A high-tax environment in the Empire State could lead online sports betting sites to jack up the juice on wagers they take in New York.
Representatives from DraftKings and FanDuel appeared during a joint hearing of the New York Assembly and Senate gambling committees on Tuesday, the purpose of which was to review the first year of mobile sports betting in the state and its impact on the state budget.
While lawmakers heard about the success of the market for online sports betting in New York, they were also cautioned that success could be fleeting if changes are not made to the state’s tax structure. New York has a 51% tax rate on gross gaming revenue generated by its nine online sportsbooks, one of the steepest levies in the U.S.
FanDuel Group President Christian Genetski, citing a report from consultants at Spectrum Gaming Group, said they suspect New York’s sports-wagering handle will drop 10% to 20% on a year-to-year basis.
“As legal operators struggle to make the numbers work, they will not only reduce marketing and generosity, they may also be forced to adjust pricing in New York,” Genetski told the committee members. “That is how much it costs to make a bet, to ensure a higher hold percentage.”
May the odds stay ever in your favor
FanDuel is the leader in market share in New York, but operators with weaker customer and handle numbers could ultimately decide to pull out of the state, Genetski added. He said this would mean less competition and fewer choices, making offshore sportsbooks more attractive to bettors.
New York does not allow operators to deduct the value of free bets and other promotions provided to players either. DraftKings Chief Executive Officer Jason Robins told the committee that this translates into an effective tax rate of more than 70%, as taxable revenue earned on a free bet would include the value of the free bet itself.
Operators have yet to make more "draconian" decisions to try to make a go of it in New York, Robins added. That includes "meaningfully" reducing the value of promotional credits offered to customers, which the CEO said had already begun on a smaller scale.
“In a nutshell, we will likely be forced to offer a significantly worse value proposition for customers that are placing bets in New York,” Robins said. “This starts with the betting odds, where New York customers would receive worse odds than DraftKings offers in other states and that you can find in the illegal market.”
Holding out hope
One of the reasons these harsher moves haven’t been made is because operators are hopeful about possible tax changes, Robins added. The DraftKings CEO said New York should consider legalizing online casino games as another source of tax revenue as well.
Still, the alarm bells about New York's tax rate have been rung almost since the state's mobile sports betting market opened. And, as was noted Tuesday, a relatively higher cost of doing business in New York for online sportsbooks was something sought from the outset by lawmakers and ultimately agreed upon by the companies themselves.
But DraftKings and FanDuel are the two biggest operators in New York, so their words carry weight. Moreover, the two bookmakers are claiming the Empire State’s revenue projections are in jeopardy of not coming true if it continues on its current tax trajectory for sports betting.
“We do not believe that this level of economic success is sustainable with the current tax rate of 51%,” Genetski said. “Although it's only been one year since the market launched, there are clear signs that the New York market has already peaked, whereas other states remain on a solidly upward trajectory.”
Online sports betting sites in New York have now taken more than $16 billion in wagers since they were allowed to operate in the state in January 2022. That handle has translated into around $700 million in tax for the state, which applies a 51% charge to gross gaming revenue. The state also received $200 million in licensing fees.
But getting lawmakers and the public to accept a tax break for bookmakers will be a tough sell. There was also some skepticism about the decline of New York’s online sports betting market, which is the biggest in the U.S. and has only just begun providing year-over-year comparisons given its January 2022 opening.
“There's no foundation to say these numbers are suffering at this point, in my opinion, so we need to change this,” Sen. Joseph Addabbo Jr. said during Tuesday’s hearing. “It's a very hard argument to make.”
That being said...
Even so, there may be an appetite for further tweaking of gambling laws and rules in Albany and at the state gaming commission, such as tighter marketing regulations. Several pieces of gaming-related legislation have been filed this year, including one bill that wants all sports betting advertisements to contain warnings about the potentially addictive effects of gambling.
Addabbo, the chair of the senate’s gaming committee, said the state's performance this far lays a "foundation" for where mobile sports betting and gaming in the state could go in the future, including by spurring thoughts about legalizing online casinos in the state. But Addabbo said the legislature first needs to be aware of two things, which are that it can't remain idle if changes are needed and that it must understand the risks of gambling addiction.
“We need to stand at the ready to make sure that we give New Yorkers of this state the best product possible, the best product in the nation,” Addabbo said. “We have to stand ready to make those changes and improvements when needed and when the opportunity arises.”
The New York legislature's gambling committees are meeting to examine the 1st year of online sports betting and its impact on the state's budget. Sen. Joseph Addabbo says lawmakers can never just say they're done, have to be ready. Mentions iGaming as something to think about. pic.twitter.com/M7mVMPffuI
— Geoff Zochodne (@GeoffZochodne) January 31, 2023
Addabbo introduced legislation in January that would expand the state's sports-betting market to 14 operators by the end of January 2024 and to 16 operators by the end of January 2025.
The expansion would also come with a tax cut. The legislation proposed to let operators deduct free bets and other promotions from their revenue and would lower the state's tax rate for online sports wagering revenue to as low as 25% when the 16 or more operators are licensed. Even so, the new operators would be subject to a $50 million licensing fee.
There is no guarantee Addabbo’s bill goes anywhere; he introduced similar legislation during the last legislative session. Getting support from lawmakers will require making a case to them for why bookmakers deserve a lighter tax load, and why not doing so will imperil the ongoing stream of revenue from online sports betting.
“While there has been an exciting start to mobile sports wagering in New York, there is still room for improvement,” the justification for the bill says. “This legislation would clarify and update the laws governing the current operations and would direct the Gaming Commission to issue additional mobile sports wagering licenses so that we can continue to grow and improve the market.”
