- January 10, 2019
- Posted by: detaxify
- Category: Tax Law
I don’t have an official over-under for the number of states that will legalize sports gambling in 2019, but I know it’s high. Since the Supreme Court opened the door to legal and taxable sports betting last May, six states have joined Nevada (legal since the 1940s) as homes to legal sports books. The District of Columbia approved sports betting in December and will take bets in the spring. Nearly every other state will at least discuss the issue during this year’s legislative session.
But raising large amounts of tax revenue from sports gambling is no sure bet. Here’s what policymakers should know before placing wagers.
How does your state currently approach gambling?
Every state except Hawaii and Utah offers some form of legal gambling, 44 states operate lotteries, and 24 states have commercial casinos (not counting those with tribal casinos and state-run gaming machines in bars). Utah’s state constitution prohibits gambling so there will be no debate there, but even legislators in Hawaii say they will consider legal sports betting.
Lotteries and casinos not only signal support for gambling, they also provide a regulatory infrastructure for sports betting. The states that recently legalized sports betting all used existing casinos and lottery systems to help establish and run the new gambling activities.
How should states tax sports gambling?
Legislators need to learn two gambling terms: “handle” and “revenue.” The former is the total amount bet. The latter is the casino’s or operator’s take after paying the winners. Hypothetically, states could tax either, but currently all tax revenue. This can lead to misstatements from policymakers who sometimes confuse the handle (a lot of money) with gambling revenue (far less money) or even tax revenue (a fraction of the lesser amount) when advocating for legalization.
States also must set a tax rate high enough to maximize revenue but not so high that it discourages casinos or bettors. As the table above shows, the District of Columbia, Mississippi, New Jersey, and West Virginia have rates relatively similar to Nevada’s, but Delaware, Pennsylvania, and Rhode Island have far higher rates.
Casinos and other gambling providers already operate on very small margins so high tax rates can discourage them from promoting or funding sports betting—or even operating a sports book at all. For example, even though sports gambling was legal Pennsylvania by May, casinos waited until November to offer the product to betting customers. Fewer options and smaller amounts bet mean less tax revenue.
Tax rates also can affect payouts to winning sports bettors, which can be important with state competition. If a $100 bet on the Philadelphia Eagles wins $150 in Delaware, $200 in Pennsylvania, and $300 in New Jersey, where do you think bettors are going to make the wager? And states also must compete with illegal bookmakers who still operate with tax-free odds (and whose customers probably pay no income tax on their winnings).
What’s an “integrity fee”?
Every time a state considers legalizing sports gambling the professional leagues ask for an “integrity fee,” which is a tax on the handle that goes directly to the leagues. Professional sports leagues say this money could pay for efforts to protect the “integrity” of the sports and the data used for gambling. Most others view this as leagues looking for their piece of the revenue action. Regardless, all new states have resisted integrity fees so far, following seven decades of practice in Nevada. And the sports leagues seem pretty excited about legal gambling even without integrity fees. However, the politically influential leagues may try to convince Congress to create a federal fee.
Should states allow online sports gambling?
New Jersey originally challenged the federal ban on sports gambling to revitalize Atlantic City. But as with so much else in 2019, many customers want the sports betting product on their phones.
New Jersey, Nevada, and West Virginia already offer mobile gambling. The District of Columbia and Pennsylvania plan to do so soon.
The betting apps use geolocation to ensure online wagers are made only within the state sponsoring the sports gambling, and users must first register at a casino or other in-state location. New Jersey lets private vendors such as the previously online fantasy sports operator FanDuel partner with casinos, while the District of Columbia plans to run its online gambling through the DC Lottery.
Because online betting requires more regulatory planning, Delaware, Mississippi, and Rhode Island have yet to adopt it. But there is one very good reason to allow mobile sports betting, which brings us to the bottom line: How much will revenue states get from taxing sports betting?
How much revenue will sports gambling bring your state?
Short answer: Not much as much as some hope. Over the past 12 months, Nevada collected about $20 million in sports gambling tax revenue. That’s roughly 0.1 percent of the state’s annual general revenue.
New Jersey collected roughly $8 million in sports betting tax revenue in its first six months. Notably, based on data my colleague Lucy Dadayan received from the Division of Gaming Enforcement, about $5 million was from online wagers and $3 million from in-person casino bets—which is why you may see more emphasis on online gambling. Delaware has collected a couple million so far while Mississippi and West Virginia are only generating a few hundred thousand dollars each month in sports gambling tax revenue.
As more states legalize sports betting, they’ll divide the meager tax pie among more jurisdictions—something that has been happening with casino gambling for years. Further, many gamblers will substitute sports betting for lottery tickets or other casino gambling, further reducing what little new net tax revenue states can add to their coffers. There’s a reason Nevada doesn’t have a state lottery and it’s not moral opposition.
Bottom line is this is no great boon for state revenue. Sports gambling will bring in a few extra dollars to the state but it won’t fund large amounts of education or infrastructure. If states want to play, that’s fine, but they shouldn’t bet their budget on it.