DraftKings and FanDuel warn of added juice in NY with no tax relief

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The New York Senate Racing, Wagering, and Casino Committee hearing on Tuesday was supposed to be a review of the first year of online sports betting in the state. Instead, it turned into two things: A massive plug for passing online casino laws in the state and a time for members of the gaming industry to beg for change in spite of a record first year of numbers.

The Executive Director of the New York State Gaming Commission Robert Williams was the first to testify. He provided an overview of the top-level numbers from the first year of sports betting. That includes the $16 billion in wagers and, more importantly, the more than $700 million in tax revenue for the state.

FanDuel and DraftKings warn of dire consequences if tax rate remains

However, when DraftKings CEO Jason Robins and FanDuel President Christian Genetski took the stand to testify, they warned that the numbers may seem big, but the state’s handle is already shrinking compared to other states. And what’s to blame? The 51% tax rate.

“We do not believe that this level of economic success is sustainable with the current tax rate of 51%. Although it’s only been one year since the market launched, there are clear signs that the New York market has already peaked, whereas other states remain on a solidly upward trajectory,” Genetski stated.

Genetski also noted that FanDuel, despite having a huge market share of 40% in New York, spends 50% less per capita than it does in a market like Louisiana, where the company’s market share is nowhere near as outsized.

Robins agreed that DraftKings would love for New York to remain a major market for them but that the tax situation just makes it insurmountably difficult to be profitable.

NY operators could add extra juice if 51% remains in place

Robins cautioned DraftKings would likely resort to “draconian” measures like reducing promotional spend even further and adding additional juice to bets placed in New York.

Genetski said much of the same, citing the potential cessation of deals with professional teams and inflated pricing as the inevitable outcome if the legislature does not act.

Robins also noted that the tax rate becomes even more oppressive because the state does not allow for promotional credit deductions. Without those, Robins argued the effective tax rate is “north of 70%.”

A number of committee members, including Committee Chair Sen. Joseph Addabbo, pointed out that the tax rate should not have come as a surprise to operators.

“Everybody on the planet knew that,” Addabbo said. “There was no sunset, so you knew it was 51% going forward. You negotiated it. You agreed to it. And now we have these numbers, and there’s no real foundation to say these numbers are suffering at this point.”

Both Genetski and Robins did say that a decrease to even the next-highest tax rate in the state, which would be Pennsylvania at 36%, there might be a shortfall in tax revenue in the short-term, but that they could provide data and forecasting to support that it would net more tax revenue in the long-term.

They also admitted that they came into the state under less-than-ideal conditions hoping that the tax rate and marketplace would change as it matured.

Addabbo and the other committee members agreed that, without evidence that this would improve revenue coming back to the state, it is very difficult to support it.

Assemblyman Jeff Hallahan also asked operators what they planned on doing if the tax rate remained at 51%.

“What’s your Plan B?”

At this, Robins and Genetski echoed the need to further reduce their investment in the market from the reduced levels they are already at. They also reiterated the need to potentially charge more vig to New York bettors.

Pretlow threatened AG involvement if sportsbooks “collude” on pricing

Assemblyman and Co-Committee Chair Gary Pretlow did not like the sound of that suggestion and made it very clear what would happen if sportsbooks collectively agreed to price inflation.

“You got everybody who was on your side is going to go with Christian and go to MGM,” Pretlow said of the idea that DraftKings would make prices worse without losing market share to competitors. “So you’d have to do this in concert with each other and getting nine entities to all collude to give worse odds in New York wouldn’t be really beneficial and that might get the [Attorney General] involved or something like that.”

When Genetski responded that the price inflation would not be colluding, Pretlow balked and responded, “You’d have to.”

Robins disagreed with that and explained how he thought it would happen.

“The other choice is just to lose money forever in the market, and I don’t think anyone’s going to do that. So I think it’ll have to happen, but it will be more iterative because you’re right. We can’t directly collude. It’ll be people watching what each other doing and it’ll happen over months, not necessarily all at once.”

Despite sports betting focus, online casino was a major discussion point

While much of the meeting was a somewhat tense discussion about the potential shortcomings of online sports betting in the state, a great portion of the meeting also served as an unofficial plug for Addabbo’s planned online casino legislation.

Robins and Genetski both hammered home how much online casinos could massively impact the marketplace. For example, Robin’s noted that the Michigan online casino market is six and a half times the size of its sports betting market.

Spectrum Gaming also testified and provided numbers about just how big the industry could be. Their report said Year 1 would produce $2.3 – $3.1 billion in gross gaming revenue in its first year and between $3.6 – $4.3 billion by the fifth year. Robins said those numbers seem in the ballpark, but also cautioned that if the tax rate on online casino was prohibitively high as well, it could stagnate growth.

Genetski and Robins advocated for online casino, promotional credit deductions, and a reduction in the tax rate for sports betting. It seems unlikely all three will get done this year, but it will be interesting to see which are prioritized by the committee after this hearing.