Higher tax rates for sports betting can spread to other states

June 12, 2024 6:58 PM
Photo: Shutterstock
  • Buck Wargo, CDC Gaming Reports
June 12, 2024 6:58 PM
  • Buck Wargo, CDC Gaming Reports
  • United States
  • California
  • Illinois
  • New Hampshire
  • New York
  • Ohio

States run the risk of going too far in their tax rates on sports betting after Illinois’s recent increase and it could become a trend if one more major state follows suit, according to participants in the New Normal webinar “Beyond New York: Predicting State Moves on Sports Betting Taxes,” hosted by the Indian Gaming Association.

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Illinois lawmakers raised the tax that will top out at 40% for online sports betting companies, up from the 15% flat rate in place since the industry launched in the state in 2020. Ohio doubled its tax rate from its launch in 2023 at 10% to 20%.

The trend started with New Hampshire at 51%. Then former New York Gov. Andrew Cuomo announced that if the Granite State could get away with it, New York could “easily do it” too, according to Brendan Bussmann, managing partner of B Global.

Operators could have refused to buy into that rate, but would have been accused of collusion, so they dealt with it, Bussmann said. With the 5% federal tax, 56 cents of every dollar goes governments before operations, marketing, and other expenses are addressed.

“The problem we’re running into is that legislators don’t understand the economics of this,” Bussmann said. “The golden goose can kick out only so many eggs and at some point, something has to give. Either the player gets screwed, innovation gets screwed, or companies say they won’t do it.”

Steve Ruddock, a gambling-industry analyst and consultant, said the industry hasn’t helped itself when it comes to state officials increasing tax rates. He called it an “optics problem,” since operators such as DraftKings and FanDuel aren’t profitable, but tout huge numbers in earnings’ reports to make their investors happy.

“There’s give and take from operators that say, ‘Hey, everything is going good,’ while lawmakers are saying, ‘If you’re doing good, we want a little more of the pie,” Ruddock said. “It gets a little problematic. They’re not going to leave Illinois or Ohio. They’ll never leave New York, because of the size of the market. If you leave those markets, you lose a lot of national market share, what investors are looking for.”

Victor Rocha, conference chairman of the IGA’s annual tradeshow, said that while the industry isn’t profitable, it’s a mistake for DraftKings CEO Jason Robins to go on national television and talk about generational wealth, not having to work, and gambling addiction is the responsibility of the gambler as well.

“An arrogance in the industry is going to bite them in the butt and lay the groundwork for more taxation for online gaming,” Rocha said.

Ruddock called it “a whole new world,” citing the idea that a state like Ohio would change its tax rate three months after the industry’s launch as “wild.” When Pennsylvania jumped its tax rate by only 2%, that was considered a big deal, because it hadn’t been done in the past.

“Now they’re changing the terms whenever they feel like it, and I’ll be very concerned if another state does this in the near term. then you might have a trend,” Ruddock said. “If another major state changes the tax rate, the industry is will be very concerned.”

Ruddock said that the tax hikes have been a “serious punch in the face” after success after success in the five years since the Supreme Court struck down a ban on full-fledged sports betting outside of Nevada.

“You almost start feeling invincible and even in the rhetoric in the earnings calls, we think our group will be able to convince them this is the right way to do things (but they can’t),” Ruddock said. “I haven’t been around that long, but there’s no logic in a state legislator.”

Bussmann said the Illinois tax hikes change the dynamic in that state by paying 33% more. He not surprised, because the state’s history has been to seek out specific revenue and match the tax rate to it, making gaming out “to be the bad guy.” A high tax rate kept MGM Resorts International and Wynn Resorts from bidding on a casino in downtown Chicago, he said.

“If you head down the road to Ohio, when the governor arbitrarily doubled the tax rate from 10% to 20%, all he did was screw the little guy,” Bussmann said. “The smaller operators don’t have the ability to take this out over 20 to 30 states and neither does the guy that’s just placing wagers. The tax has to be passed through to somebody. I still believe profit shouldn’t be a four-letter word.”

Rocha wondered what the tax rate would be in California when that state adopts sports wagering in the future. In order for sports betting to be sold, everyone will have to be on the same page, because the tribes don’t want to pay excessive taxes. He acknowledged, however, that states have a right to increase taxes if they think they didn’t get it right the first time, especially if money goes to problem gambling.

Rocha and Ruddock brought up recent sports betting scandals involving athletes and coaches and stories documenting individuals being harmed by betting on sports.

“Let’s talk about the 800-pound gorilla in the room: all of these sports betting scandals every week,” Rocha said. “It’s getting attention the industry doesn’t need. The industry has a PR problem. It’s starting to be defined by its scandals and not its victories.”

Ruddock said when sports betting became legal in the U.S. in 2018, people in the UK told him that it had a five-year honeymoon. He cited the betting scandals and problem-gambling stories and blamed some of the issues on the speed at which sports betting has been legalized in a rush to earn revenue.

“They’ve lost the narrative over the last year and a half,” Ruddock said. “It seems like a new scandal is reported every week whether it’s a true scandal or not. You can guarantee one major paper every weekend will have some type of social-harm article about betting. It’s true because it’s anecdotal. It’s hard to battle against that.”