The cost of doing business is on the verge of going up in Illinois for legal bookmakers.
While there was some parliamentary drama, the Illinois House of Representatives ultimately concurred on Wednesday morning with a Senate amendment to House Bill 4951 that will increase the tax rate for legal sports betting in the state.
The bill now needs approval from Gov. J.B. Pritzker, who initially sought a general increase in the tax for Illinois sports betting to 35% from its current 15%.
Under H.B. 4951, however, operators will be subject to a 20% tax on annual online sports betting revenue up to and including $30 million starting on July 1. That rate would then rise to 25% for yearly revenue up to $50 million, 30% for up to $100 million, 35% for up to $200 million, and 40% for more than $200 million. Retail revenue would be subject to similar rates.
The new tax scale could mean more money for the state — and less for operators.
Looks like there was parliamentary drama but the Illinois House concurred with the Senate's sports wagering tax hike. H.B. 4951 now off to Gov. Pritzker, who initially wanted a general increase to 35% from the current 15%, not the legislature's progressive rate of 20% to 40%. pic.twitter.com/CwmRqHIhkH
— Geoff Zochodne (@GeoffZochodne) May 29, 2024
A note from Citizens JMP Securities analyst Jordan Bender forecast that, based on revenue generated over the past 12 months, the annual amount of tax owed by all operators in Illinois would rise by $175 million under the new effective rates, increasing to approximately $329 million.
JMP projected the bulk of that would come from DraftKings and FanDuel, the two biggest bookmakers in the state. The duo's tax bills in Illinois were estimated to grow to $121 million and $150 million, respectively, from the $53 million and $63 million they faced with a 15% rate.
Bender wrote that online sports betting companies focus on contribution profit from states and adjust costs to “right-size” their businesses there, such as by slashing advertising costs and promotions.
But the tiers of tax rates in Illinois are a different dynamic compared to another higher-tax state, New York. There, Bender said that DraftKings and FanDuel “have gained a structural advantage through product, scale, and willingness to spend” more than their rivals under New York's 51% tax rate for online sports betting.
“The graduated structure [in Illinois] changes that equation where the top companies can't structurally gain a strategic foothold in tougher regulatory environments, creating a more even playing field when it comes to the tax environment,” Bender wrote in a note to clients on Tuesday. “In terms of market size, we would expect growth to be impaired by the lack of investment.”
Swing and a miss
Major sportsbook operators tried to fight off a tax hike in Illinois, warning it would lead to a weaker product and worse odds, as well as force companies to rethink their presence in the Land of Lincoln.
The president of the Sports Betting Alliance, whose members are BetMGM, DraftKings, Fanatics, and FanDuel, called the Senate’s proposed tax scale, which the House has now approved, “an extremely disappointing decision that will cause real harm.”
“This tax hike doesn’t just threaten the legal, regulated sports betting market — it will have devastating effects for operators’ in-state partners, including the most vulnerable downstate casinos, who rely on sports betting revenue to create jobs and invest in communities,” SBA President Jeremy Kudon said in a statement. “Sportsbooks across the industry will have no choice but to reevaluate their level of investment and participation in the state should this become law.”
Anybody else?
Despite these warnings, and the possibility of a tax hike helping unregulated operators, a majority of state lawmakers thought it was something operators in Illinois could digest.
While the initial vote on the increase came up one "yea" short of passing, the House reconsidered and concurred with the amended H.B. 4951 (which was part of the legislature’s broader budget work) by a 60-47 vote.
The decision to approve higher rates for operators in Illinois is also another sign of the shifting sentiment some legislators have toward the legal sports betting industry in the U.S.
Lawmakers in other jurisdictions have kicked the tires on tax hikes of their own, and one, Ohio, has already implemented an increase. Additional states may consider tweaking tax structures.
JMP’s Bender wrote that “the tax itself is financially harmful to any company touching the sports betting market in Illinois,” but that it and its relatively speedy passage are emblematic of a larger issue.
“We find it interesting states are now turning back to tax rate adjustments for online gaming when tax changes have been non-existent in states with brick-and-mortar casino gaming,” Bender added. “While several of these efforts never had steam, the floodgate is now open, in our view, whereby state legislators have found a way to increase tax revenue with little to no effort.”
