I’m almost surely in the minority here — and likely a slim minority at that — but I’m a bit disappointed that DraftKings Inc. decided to scrap its planned “gaming tax surcharge.”
That’s not because I’m some sort of sports betting sadist who wants people to surrender more of their winnings. It’s also not because I’m a DraftKings investor who was craving that estimated EBITDA bump. And while the surcharge did make for a lot of news, which wasn’t bad for those of us in the news business, that’s not why I’m just a tad uneasy about its demise.
What’s bothering me is a concern that whatever happens next involves bettors getting stung in ways they may not even realize, as operators strive to offset tax hikes through measures that are less transparent than a surcharge shown on bet slips.
DraftKings Statement on Gaming Tax Surcharge pic.twitter.com/cucbsQJIVD
— DraftKings News (@DraftKingsNews) August 13, 2024
Now, if you’re reading this you probably already know, but DraftKings announced earlier this month that it was going to tack a relatively small fee onto winning bets in Illinois, New York, Pennsylvania, and Vermont in response to the higher tax rates there.
While the Boston-based bookmaker predicted the surcharge could have “upside” for its adjusted earnings, I thought the move was more about firing a shot across the bow of lawmakers inclined to hike taxes further.
Bettors are voters, and if those bettors/voters are upset enough (especially if they were only DraftKings users and were mistakenly thinking this was a government measure, and not a company one), maybe they would reach for their phones and fire off an email or make an angry call.
"I do think that this is something that may make some states reconsider because now they may be hearing more from their citizens that they don't like it,” DraftKings CEO Jason Robins said on an earnings call.
But DraftKings soon found itself alone and isolated in the industry, as no other operator said they would enact something similar. Perhaps the last straw was FanDuel-parent Flutter Entertainment PLC making it clear yesterday that it had no plans to impose a surcharge. Around an hour later, DraftKings announced the surcharge was dead, saying it was scrapping the measure after hearing from presumably irritated or upset customers.
We can argue whether DraftKings customers prompted the decision to drop the surcharge or if it was the fact that the competition wouldn’t do the same. Maybe it was one, maybe it was the other, maybe it was a combination of both or additional factors.
At any rate, I’m sure there are DraftKings customers and investors who are happy the company isn’t following through on its plan. DraftKings shares skidded in value following the announcement and a downward revision to its guidance for 2024. On Wednesday, after DraftKings said the surcharge was dead, the company’s stock price saw a nice bump.
Time to rain on this parade
So, yay, right? Mission accomplished. Nothing more to see here.
Well, I have a few quibbles, qualms, whatever, about what happens next.
Let me give credit where I think it’s due regarding DraftKings’ surcharge plan. While this could have been a self-serving decision, the fact the company planned to break out the added fee for customers would have been a welcome bit of transparency.
Yes, I’m aware of all the anger and irritation about the lack of the same transparency when it comes to bettors getting limited and a lot of other aspects of the industry. Hypocrisy is a word that comes to mind. But telling people they were getting surcharged was a good idea, even if it was part of a larger, worse idea.
So yes, the surcharge is gone. What isn’t gone are those higher tax rates the surcharge sought to offset. The question, then, is what do DraftKings and FanDuel (and maybe a few others) do now to try to ease their financial burden? Moreover, when they do what they’re going to do, will customers get the same sort of transparency DraftKings promised with its surcharge?
Time for some game theory
I know some people hate to deal in the hypothetical, but let’s give it a whirl anyway.
Operators have warned odds could worsen with higher tax rates, so bettors could see -110s morph into -115s and -120s. At least that’s something you’d know upfront. Still, not every bettor shops around for the best price, and not all bettors have access to a huge selection of operators. Steeper odds could fly under the radar for some.
A more opaque part of the business is the limiting that at least some bettors have already been on the receiving end of, and there’s a non-zero chance it could worsen. If taxes are more burdensome, maybe bookmakers' appetite for risk diminishes further, and bettors are not always told why or to what extent they’ve been limited.
FanDuel-parent Flutter now starting their Q2 results call. Will update if anything interesting gets flung out, surcharge-related or otherwise. Based on their earnings release and CEO comments, though, FanDuel is not going to follow DraftKings in imposing a tax fee on winners. pic.twitter.com/FAJN8j0AOJ
— Geoff Zochodne (@GeoffZochodne) August 13, 2024
Now, here’s a much less hypothetical situation. Arguably, one of the catalysts for DraftKings’ decision to drop the surcharge was FanDuel’s decision not to follow suit. FanDuel’s parent company, Flutter, noted in updated guidance for 2024 that it expects a $50-million hit from the tax hike in Illinois, of which it expects to initially offset $10 million.
“We expect to directly mitigate 50% of the cost in 2025 through locally optimized promotional and marketing spend,” Flutter added Tuesday in its second-quarter earnings release. “This is prior to second order mitigation impacts such as in-state market share gains, which we have typically observed market leaders such as FanDuel to benefit from over time when regulatory changes are introduced.”
CEO Peter Jackson added later that the company has a history doing business in higher-tax jurisdictions, and that “our experience is that moderating levels of generosity or indeed reducing local marketing is the best response.”
So two things to think about there. One is that FanDuel expects higher tax rates may put pressure on smaller operators and force them to increase prices, which could then drive customers toward FanDuel, the largest operator in the U.S. In other words, less choice for consumers.
The other thing is that FanDuel anticipates it would reduce “generosity” for customers, so potentially fewer free bets and other promotions for bettors. Those bettors may have turned to FanDuel as a second or third choice as well, after their first choice becomes less appealing or perhaps even closes entirely.
In short: not great! And perhaps not entirely noticeable or transparent for users, unlike a surcharge they see on slips.
RIP in peace
Lastly, I guess, is that the message sent to lawmakers is the industry will figure out a way to make higher tax rates work, even if it's at the expense of the customer. What’s stopping states, then, from hiking those rates? And what will operators do if that happens?
“Over time, our view had evolved to consider the notion that [the surcharge] was intended to spark debate and awareness rather than actually recoup margins,” Jefferies analyst David Katz wrote in a note to clients on Wednesday regarding DraftKings.
So, yes, the gaming tax surcharge is dead. We hardly knew ye. Will we know more about what comes next?
