There is one constant in gaming: Budget time is run-for-the-hills time.
It is the time when hungry lawmakers look at gaming as low-hanging fruit. Of course, those same hungry lawmakers in the past were willing to increase and expand gaming options to satisfy their hunger. It works both ways. But when there are no new ways to expand gaming, the lawmakers are usually willing to increase the taxes. It is an obvious choice. After all, it is a well-established principle that a casino license is a license to print money. Raise the tax and the casinos simply print more money.
In the waning days of May, the Illinois Legislature passed the state’s budget. It was just in time as the fiscal year begins July 1. The $53 billion budget exceeds the state’s revenues by $1 billion. That required the clever lawmakers to put their heads together and increase revenues. They targeted corporate losses, limiting the amount of loss a corporation could declare, and retailers would have a limit on tax discounts they receive from collecting sales tax. Together, the two are estimated to add $600 million to the state’s coffers. And then there was everyone’s favorite, gaming. Taxes on sports wagering will increase in the next fiscal year. The estimated increase is about $200 million. The $800 million is not quite what is needed, but who counts nickels and dimes at the Capitol?
The budget passed by the narrowest of margins. According to lawmakers and reporters, the discussions were contentious. The Democrats wanted more money for social services and higher taxes. The Republicans wanted to cut spending and not increase taxation on business. The Illinois law takes the sports-betting tax from 15 percent to a graduated scale that begins at 20 percent and tops out at 40 percent; FanDuel and DraftKings are the only companies generating enough revenue to be in the top tier.
The sportsbooks were out in force trying to head off the tax increase. They argued that increased taxes would lead to fewer promotions and worse odds, which would render Illinois sports bettors prime targets for black-market books that could offer better odds and promotions. The arguments fell on deaf ears.
Illinois was not the first to raise tax on sports betting. Ohio raised its sports betting tax from 10 percent to 20 percent and others may follow. Deutsche Bank analyst Carlo Santarelli issued a report on the Illinois tax increase, predicting that New Jersey, Michigan, Iowa, Indiana, Massachusetts, Arizona, and Kansas could be next. A bill introduced in New Jersey would raise its tax from 13 percent to 30 percent. The New Jersey lawmaker cited other states’ rates as a justification.
Pennsylvania taxes its sports industry at a 36 percent rate and New York, New Hampshire, and Rhode Island charge sportsbooks 51 percent of gross gaming revenue (GGR) for the privilege of plying their trade. New York is averaging over $1 billion a month in gross wagers and $100 million in GGR. New York has collected $2 billion since January 2022. The numbers from New York are so big that they confuse lawmakers in other states. Sports betting is bigger in New York because the population is bigger. Illinois, Ohio, New Jersey, and Pennsylvania are in the top five states for sports betting wagers and win.
An increase in the tax rate in those states will certainly increase their cash flow, at least in the short term. It is difficult to predict the long-term consequences of those higher tax rates. Jason Robins, chairman, cofounder, and CEO of DraftKings, predicts worse odds for the bettors and fewer promotions. Will the increase lead to a stronger black market in sports betting? Other less-legal operators are out there. Michigan issued a cease-and-desist to Bovada, a sportsbook operator based in Curaçao. If American books offer competitive odds and attractive promotions, those offshore books have little opportunity. Increased taxes could change the dynamics.
There is another and bigger issue. Few businesses can survive with a 50, 40, or 30 percent tax rate. And even if they do, they cannot prosper. Illinois and Pennsylvania traditionally have the highest tax rates for gambling; the rate for casinos is two or three times what it is for Nevada or New Jersey, for example. Casino investment in Nevada dwarfs them. Pennsylvania, with fewer casinos, collects more tax revenue than Nevada does. To a lawmaker seeking to balance a budget, that means raising taxes on casinos is a no-brainer.
States like Nevada have learned that if the gaming industry is not overtaxed, it reinvests in infrastructure, employees, and growing its market. Pennsylvania gets more in direct gaming taxes, while Nevada gets much much more in other benefits and taxes. But few states or their lawmakers are introspective. As the legislators in Illinois did, they count the revenue gained, but never measure the revenue lost.
In the 1980s, a casino general manger friend of mine insisted that every proposal for a casino promotion or special event include an assessment of the displaced revenue, the revenue lost. It would be a valuable practice for legislatures. The sportsbooks in Illinois will pay more, but so will others, including the bettors. And in the long run, the state of Illinois will pay more in lost investment and other revenues from associated businesses and employees.
