The cost of doing business could be going up for legal sports betting sites in several jurisdictions in the United States.
Sportsbook operators are staring down the barrel of proposed tax hikes in Illinois, New Jersey, and Washington, D.C. That is in addition to the increase bookmakers had to digest last year in Ohio, when the Buckeye State doubled its tax rate for them to 20%.
The threat of another hike is real enough in Illinois that the Sports Betting Alliance (SBA), whose members are BetMGM, DraftKings, FanDuel, and Fanatics, is rallying bettors to try to stop Gov. J.B. Pritzker's attempt in its tracks.
Sports betting revenue helps fund education and infrastructure across the state. An unfair tax hike would push legal businesses—and their revenue—out of Illinois.https://t.co/8ICLGztOTB pic.twitter.com/Bx4qwJcYNn
— Sports Betting Alliance (@SBAllianceUS) May 7, 2024
Pritzker’s proposed $52.7-billion budget for the coming fiscal year included a 20-percentage point increase to the sports wagering tax in the Land of Lincoln, which would ratchet it up to 35% from 15%.
This, the SBA says, will mean worse odds for players (presumably because operators will make those odds worse to compensate for a higher tax bill), fewer promotions and bonuses, and an uptick in action for illegal and offshore bookmakers. The alliance has organized a campaign to get residents to contact lawmakers to prevent the "unfair" tax hike from happening.
“Despite COVID restrictions and red tape on-site registration requirements, legal sports betting operators have invested millions of dollars in Illinois,” the SBA’s website says. “Operators have played by the rules and have enabled millions of fans to support the players and teams they love.”
Not only Illinois
Whether the effort is successful is yet to be determined. However, the fact it was launched at all suggests operators are taking it seriously. Sportsbooks are also facing at least two other proposed tax hikes and perhaps the prospect of even more if other states deem it good policy and follow suit.
One of those proposed tax increases is in New Jersey, where a state senator filed legislation aiming to boost the tax rate on online sports betting to 30% from 14.25%. The legislation has not made much progress since it was introduced in April, at least not publicly.
Nevertheless, a third hike looms in D.C., where the local council is considering a more competitive market for online sports betting that would come with an increased cost of admission. The legislation proposes doubling the sports betting tax rate to 20% for existing operators and would force newer entrants to turn over 30% of their revenue.
The D.C. bill has already met with pushback from at least two interested parties, including Caesars Entertainment Inc., which runs a brick-and-mortar sportsbook in the district at Capital One Arena.
Deutsche Bank analyst Carlo Santarelli recently cited the "regulatory environment" as a headwind in a research note for DraftKings Inc.
Santarelli warned that "much like was the case when the dominoes began to fall with [online sports betting] legalization on a state by state basis, and neighboring FOMO pushed further legislation and further expansion, ignoring the tax rate increase proposals currently out there, or viewing them as isolated instances, is likely to prove shortsighted."
Some 'levers' to pull
DraftKings CEO Jason Robins was asked during the company’s earnings call last week about the possible fallout from tax hikes in existing states and what the Boston-based bookmaker could do to offset those costs.
Robins responded that states understand there is still a large illegal sports betting market and that for legal operators to be competitive, tax rates have to be kept "at a reasonable level."
Even so, Robins said they are prepared if that logic doesn't prevail.
“In the end, that cost has to get absorbed by the consumer if the government raises taxes,” Robins said. “So there's various levers to do that.”
The DraftKings CEO added that the company could cut external marketing costs, which would be one move they could use to "create better margins" they will need if taxes rise.
“But, like I said, 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. “So I think states get that and I expect that maybe there'll be one or two here and there that look to do that, but I don't think many of them will, and I even think the ones that are are getting a lot more information now. And my expectation is that we’ll be able to convince them that it's not a good policy decision.”
