Will the Supreme Court’s decision allowing states to legalize sports betting be the tax revenue jackpot that some states hope for? Perhaps, but plenty of obstacles remain.
The potential is there, of course. Sports betting is a huge business. The American Gaming Association (AGS) estimates that $107 billion is wagered on sports illegally each year (though estimating illegal activity is always dicey). And tax revenue, collected as income tax on winnings and as an excise tax on casino revenue less those winnings (called gross gaming revenues or GGR), could easily add up. The temptation for states to replace unpopular broad-based taxes on income, property, or sales with much narrower taxes such as lotteries--often on low-income people--is high. But before states start counting their money, they may want to think about these six issues:
How important will it be to be a first mover? States such as New Jersey (which filed the lawsuit that ended up in the Supreme Court), Mississippi, Delaware, and Pennsylvania are ready to go, perhaps standing up sports betting within a few weeks. Other states are being more cautious. And because many state legislatures are out of session until next year, it will be a while before they can act. We’ve learned from casino gambling that consumer demand is relatively fixed. When one state opens a new casino, it is more likely to take customers from casinos in nearby states than increase overall gambling activity. The early movers may see something of a revenue windfall, but it may shrink as more jurisdictions share the action—and the tax take. That was the experience with state-run lotteries as well.
On line or in person? For now, most states are likely to allow sports betting only at casinos and race tracks. They will face enormous pressure to allow sports wagering online—and big pushback from politically influential casinos to not do so. In the end, it is hard to imagine brick-and-mortar winning this battle. But who knows how long it will take to sort out? Until it does, states will lose a big source of potential revenue from online betting.
The AGS study projects annual tax revenue could range from $5 billion to $18 billion, depending on what venues are taxed, as well as the rates. And remember, most states are talking about taxing only gross gaming revenue (the total amount bet minus winnings that are paid out). That margin turns out to be relatively modest: In 2017, Nevada collected only about $15 million in tax on nearly $5 billion in sports bets.
What do you tax, and what’s the right rate? Nevada, where sports betting is already legal, imposes a 6.75 percent tax the GGR. Pennsylvania, anticipating the High Court ruling, has enacted a 34 percent tax. Neighboring New Jersey wants to tax sports betting at casinos and race tracks at 8 percent and online sports wagers at 12 percent. How long will Pennsylvania’s rate hold up in the face of that tax competition. And what is the right tax base? For instance, will states tax only state-licensed venues or try to tax the office pool for the Super Bowl or March Madness? Good luck with that.
Who else shares the action? Sports leagues want a cut of up to 20 percent of the GGR or a small piece of all wagers. Individual teams will want some of the revenue stream as well. Such revenue-sharing will narrow margins for bookmakers, which will inevitably be reflected in odds or fees, making legal betting less attractive.
What will it mean for illegal gambling? New Jersey and other supporters of legal sports betting claim it will clean up the activity and make it easy to regulate. But if bettors have a less regulated and untaxed way to bet, the odds are pretty good they’ll take it. Besides, your neighborhood bookie still provides, umm, financing. States should also keep in mind their experience with marijuana: Legalizing and taxing a product does not eliminate—and may even encourage-- illicit sales.
What will Congress do? Remember, the Supreme Court didn’t stop Congress from regulating sports betting. It merely said that it couldn’t stop states from allowing—and taxing—such wagering. Already, Senate Finance Committee Chair Orrin Hatch (R-UT) says he’ll propose federal legislation to set national standards. It is not clear what Congress will do, when it will do it, and how federal rules will constrain sports betting.
There is little doubt that sports wagering will become a new source of tax revenue for many states. But will it become the big cash cow that many predict? I wouldn’t bet on it.
