Analysts at the investment banking firm Jefferies argue the reaction to Illinois’ proposed sports betting tax hike are overdone.
DraftKings’ stock fell more than 13% Tuesday while the shares of FanDuel parent company, Flutter Entertainment, dropped more than 7%. Illinois’ likely tax hike for sports betting companies is believed to have triggered the market reaction.
The Illinois Senate approved a budget Sunday that included raising the maximum tax rate for sports betting companies from 15% to 40%. The new tax rate is progressive, only reaching 40% when a sports betting company exceeds $100 million AGR.
On Tuesday, Jefferies analysts David Katz and James Wheatcroft issued a report, arguing that concerns over higher sports betting tax rates are “overdone.” They point out that only DraftKings and FanDuel would fall into the highest tax rate of 40% in Illinois, impacting smaller operators by a lesser extent.
"At this point, we view the Illinois proposal as relatively state-specific and see scope for material mitigation over time. Our math and checks suggest the reaction is overdone," wrote the Jefferies analysts.
Jeffries also points out that as many of these sports betting companies mature, they will no longer need to spend as much on promotion and customer acquisition. In fact, sports betting companies are already trimming their advertising budgets. As a result, they will have more bandwidth to address incremental tax hikes should they occur.
Jefferies also doesn’t see a lot of other states following Illinois’ lead. An amendment to raise the Massachusetts sports betting tax from 20% to 51% was rejected by the Senate last week. Meanwhile, New Jersey is considering a bill that would raise the online sports betting tax rate from 14.25% to 30%. But that bill has made little headway since it was introduced in April.
Washington, D.C. is looking to boost its retail sports betting tax rate from 10% to 20% as part of a larger sports betting overhaul. But three jurisdictions are hardly a contagion.
Another point that Jefferies makes is that tax rates more than 25% could “increase the attractiveness of illegal markets.” That’s a point DraftKings CEO Jason Robins made during the company’s recent earnings call.
“I think that states do understand that any sort of negative impacts to the consumer offering that companies would have to take where tax rates increase would really be counter to the notion that we're trying to drive activity from the illegal market to the legal market, which has an enormous number of benefits, only one of which is generating taxes,” Robins said.
Jefferies raised their price target on DraftKings from $52 per share to $54 per share in early May. DraftKings is currently trading below $40 on the Illinois news.
