Industry Sports

Reality Check: How Much Will States Really Make On Sports Betting?

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Among the most burning questions surrounding legalizing sports betting is this: How much money do states really stand to make? Lawmakers across the country have thrown out some big numbers as they try to legalize sports betting, but how accurate are they? And will sports betting really solve the financial issues some states are facing?

A 2017 Oxford study commissioned by the American Gaming Association, strives to give a clear answer to that question, but since sports betting launched in Delaware in June, the only thing that is clear is that, well, sports betting is still in its infancy, and whatever revenue politicians, academics, and others involved in sports betting may have been hoping for is likely a long way off.

In a review of the tax revenue generated by the four states that fully launched sports betting by the end of 2018, the only common theme is that while the Oxford Study may be on point for a mature, regulated sports betting market that includes a state-wide mobile piece, maturity is likely five years away for the states that launched in 2018, and even further afield for Pennsylvania and Rhode Island, which launched late in the year, and other states that are still considering legalizing.

Mobile sports betting key to capturing highest tax revenue

Looking at Nevada and New Jersey, in particular, the mobile/internet piece has emerged as a critical part of the equation. In addition, it appears the Oxford study may be a bit more conservative than numbers are actually bearing out, and certainly compared to claims being made by politicians.

The only truly mature sports betting market is Nevada, which began offering sports betting in 1949 and added a mobile/online component in 2010. For the 12-month period ending Nov. 30, 2018, Nevada sportsbooks took in $273.7 in revenue, which translates to $18.4 million in tax dollars to the state based on a 6.75% tax rate. Using a 10% tax rate, the Oxford Study projected $26.7 million in tax revenue for 12 months, based on revenue of $267.1 million. But if the 10% rate is applied to the 12 months ending Nov. 30, Nevada would have brought in $27.3 million, slightly more than the Oxford study projected.

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The study projects that a fully mature market in New Jersey would result in $38.7 million in revenue to the state based on a benchmark 10% tax. New Jersey has a sliding scale starting at 9.25%, and in 6 1/2 months (June 14 – Dec. 31, 2018) brought in about $10.4 million in taxes on $1.25 billion in handle for the year. Projected over 12 months, New Jersey will bring in about $20 million in tax revenue in its first year (most of NJ’s revenue in 2018 was collected during football season, the busiest for sportsbooks). Given that about two-thirds of New Jersey’s sports betting handle has come from online/mobile bets, that component represents about $13.2 million of the tax pie. The online component will likely grow even larger in subsequent years.

Comparatively, the Oxford study projects $20.5 million in tax revenue at 10% for Mississippi, which had fully launched its more than 20 sportsbooks by Oct. 1. The state charges an 8% tax on handle, and in the five months, ending Dec. 31, 2018, the state’s 23 casinos had generated $14.8 million in gross gaming revenue. Applying the 8% tax rate, the state brought in $1.18 million in tax revenue. Over 12 months, Mississippi won’t come near the $20.5 million projection, but the state’s potential is severely limited because it doesn’t have state-wide mobile sports betting.

Modeling doesn’t work in states with unusually high tax rates

In the other three states that have launched, it’s difficult to apply the Oxford model. Delaware is getting a 50% cut of handle under its “revenue-sharing” plan, through which the state lottery regulates and oversees sports betting. In its first two-and-half months alone, Delaware brought in $4.45 million in tax dollars. The Oxford study projected $4.8 million with a 10% tax rate.

And in West Virginia, where the tax rate is 10%, a fiscal note in the new sports betting law projects $5.5 million in tax revenue in the first year, while the Oxford Study projects $7.9 million in a fully operational market. West Virginia has only five sportsbooks, two of which didn’t launch until late December. The first mobile sportsbook in the state launched at that time, as well. West Virginia year-to-date revenue numbers were not available. Considering Mississippi’s numbers, the West Virginia $5.5 million first-year project appears high, as the state has limited mobile sports betting.

Two other states, Pennsylvania and Rhode Island, also launched sports betting in 2018, but not until late November. The Oxford projections for both states likely won’t apply, as Pennsylvania has a 34% state tax (plus a 2% local share assessment) and Rhode Island, another lottery-run state, has a 51% tax rate.

Using the small sample available, what can states that are moving to legalize expect, and are the projections being made in state capitals across the country accurate?

The answer is likely a resounding no, assuming a state adopts a 10% tax, which is about average if states with unusually high tax rates – Rhode Island (51%), Delaware (50%) and Pennsylvania (34%) – are taken out of the equation.

Here’s what lawmakers are promising

If you listen to lawmakers, the windfall from sports betting could be a game-changer. But the what those lawmakers are promising and reality are likely two different things.

Some examples:

  • Virginia’s Mark Sickles (D-District 43) proposed a bill with a 15% tax rate and told the Washington Post in November that the state could expect $41 million in tax revenue. The Oxford Study projects about $30 million in tax revenue at 10%.
  • Kentucky lawmaker Morgan McGarvey (D-District 19) told the Courier-Journal in August that the state could expect to see up to $30 million in revenue from sports betting.  The Oxford study puts that number closer at $9.4 million, based on a 10% tax rate. In addition, it’s unclear if mobile sports betting would be state-wide in the only bill that’s been filed, though the tax rate in that bill is 25%.
  • In Tennessee, where a bill filed by Rick Staples (D-District 15) sets a 10% tax rate, the Oxford Study projects $15.1 million in tax revenue in a mature market. Staples told WVLT in January that “For those that go in locally, in the first year $2.2 million, the next year it would double to five million and then it would increase several million every year afterwards.”  Thirty percent of sports betting revenue is earmarked to go to local governments, so the $5 million estimate may not be too far off — but that $5 million would not be per local government, but would have to be split among all local governments that have sports betting.  The fiscal note attached to the bill projects more than $14.87 million in a mature market. The bill does allow for state-wide mobile sports betting.
  • In Indiana, where Alan Morrison (R-District 42) recently filed a sports betting bill with a 6.25% tax rate, the fiscal note attached projects up to $13.3 million in revenue beginning in fiscal year 2021. Even with the reduced tax rate compared to the Oxford study, that number appears low. Applying a 10% tax rate, the study projects $27.5 million in revenue to the state in a mature market. Sara Tate, executive director of the Indiana Gaming Commission said that a study the state commissioned projects $87 million in “taxes and fees to the state” total after five years of operation.
  • In Massachusetts, Republican Governor Charlie Baker said in a letter to state legislators that sports betting would bring in “$35 million” in revenue in fiscal 2020, the first year of sports betting. His proposed bill would tax sportsbooks at 10% for brick-and-mortar and 12.5% for online. The Oxford study projects $27.2 million in revenue in a mature market at a 10% tax rate.

Among the other states in which bills have already been filed, tax rates range from a low of 6.25% in Missouri, via Representative Cody Smith’s bill, to 15% in one of three bills filed in Virginia. But more important, most lawmakers seem to understand that the lion’s share of sports betting revenue comes online, and they have included state-wide mobile/internet gaming in their bills.

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