With many state legislative sessions wrapping up for this year, and a new fiscal year about to begin, it’s a good time to examine some of the 2021 legislative trends—and sports betting taxes are among the more prominent. This year, 11 states have made changes to sports betting regulation and taxes, and Ohio is still in the process. It is understandable that states want to join the sports betting team. In 2020, more than $21 billion was wagered in states with legal sports betting, and both industry and financial analysts are predicting continued explosive growth.
The relatively recent expansion of sports betting in the U.S. is a result of the Supreme Court’s 2018 decision in Murphy v. National Collegiate Athletic Association, which overturned a federal ban. Currently, 30 states and the District of Columbia have legalized sports betting in some form (not all have operational markets yet). Most states that have legalized sports betting allow operators to offer both in-person and online betting. There are a few states that only allow in-person or only allow betting on tribal lands.
All but one of the states which passed bills this year will allow online betting, which yields much more activity—and revenue—than simply approving brick-and-mortar operations. For instance, in New Jersey, more than 90 percent of the bets were taken online in May. With that in mind, it is no surprise that lawmakers in New York, where online betting was previously not allowed, voted to expand sports betting to also include online offerings.
|Requires voter approval
|TBD but minimum 8% of adjusted revenue
|Ballot initiative approved for 2022 ballot
|13.75% of adjusted revenue
|13.75% of adjusted revenue
|10% on-premises; 15% online
|15% of adjusted revenue under $5 million; 17.5% on revenue above $5 million
|Legalized in-person betting
|20% of adjusted revenue
|Online sports betting legalized
|13% of adjusted revenue
|9% of adjusted revenue
|10% of adjusted revenue.
Note: Adjusted revenue refers to revenue after winnings are deducted. In addition to the states listed, the Ohio Senate has passed sports betting legalization. It still needs approval from the House and the Governor. Furthermore, a question over whether the bill is constitutional may be heading to the courts.
Source: State legislatures
Most of the new states coming online with sports betting are implementing taxes in the low teens (only Nebraska and Maryland have rates above 15 percent). This is in line with the national trends, where the majority of states have opted for lower rates. The exceptions to the rule are Delaware, New Hampshire, and Rhode Island, which all have rates around 50 percent, and Pennsylvania with a 34 percent rate.
Sports betting taxes are almost always levied as a percentage of the value of the adjusted revenue (revenue minus winnings). It is one of the few products where a price-based (ad valorem) excise tax is appropriate. As an excise tax, the sports betting tax is supposed to internalize negative externalities (harm) associated with wagering, and the best proxy for any harm caused by betting is certainly the amount of money spent on betting.
The setting of tax rates should be carefully considered when states decide to legalize wagering, as setting rates too high could keep bettors in well-established illicit and untaxed markets. To that end, states should consider the impact of the federal handle tax, which has an effective rate of 5 percent of adjusted revenue (and is in addition to a state tax). Similar to issues raised by marijuana legalization, sports betting facilities will be competing with illegal markets. In 2018, the American Gaming Association estimated that Americans spend close to $150 billion on illegal bets each year.
In the long run, sports betting represents an opportunity for new revenue for states—especially if they develop an appropriate regulatory and tax framework, one which allows the industry to grow. However, it should be a guiding principle that excise taxes are only levied when appropriate to capture some externality or to create a “user pays” system—not as a general revenue measure. Revenue should be allocated to relevant spending priorities associated with the issues that can arise from gambling, such as addiction, which tends to escalate, and may eventually lead to, crime.
Too often, lawmakers appropriate the funds to tangential spending programs, as in Colorado, where tax revenue from sports betting is used for water projects, or in Ohio, where legislation currently under consideration would dedicate 98 percent of tax revenue to education and only 2 percent to problems arising from wagers.
Due to their narrow base, excise taxes on sports betting are not a sustainable source of revenue for general spending priorities. States legalizing and adopting these taxes presumably also wish to foster the new industry, with its potential for economic activity and job creation. If a state chooses to legalize, concerns about the adverse consequences of gaming are best addressed regulatorily, not through a tax which only increases costs for bettors.
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