Several states have passed legislation this year to increase the tax rate that online sports betting operators pay on their revenue. But how much change is too much?
Maryland raised its tax rate from 15% to 20%, Louisiana increased its own rate from 15% to 21.5% and New Jersey lawmakers ultimately agreed on a new 19.75% tax rate for online casinos and sports wagering operators, up from 15% and 13%, respectively.
In all three of those cases, the actual tax hike implemented was scaled back during legislative sessions amid concerns from sportsbook operators and other industry stakeholders, as well as some legislators. Maryland Gov. Wes Moore wanted a 30% tax, Louisiana trimmed back an initial proposal of 32.5% and New Jersey Gov. Phil Murphy aimed for 25%.
Although the Canadian Gaming Summit in Toronto in June naturally mostly concerned developments north of the border, it was inevitable that U.S. measures would seep into some conversations. A panel titled ‘To market, to market: where will all the new customers come from?’ that was ostensibly focused on Canada ended up discussing U.S. tax changes at length.
An operational obstacle course?
“It’s a balancing act that states are playing right now,” ventured Tom Metzger, CEO of lottery courier platform Lotto.com. “Louisiana was proposing a very steep increase, which they clawed back to a more reasonable level realizing that they would be catering to the black market. So, there is a balance to be found there.”
At the other end of the bench was Scott Vanderwel, CEO of the Canadian business of online sportsbook PointsBet. Vanderwel told the room that starkly different regulatory requirements from jurisdiction to jurisdiction can make the road tough to navigate for operators.
“We definitely have seen in the U.S. that jurisdictional differences for the sake of differences doesn’t produce value,” Vanderwel suggested. “It produces costs and friction that are difficult to overcome for operators. And what you’ll end up with is a long tail of operators that just can’t bear the cost of participating.”
Metzger suggested that it could even become a disincentive to operators trading publicly. “There might be some benefits in the future to being privately held, because if you’re disclosing your margins and you have analysts asking specific questions about how much you’re making in this state, it can be pointed out to regulators that they can tax more.”
Wherefore art thou, Illinois?
One of the states not mentioned above is Illinois, which introduced the most hotly debated tax change of this year when it began charging sportsbooks 25 cents per wager taken, rising to 50 cents above a certain volume threshold. That was in addition to the progressive tax rate it introduced last year, which charges leading sportsbooks up to 40% of their revenue in the state.
In Illinois and elsewhere, an oft-cited motivation for hiking betting tax rates is to bring in more revenue for the state and/or to help to make up a fiscal deficit. Metzger noted that Illinois has one of the highest budget deficits in the entire country.
“So, obviously, they’re desperate for revenue and they put together a budget at the very last minute, which wasn’t supposed to include gaming,” he said.
The Illinois moves, particularly the per-wager fee, faced pushback from the industry, not least from the likes of market leaders FanDuel and DraftKings, who are on the hook for the highest percentage tax rate and the larger per-bet fee. DraftKings even called out the most recent tax tweak in its reasoning for seeking to establish a Political Action Committee, with which it hopes to exert more influence on such industry changes.
A square tax hike in a round budget hole?
Vanderwel and Paris Smith, founder of gaming innovation venture Life Winning and startup supporter Defy The Odds, each questioned the wisdom of using major tax hikes for financial relief.
“The reality is that, if you take the long-term view, having a tax rate that’s artificially high isn’t going to achieve the maximized advantages from a revenue perspective or a consumer production perspective,” Vanderwel opined. “You want 100% of play to sit inside of a regulated framework and a reasonable tax rate that allows for that market to grow in a healthy way.
“Short-termism, to Tom’s point, solves short-term budget deficits and those types of challenges, but ultimately is only going to hurt the development of the regulated framework.”
Smith also referenced the consumer protection aspect, suggesting that creating too many obstacles to sportsbooks’ participation in regulated markets risks pushing players towards the unregulated market.
“The irony is that the regulators, through these ridiculous taxes, are feeding the black market,” Smith said. “Rather than feeding that, pull it back and try to get more for the long term and get all those players. Because all the players they’re pushing away, that is the big revenue they’re missing out on.”
