US Sportsbooks Can’t Fight Illegal Competitors Without Tax Help

Written By Martin Derbyshire on October 30, 2018 - Last Updated on September 21, 2020

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The argument for legal sports betting across the US has long centered around the idea state governments can get a piece of the $150 billion the American Gaming Association estimates Americans bet illegally on sports every year.

Of course, that requires US gamblers to embrace legal sportsbooks. For the whole idea to work, gamblers must move their action over from illegal bookies and offshore sportsbooks to legal sportsbooks, which the state can then tax.

What some states are ignoring in a rush to get their piece of the pie is that there’s only one way to draw gamblers away from the illegal market. It involves allowing legal sportsbooks to be competitive with their illegal counterparts. Obviously, that means offering competitive odds on every bet.

Allowing legal sportsbooks to make enough of a profit to spread a little marketing money around can help. Leaving them just enough to offer sign-up bonuses might even convince gamblers to try them out. However, only consistently competitive pricing will keep them there.

Gamblers are savvy consumers

In other words, if a gambler has been getting a price of -195 on the Golden State Warriors to win the NBA title on an offshore sportsbook the past few seasons, that gambler isn’t likely to move that action over to a legal sportsbook offering the same bet at -250 just because it’s legal. Gamblers are savvy consumers and go wherever they get the best price.

In setting up the legal framework for sports betting inside their borders, states need to be conscious of this. They need to set tax rates at a level that allows sports betting operators to offer competitive pricing. If the tax rates are too high, sports betting operators have few choices. They will ultimately pass that cost on to customers.

In other words, high taxes eliminate a legal sportsbook’s ability to offer competitive prices.

States may implement high taxes thinking they’re getting a bigger piece of the pie. However, that pie will ultimately end up being a lot smaller than they bargained for.

In fact, a state could conceivably have both the highest tax rate on sports betting in the nation and the lowest amount of tax revenue generated. By charging excessive taxes, a state essentially handcuffs its legal sportsbooks in their effort to compete with the illegal books. Gamblers won’t move their action over. Revenue, and ultimately tax revenue, will be infinitely smaller than anyone hoped for.

Reasonable taxes = competitive sportsbooks

There’s a healthy and robust legal sports betting market in Nevada, and it’s been around for decades. This is due in no small part to the fact the state charges just a 6.75 percent tax rate on operator revenue. It’s a rate that allows Nevada sportsbooks to remain competitive in the face of a growing offshore mobile sportsbook industry.

New Jersey launched legal sports betting in June charging operators an 8.5 percent tax on land-based sports betting revenue and 13 percent for online and mobile wagering. Up to the end of September, NJ sports betting operators have generated more than $40 million in revenue. Gamblers are clearly moving their action over to the legal market, in part because the state has a reasonable tax rate allowing legal sportsbooks to offer competitive pricing.

There have been a few bumps in the road, including September’s $82,610 FanDuel Sportsbook at the Meadowlands Racetrack debacle. A glitch in the brand new NJ sports betting operation’s system allowed it to book a bet at a whopping 750-1 (+75,000). It actually came in, teaching FanDuel Sportsbook an $82,000-plus lesson in the need to check a ticket before handing it out to a customer.

But on the whole, NJ sports betting is a success.

The problem in Pennsylvania

Yet still, Pennsylvania stands ready to launch its own PA sports betting system, ignoring these examples and leaving little hope gamblers in PA will be convinced to stop betting illegally.

In fact, it’s so wrongheaded, when the Illinois legislature began looking at sports betting laws of its own recently, one state representative pointed to the PA sports betting plan as one Illinois should not model its own after.

Pennsylvania has set its tax rate on sports betting revenue at whopping 36 percent. After balking at first, a number of PA casinos have now applied for sports betting licenses in the state. Regulators have already conditionally approved some. How these operations expect to draw customers away from illegal sportsbooks under such an oppressive tax scheme is anybody’s guess.

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Illinois’ answer

As Illinois State Representative Lou Lang told other Illinois lawmakers:

“If this industry is taxed too high, illegal betting continues.”

Rep. Lang explained that sports betting margins are quite small already. Even though large handle numbers make for flashy headlines, no one should be fooled into thinking otherwise. As he sees it, excessive tax rates lead to less-competitive pricing allowing the illegal market to continue to flourish.

From the sound of it, Rep. Lang is prepared to push Illinois sports betting legislation in the right direction. Unfortunately, it also looks like PA will have to try and fail first. Hopefully, it eventually gets things right, lowers the tax rate, and allows PA sports betting operations the chance to compete.

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Martin Derbyshire

Martin Derbyshire has more than ten years of experience reporting on the poker, online gambling, and land-based casino industries for a variety of publications including Bluff Magazine, PokerNews, and PokerListings. He has traveled extensively, attending tournaments and interviewing major players in the gambling world.

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