U.S. Sports-Betting Operators Not Exiting High Tax States, Yet

June 14, 2024
Illinois and Ohio have increased their take from a growing online sports-betting business, but analysts warn that lawmakers run the risk of going too far and damaging the industry should other state legislatures follow their lead and raise taxes.

Illinois and Ohio have increased their take from a growing online sports-betting business, but analysts warn that lawmakers run the risk of going too far and damaging the industry should other state legislatures follow their lead and raise taxes.

“It is going to the golden goose and asking for more,” said Brenden Bussmann, managing partner of the Las Vegas-based advisory firm B Global. “The problem is, at some point, the golden goose can only produce so much.”

Earlier this month, Illinois Governor J.B. Pritzker, a Democrat, signed the state’s $53.1bn fiscal 2025 budget law that included provisions to implement a graduated sports-betting tax rate that will see leading operators pay up to 40 percent of revenues to the state.

The graduated tax rate for sports betting ranges from 20 percent of adjusted gross revenues up to 40 percent of annual revenue of more than $200m. Pritzker had originally proposed in February to increase the 15 percent rate to 35 percent, but lawmakers preferred the progressive tax rate. 

“When they went to a tiered tax rate, they really said, I don’t care who you are, we are going to increase your taxes across the board,” Bussmann said. 

As analyzed in depth in Vixio's U.S. Sports Betting Outlook report for June, the key question being posed across the industry since Illinois approved its tax increase is whether the move is the start of a much wider trend that actually began 12 months earlier in Ohio.

In a 2023 budget law, Ohio doubled its tax rate from 10 percent to 20 percent of gross revenue on sports betting. Republican Governor Mike DeWine first unveiled the increase in late February, barely two months after the launch of wagering on January 1, 2023.

“We are in a whole new world where … the idea a state could change its tax rate [two] months into the industry launch, which Ohio did basically from what was proposed, is wild,” said Steve Ruddock, a gaming industry analyst and consultant.

“I would be very concerned if another state were to do this in the near term. Then you might have a trend,” Ruddock said.

The New Jersey Senate is also considering a bill that would raise the states' tax rates on online sports betting from 13 percent and online gaming from 15 percent to 30 percent. A budget amendment proposed by one Massachusetts senator to boost the state’s mobile sports-betting tax rate from 20 percent to 51 percent failed in May.

Bussman said the trend of higher tax rates started with New Hampshire, where DraftKings agreed to pay a 51 percent rate in exchange for exclusive rights to offer sports betting.

That then inspired former New York Governor Andrew Cuomo to believe that if such a rate could be adopted in New Hampshire, “we can easily do it here in New York”.

“If you go back and look at the [request for proposals (RFP) for New York mobile sports-betting licenses], the only way you could get full credit on the RFP was to go at the 51 percent tax rate they wanted,” Bussmann said. “So, it was a rigged system.”

Bussmann said operators could all have agreed not to bid 51 percent and only offer a lower rate across the board.

“But the industry would have been accused of collusion if they would have done that,” he added.

Bussmann said any discussion on taxes comes down to basic economics.

“If I sit there and I have 51 percent to pay in taxes to the state of New York, I pay 5 percent to the federal government [in a federal excise tax of 0.25 percent on handle], 56 cents of every dollar I achieve goes to somebody else. It doesn't take care of my operations; it doesn’t take care of my marketing.”

“That’s the fundamental problem we are running into: legislators don’t understand the economics of this,” he said.

Ruddock noted that the industry had initially advocated for lower tax rates on the basis that sports betting was a 5 percent hold business. But operators have since introduced new products such as same game parlays and are getting into double-digit hold rates, which is expected to increase over time.

“Nobody wants to pay more taxes,” said Ruddock. “It’s an image problem. DraftKings and FanDuel are not profitable, but they are touting huge numbers to make their investors happy.”

Both Ruddock and Bussmann were speaking during a June 12 webinar hosted by the Indian Gaming Association (IGA). The hour-long discussion was moderated by Victor Rocha, IGA’s conference chairman, and Jason Giles, executive director of the IGA.

As Illinois lawmakers were considering having the state's leading operators pay a 40 percent tax rate, lobbyists representing DraftKings and FanDuel were reported to have indicated that would even consider withdrawing from the state if such a tax structure was adopted.

“The reason they are not going to leave Illinois or Ohio [and] they would never leave New York, unless you are like a third-tier operator, is because of the size of the market,” Ruddock said. “So, if you leave these markets, you are losing a lot of national market share, which also goes into what investors are looking for.” 

If it were Kansas raising its 10 percent rate, Ruddock said, “it would be a very different conversation.”

Bussmann offered sports-betting operators some advice about making threats to leave any state.

“Don’t walk into the room [and] say you’re going to push the nuclear button,” Bussmann said. “Because it only hurts you down the road. At some point somebody is going to say, ‘You were going to do this, and you didn’t.’”

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