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Statehouses across the United States have been good to the online gaming industry in recent years, approving regulated online sports betting markets in 30 states and online casino in seven.
With online casino and online sports betting legalization efforts stalled across the country, online gaming operators are switching from offense to defense.
At the National Council of Legislators from Gaming States conference in Pittsburgh last week, FanDuel led the charge in pleading with legislators not to raise the tax rates they are paying in regulated US markets.
“The plea that I have today is to take a step back and say at what point does the model break?” said Cesar Fernandez, FanDuel’s head of state government relations. “Is there a breaking point where the cost structure of these companies with what is ultimately a relatively thin margin business, can it survive in the long run?”
An industry under fire
In the first few years of sports betting legalization after the US Supreme Court overturned The Professional and Amateur Sports Protection Act (PASPA) in 2018, most states followed the model set by New Jersey.
The Garden State took into consideration sports betting’s small profit margins and desire to boost casinos and racetracks when adopting an online sports betting tax rate of 14.25%.
Reasonable tax rates allowed operators to advertise and offer promotions to bring bettors over from the black market. However, the sudden inundation of sports betting advertisements also faced backlash.
Ohio Gov. Mike DeWine wanted to see fewer gambling advertisements, so he led a push to double the state’s sports betting tax rate to 20%.
And when operators gave in to then-Gov. Andrew Cuomo’s demands to pay a 51% online sports betting tax in New York, states getting less tax revenue took notice.
This year, Illinois lawmakers increased a 15% online sports betting tax rate to as high as 40% at a graduated rate.
Brandt Iden, vice president of government affairs at Fanatics, said despite threats made to leave the Illinois market if the tax rate increased, operators are going to stick it out.
“Illinois wasn’t quite as bad as New York, but Illinois has been bad from a sports betting perspective,” Iden said. “I mean, they raised the tax rates overnight, a very difficult progressive tax rate structure, and it doesn’t make sense.
“I know there was a lot of conversation on are operators going to leave … they’re not going to leave. That’s the reality. Our companies are not going to leave. We are going to figure out a way to make it work. That’s what companies do.”
Even a lawmaker in New Jersey proposed doubling its online sports betting and online casino tax rates.
New York tax rate isn’t changing
Troy Mackey, a key aide to New York Asm. Gary Pretlow and coordinator of the Assembly Racing and Gaming Committee chaired by Pretlow, opined at NCLGS that the 51% tax rate in New York isn’t going anywhere.
With that tax rate, New York has been the most successful state in capturing revenue from online sports betting.
“New York is doing extremely well and it’s one of those things that you cannot go back now, unfortunately, to reduce the tax rate,” Mackey said. “We tried to revisit that and … you couldn’t justify taking away money from education and giving it to a corporation.”
Iden, who helped set up the reasonable Michigan online casino and sports betting tax rates when he was a state representative, presented New York as a cautionary tale for the industry.
“The moral of the story, governments do not lower tax rates, wow, surprising. They only go one direction, unfortunately.”
Improving narrative of online gaming impact
Fernandez focused his presentation at NCLGS on changing the narrative on whether the online gaming industry is a net positive for states.
Since 2018, he said that FanDuel alone has contributed $3.5 billion in state tax revenue across the US. Last year alone, FanDuel paid $1.2 billion to states where it operates.
In framing the impact of overall online sports betting taxes paid by the industry, he noted that online sports betting tax revenue pays for 3,172 teacher salaries in Ohio, 10,535 miles of state road repairs in Arizona and 2,636 state trooper salaries in Virginia.
“If we look at that impact, which is undeniable, and we say what would happen if these states actually passed iGaming?” Fernandez said. “The impact is even more staggering.”
Fernandez added that online gaming companies are treated differently than any other businesses operating in the state. That operators are paying a multiple of between 2x and 7x the corporate tax rate in various states.
And when choosing to locate in a state, any company needs to feel safe. Which means the state won’t increase the agreed-upon tax rate soon after it enters the market.
“I’m here to say that over-taxation and over-regulation could actually be a threat to the industry,” Fernandez said. “For whatever reason, taxation for the online sports betting industry and the online iGaming industry has been detached from how we treat any other company.”
Pushback by Maryland legislator
Maryland Sen. Ron Watson stood up to respond to what he was hearing on the panel.
Watson supported a Maryland online casino bill this year that included a 55% tax rate on electronic online games, which would have been the highest in the nation.
Watson said tax revenue is his biggest selling point when trying to convince colleagues to vote for online gaming.
“When a legislator has to go back and craft legislation, all the hands go in for money,” Watson said. “And so there is no way that iGaming can be taxed like a Safeway or a Giant food store down the street. That’s not going to happen. The real deal is being logical about how much money this industry makes and filling in the gaps in the state that you’re trying to operate in.
“The thought that you can have iGaming taxed at a regular rate as anyone else will not pass the muster in a state legislature, at least not in Maryland.”
In some good news for the industry, however, Watson told PlayUSA he wouldn’t pursue a Maryland sports betting tax increase in the coming years.
Fernandez responded that FanDuel and other members of the Sports Betting Alliance have never advocated for iGaming legislation at the corporate tax rate.
“The presentation was more about the cautionary tale of going too far could be a breaking point for the industry,” Fernandez said. “… My plea today was just let’s have an honest dialogue about where that middle ground is where we can make sure that the state feels that they have the resources to solve some of those real important problems like infrastructure and education, but also that the companies aren’t up into that breaking point of this may not work financially.”
