On August 1, DraftKings announced that it was going to impose a surcharge of 3.2 percent on winnings in states that charge more than 20 percent tax on gross sports revenue. Illinois, New York, Pennsylvania, New Hampshire, and Vermont fall in that category. The surcharge idea probably surfaced in corporate discussions after Illinois raised its sports tax from 15 percent to a graduated tax of up to 40 percent. The change caused agitation. Operators were paying 36-51 percent in other states. But those rates were part of the initiation conditions.
The highest sports betting revenue tax rate in New York. Actually, New York copied New Hampshire, but with only 1.3 million people in New Hampshire, who cares? New York, on the other hand, has the largest population of any of the gaming states with legal sports betting at just under 20 million. Given the results in New York, it is easy to see why operators are very interested in California with 39.5 million, Texas with 29.1 million, and Florida with 21.5 million people. The average amount wagered per person is pretty standard across the nation. Thus, the more people a state has, the more money will be bet on sports.
Depending on the season and the sports available for bettors, New York generates between $1 billion and $2 billion a month in handle and revenue of between $100 million and $200 million. It wasn’t always that way. Between July 2019 and December 2021, the retail-only books never achieved more than $25 million in monthly handle. As long as New York offered retail sports betting only, there wasn’t much interest from gambling operators. But when Governor Andrew Cuomo signed an online bill in April 2021, it attracted attention. All the major operators wanted a shot at New York’s 20 million sports-crazed fans.
The books were eager enough to agree to the 51 percent tax rate. Each must have felt It worth the cost for the opportunity to feed the sports hunger in the Empire State. One operator was so enthusiastic, it even proposed a 64 percent tax rate. Whether or not any sportsbook operator can make a profit while paying such an absorbent rate is another question. But in the world of capitalism, if you know the rules and still want to invest, it is on you. However, it is a horse of a different color when the conditions change mid-stream. That is what happened to DraftKings and the others in Illinois.
The Illinois tax was a bait and switch. DraftKings, FanDuel, and the rest of the bookies signed on to pay 15 percent. To have the tax rate double and at the top end nearly triple is a bitter pill to swallow. It also makes turning a profit even more difficult than it has already proven to be for sports operators. If Illinois or any state doubled or tripled the tax on food, it would throw the whole system into chaos. In retail sales, an operator can simply pass the tax increase on to the customer. But paying three times as much for bread and milk would certainly have political implications. In fact, it is preposterous and unimaginable in any real-world setting. The customers could not afford it, and the politicians could not afford that backlash. It is different in commercial gaming.
Gambling operators, including sportsbooks, cannot pass on tax increases to customers. They therefore have an immediate impact on the bottom line. DraftKings stepped up and said, “Something has to change.” It suggested the surcharge in a rather casual manner. “If a bettor wagers $10 to win $20 and wins, he will pay $0.32 when he cashes in his ticket.” As you can imagine, the idea was not popular with bettors. One angrily said he thought DraftKings and the other sportsbook operators were crooks, stealing the hard-earned cash from the bettors. He went on to say that CEO Jason Robins probably imagined himself as a superhero leading his cohorts into the promised land of wealth, for which he would probably be knighted or made into a god.
That proved to be the problem for DraftKings: None of his cohorts wanted to join him. Two weeks later, when FanDuel released its results reporting $4.4 billion in revenue, the company announced that it would not be joining DraftKings in a fool’s quest. By that point, most of the other operators had also vetoed the idea. To the bettors, investors, media, and critics, it was clearly a bad idea. Two hours after the FanDuel announcement, DraftKings rescinded the plan and crawled away with its tale between it legs.
The surcharge was a bad idea, but so was the tax increase in Illinois. The tax rates in Pennsylvania, New Hampshire, and Vermont are also bad ideas, at least to everyone except lawmakers looking for a quick buck. Worse, many observers believe that other states will join the parade. One state that will not is Nevada.
Nevada learned a long time ago that lower tax rates are better in the long run — better for the state, casinos, customers, and employees. If you doubt that, compare the casinos in Pennsylvania and Nevada. Las Vegas is constantly on the move, reinventing, reinvesting, and renewing its properties and amenities; Pennsylvania casinos cannot compare. There is a limit to the tax any business can pay and still make a profit. High taxes limit employment, investment, and reinvestment. Those taxes cause businesses to reduce their product, service, and employees. In sport betting, that means offering less desirable odds. Since June 2018, Nevada has booked $41.5 billion in bets, holding 5.9 percent. In New York, bettors wagered $48.1 billion and the books kept 8.9 percent.
