With many state legislative sessions closed for this year and a new fiscal year beginning, it’s a good time to examine some of the 2021 legislative trends – and sports betting taxes are among the more prominent ones. This year, 11 states made changes to sports betting regulation and taxes, and Ohio is still in the process. It is understandable that states would want to join the sports betting team. In 2020, states with legal sports betting were wagering more than $ 21 billion, and industry and financial analysts are predicting further explosive growth.
The relatively recent expansion of sports betting in the US is the result of the 2018 Supreme Court ruling in the Murphy v National Collegiate Athletic Association, which lifted a federal ban. Currently, 30 states and the District of Columbia have legalized sports betting in some form (not all have operational markets yet). In most states that have legalized sports betting, operators can offer both in-person and online betting. There are some states that only allow personal bets or only tribal bets.
All but one of the states that passed bills this year will allow online wagering, which brings in a lot more activity – and revenue – than just allowing stationary operations. In New Jersey, for example, more than 90 percent of bets were accepted online in May. Against this background, it is not surprising that the legislature in New York, where online betting was previously not allowed, voted in favor of expanding sports betting to include online offers.
| Status | To update | Excise tax | Requires voter approval |
|---|---|---|---|
| Arizona | Legalized | Still open, but at least 8% of adjusted sales | No |
| California | Ballot initiative approved for 2022 ballot papers | 10% | Yes |
| Connecticut | Legalized | 13.75% of adjusted sales | No |
| Florida | Legalized | 13.75% of adjusted sales | No |
| Louisiana | Legalized | 10% on site; 15% online | |
| Maryland | Legalized | 15% of Adjusted Sales Below $ 5 Million; 17.5% on sales over $ 5 million | No |
| Nebraska | Legalized personal bets | 20% of adjusted sales | No |
| new York | Online sports betting legalized | 13% of adjusted sales | No |
| South Dakota | Legalized | 9% of adjusted sales | No |
| Washington | Tribal compact | N / A | No |
| Wyoming | Legalized | 10% of adjusted sales. | No |
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Note: Adjusted sales refer to sales after deducting profits. In addition to the states listed, the Ohio Senate has passed sports betting legalization. It still requires the approval of the House of Representatives and the Governor. In addition, the question of whether the draft law is constitutional can reach the courts. Source: State legislature |
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Most of the new states that go online with sports betting are introducing taxes in their early teens (only Nebraska and Maryland have rates above 15 percent). This is in line with national trends where the majority of states have opted for lower rates. The exceptions to the rule are Delaware, New Hampshire, and Rhode Island, which all have rates around 50 percent, and Pennsylvania, which has 34 percent.
Sports betting taxes are almost always levied as a percentage of the adjusted revenue (sales minus profits). It is one of the few products for which a price-based (ad valorem) excise tax is appropriate. As an excise tax, the sports betting tax is intended to internalize negative externalities (damage) related to betting, and the best proxy for damage caused by betting is certainly the amount of money spent on betting.
Tax rate setting should be carefully considered when states decide to legalize betting, as excessive rates could keep bettors in established illegal and untaxed markets. To do this, states should consider the impact of federal tax, which has an effective rate of 5 percent of adjusted revenue (and is in addition to a state tax). Similar to marijuana legalization, sports betting providers will compete with illegal markets. In 2018, the American Gaming Association estimated that Americans spend nearly $ 150 billion each year on illegal wagering.
In the long term, sports betting represents an opportunity for new income for states – especially if they develop a corresponding regulatory and tax framework that enables the industry to grow. However, a guiding principle should be that excise duties are only collected when appropriate to capture externalities or to create a “user pays” system – not as a general measure of revenue. Income should be allocated to relevant spending priorities related to the problems that can arise from gambling, such as addiction, which tends to escalate and eventually lead to crime.
Too often, lawmakers use the funds on tangential spending programs, like in Colorado, where sports betting tax revenue is used for water projects, or Ohio, where the under-review legislation would use 98 percent of tax revenue for education and only 2 percent for problems that arise result from betting.
Due to their narrow tax base, excise duties on sports betting are not a sustainable source of income for general spending priorities. States that legalize and adopt these taxes will probably also want to promote the new industry with its potential for economic activity and job creation. If a state chooses to legalize it, concerns about the adverse effects of gambling are best addressed through regulatory action, not a tax that only increases the cost of bettors.
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