of handle — a supposedly revenue-neutral shift designed to guarantee the state’s return based on wagering volume, without imposing an unpopular mandatory cap on operator payouts.

Last year, Colorado and Virginia also restricted or eliminated the ability of operators to deduct promotional credits from taxable revenue. Virginia operators have lobbied, so far unsuccessfully, to reinstate limited promotional deductions, with a last opportunity this year still pending as the state concludes a delayed process to pass a new budget.

Past precedent from the U.S. land-based casino industry suggests that although some states will likely stick with their original tax rates for sports betting, others may revisit them based on competitive circumstances, budgetary needs or other policy objectives.

Ohio operators will even have the chance to lobby for a return to the lower 10 percent rate in the short term.

Another provision of the state’s budget law establishes an 11-member Study Commission on the Future of Gaming in Ohio, to be made up of lawmakers and state gaming, racing and lottery regulators.

The commission’s remit will include evaluating future options for both casino and lottery games, as well as making policy recommendations regarding the implementation of sports wagering.

It is expected that the tax rate for sports betting, along with potential consideration of iGaming and iLottery, will be among areas for the commission to review.

Still, it would be surprising if Ohio did move back to the lower tax rate based on past experience of the gaming industry, according to Bussmann, who cited the example of higher tax rates applied to Pennsylvania table games that have yet to be reset by the state legislature.

“The problem with taxes is they very seldom go down,” Bussmann said.

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