The biggest online sports betting operators in the U.S. are making ominous noises about a proposed tax hike in Illinois, including what it might mean for their clientele if the cost of doing business goes up.
In short, the sportsbooks most used by bettors in the U.S. are suggesting they will offer worse odds, fewer bonus bets, and perhaps pull up stakes entirely. Whether they follow through remains to be seen, but operators are painting a dire picture of the future of Illinois sports betting.
If the bump becomes law in the Land of Lincoln, the head of the Sports Betting Alliance, whose members are BetMGM, DraftKings, Fanatics, and FanDuel, has warned bookmakers they "will have no choice but to reevaluate their level of investment and participation" in the state.
Even if operators remain in the Illinois market despite higher taxes, they are cautioning that bettors could ultimately help foot the bill with weaker wagering offerings.
“This tax hike will mean worse products, worse promotions, and inevitably, worse odds for Illinois customers – not to mention provide a massive leg up to dangerous, unregulated and illegal offshore sportsbooks who pay no taxes and adhere to none of Illinois’ sports betting regulations,” SBA president Jeremy Kudon said.
Statement on sports betting tax hike advancing out of the Illinois Senate tonight: pic.twitter.com/8x2ZuYXEk0
— Sports Betting Alliance (@SBAllianceUS) May 27, 2024
The Illinois House of Representatives had yet to concur with the proposed tax hike as of Tuesday afternoon. But the risk of tax rate increases is not limited to Illinois, so the developments there may be informative for bettors in other states.
The SBA is framing the future consequences in Illinois as simple economics: If costs go up, those added expenses have to be offset somewhere. The bettor may eventually feel it when they go to make a wager.
Not everyone buys that. Deutsche Bank analyst Carlo Santarelli said in a note to clients on Monday that the possibility of higher odds is “nothing more than a threat by operators to politicians.”
Santarelli pointed to the steady win rate operators are achieving in the U.S. despite differing tax rates. In New York, for example, the hold percentage over the last 12 months was 9%, which was managed with the state's 51% tax rate. In Michigan, the hold was the same, 9%, but with a 5% effective tax rate.
“When looking at hold percentages, across a wide variety of states, all of which have different tax structures, there is truly no discernible difference in hold percentages, relative to the tax rate,” Santarelli wrote.
But it could be that the threat is about to get a lot more real. Kudon recently told the Washington Post that operators do not have the technology yet to offer different odds in different states, but that they should by next year.
In other words, someone driving in 2025 in Iowa, with its sports betting tax of 6.75%, could see point spread odds of -110 there. However, if they cross the border into Illinois they could see -115 or higher with the state’s tax rate potentially rising to up to 40%.
“Raising sports betting tax rates will invariably force these businesses to offer less competitive products,” SBA spokesperson Nathan Click said in an email. “Already, companies have testified that they are making decisions to invest far less in promotions and partnerships in high tax places like New York, and worse odds for consumers is the next inevitable step.”
Promo deprivation
While the worsening of odds on a state-by-state basis may be a few months away, the more clear and present danger for bettors is they see fewer promotions from operators. That may mean deposit matches, free bets, and boosts become fewer and farther between.
Deutsche Bank found recently that in New York, the rate of promotional spending is lower by more than 10 percentage points compared to other states. DraftKings CEO Jason Robins told a legislative committee last year that they had already begun to reduce their promo spend in New York because of its higher tax rate.
“Where taxes have risen elsewhere, operators recapture lost margin with lower promotional activity (lower market growth rate), less favourable odds to customers and market share shifts to the larger operators (although the graduated tax rate offers some protection to smaller operators),” Jefferies analyst David Katz wrote in a note to clients on Tuesday regarding the Illinois proposal. “A rate of >25% will also likely increase the relative attractiveness of illegal markets.”
But the Illinois tax hike may also have operators considering the nuclear option, which would be leaving the state entirely. That seems less likely given all the thought about making a go of things by slashing promos or worsening odds.
Even so, the threat is there.
“Rather than heeding the outcry from tens of thousands of residents who vocally opposed more than doubling sports betting taxes, the Illinois Senate advanced a budget tonight that would make Illinois sports betting tax the second highest in the country and counterproductively penalizes sports betting operators who invested millions into the local economy and created jobs in the state,” Kudon said on Sunday.
The FOMO effect
There is the potential for other states to follow the example of Illinois, and Ohio before that, and try to implement tax increases of their own. Sports betting tax hikes have recently been floated in New Jersey, D.C., and, although it was quickly shot down, in Massachusetts.
While proposing a tax hike is one thing, and approving and enacting them another, there's a good chance some other state lawmakers at least think about it.
"It has been our contention for some time that tax rate increases were one of the primary risks for the [online sports betting] operators, and with the recent decision to raise taxes in Ohio, and now Illinois, we believe others are likely to follow," Deutsche Bank's Santarelli wrote. "We have felt, for some time, that the New York tax rate, and the taxes paid to the State, were a risk factor for the sector, and we believe that is proving true, especially in light of the proposed, though quickly dismissed, Massachusetts proposal for a 51% tax rate, identical to that of New York."
