An operator’s worst nightmare: A tax increase

February 25, 2024 7:34 AM
  • Ken Adams, CDC Gaming Reports
February 25, 2024 7:34 AM
  • Ken Adams, CDC Gaming Reports

Illinois Governor J. B. Pritzker is in search of an additional $900 million for the state’s budget. Among his recommendations is an increase of the tax on sports betting from the current 15 percent to 35 percent. Pritzker believes that the increase will result in $200 million of the $900 million he is seeking. He needs only three or so more of those increases and he is home free.

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The governor picked a good time. Sports betting is at an all-time high. Nationally in 2023, $114 billion was wagered on sporting events, resulting in $10.5 billion in gross gaming revenue.

Illinois was right at the top of the list, second only to New York, with $11.2 billion in handle, $1.0 billion in revenue, and $160 million in taxes paid by operators. Under the governor’s plan, the tax would go up to $360 million, a hefty increase by any measure. The proposal assumes that the handle and win rate would remain constant, not a certainty in any business. In addition, sports betting is not as simple as retail sales, where the profit margin can be predetermined. Nor can the tax increase be passed on to the customer as it can in retail sales. Sometimes the sportsbooks win and sometimes they lose.

Another major issue in a post-legislative tax increase is it creates an uncertain and unstable business environment. When the tax was set by the legislature, sportsbooks began making plans, investments and borrowing money based on the plans, and the tax rate. Raising the tax rate after the business is already launched ignores the realities of business. It is characteristic of countries with unstable governments and economic environments.

A long time ago, I attended a conference where one of the presenters was from a major international hotel chain. The company had casinos in its hotels in locations where it was legal, including Turkey. Out of the blue, the Turkish government decided it needed more money and that sinners should pay the tax. The hotel-casino closed within a year. The presenter warned the crowd, “Never invest in a country with an unstable government or uncertain tax rate.”

The governor of Illinois would no doubt bristle at the comparison, though his state has a history of changing the rules on gaming as it sees fit. Modern commercial gambling began in Illinois in the 1920s with horse racing; 50 years later it added a lottery. Both were touted as means to raise employment, investment, and taxes. In 1990, nearly 20 years after the lottery began selling tickets, the state legalized riverboat gambling. The casinos cut into the number of people buying lottery tickets and betting on horses racing.  The law limited the number of licenses available, which had the effect of limiting the competition each licensee faced.

In 1999, the riverboat casinos were allowed to build permanent facilities on land — no sailing times, no limit on passengers. The casinos did really well until they were confronted by another plan to raise money from another governor. Governor Rod Blagojevich in 2009 proposed allowing video lottery terminals (VLT) in bars, restaurants, and social clubs.

The gambling terminals took awhile to get off the ground; in 2012, the state reported 549 establishments with 2,290 machines, generating $12.3 million. By 2023, there were 8,464 locations hosting 47,047 VLT that generated $2.8 billion in gross gaming revenue. Illinois collected $980 million in taxes from that activity. In total, VLT in the state have generated $16.6 billion in GGR and $5.3 billion in taxes. It was well short of the $40 billion Blagojevich wanted to fix the state’s roads, but it was “found” money. Who could complain about $5 billion in taxes and some fun games for the citizens in the Land of Lincoln?

Well, casinos might complain. First, it was a bait and switch. The enabling legislation gave the casinos a landscape that seemed fixed and predictable. When the rules changed, the landscape danced under their feet. In 2012, casinos hosted more than 16 million people, generated $1.6 billion in revenue, and paid $476 million in taxes. In 2023, the casinos attracted just a little over 11 million customers and $1.5 billion in GGR, paying $320 million in taxes. In just a decade, the number of people going to a casino fell by five million. The VLT tax, it turned out, was not found money at all. Rather, it came from the pockets of former casino gamblers playing slot machines in their local pubs, not at a casino.

There are negative impacts from the introduction of free-standing slot machines. Casinos have suffered significant drops in the number of slot machines, table games, and employees, plus the amount of money reinvested in the community.

Meanwhile, the legalization of video lottery terminals was not the only shift in the casino landscape. In 2019, the state passed an expanded gaming law that allowed six more casinos, sports betting, more gaming stations in existing casinos, and more VLT in each bar. All of those added to the downward pressure that casinos have felt since 2012.

Pritzker’s tax increase may seem like a small issue. Sports betting operations do not have large expensive buildings that require thousands or even hundreds of employees to wait on customers. The majority of the sports wagering in Illinois is done remotely. Maybe the companies will easily absorb the tax increase and remain profitable, though none of the major operators has turned a profit yet. Even so, the amount of the tax increase isn’t the problem. The shifting dancing landscape is the problem. No gaming operator in Illinois can comfortably make long-term plans.

Time and again, Illinois has proven that when push comes to shove, gaming gets shoved. A tax increase is a reminder that in Illinois, just as in Turkey, your worst nightmare might be lurking right around the corner with the next governor in search of money.