The legal sports betting industry experienced a boom following the 2018 Supreme Court decision recognizing the federal ban on sports wagering as unconstitutional. To date, nearly 40 states have created legal sports betting markets, with nearly $150 billion in estimated wagers in 2024. States have implemented a variety of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. designs, but one steady element over this entire period has been the federal tax on sports wagers. A recent call to increase the federal tax on sports wagers fails to fully consider how doing so would substantially change the sports betting landscape.
Legal sports wagers are subject to a federal tax of 0.25 percent of the sports betting handle, a term meaning the total amount of wagers. When first introduced in 1951, the tax was 10 percent of all wagers with a primary goal of combatting organized crime and illegal gambling. Congress progressively lowered the tax over a period from 1974 to 1982 to its current rate and added a separate 2 percent tax on illegal wagers. While the original estimates in 1951 projected annual federal revenue of $400 million, actual collections fell way short. Only six months after the law went into effect, the estimate was adjusted to $9 million. Exact tax revenue figures are unavailable since the IRS does not report, or seemingly even know, the amount collected. From industry estimates, however, we can glean that revenue changes from 1951 to 2018 were relatively minor.
As more and more states began operating legal markets and gamblers shifted from unregulated and untaxed illicit operators into the new regulated markets, revenues from this tax have grown remarkably. While federal data from the IRS are unavailable, we were able to aggregate state reports to estimate federal tax collections.
In 2019, 13 states had legalized federal sports betting, and estimated revenues from the 0.25 percent federal sports betting handle tax totaled $33 million. By 2024, 34 states had legal markets, and federal tax revenues increased more than 11-fold to $373 million. Existing markets are continuing to grow, and if more states, especially populous ones like California and Texas, establish legal markets, then these figures will likely continue to grow substantially.
The growth in federal sports betting collections, timed with very active tax reform discussions on Capitol Hill, has reopened discussions for reforming the sports betting tax. One prominent recommendation, from the Bipartisan Policy Center, is to increase the tax rate from 0.25 percent to 5 percent—a 1,900 percent tax hike.
This reform has dual motivations, similar to most excise taxes. A higher tax rate would disincentivize some sports gambling, thus reducing perceived societal harms from the activity, and it could generate additional revenue, possibly included as part of a broader federal tax reform bill.
In 2024, the 0.25 percent handle tax generated an estimated $373 million of revenue. This is not a meaningful amount in the context of the federal budget exceeding $7 trillion. A higher tax rate could potentially raise more revenue for a period of time, but it would constitute poor tax design and such a drastic tax increase on legal gambling would hinder or even reverse the recent trend of shifting consumers into safer, legal betting markets. A closer analysis of the data suggests that significantly increasing the 0.25 percent handle tax would force sportsbooks to consider different legal ways to offer their sports betting products to consumers.
Consider the following hypothetical wager. Two teams are given even odds to win a contest. The odds read -110, meaning a better must wager $110 to win $100. The sportsbook receives $1,100 in wagers placed on each team, for a total handle of $2,200. Additionally, $45 of that handle occurred due to promotional wagers, so the sportsbook only took in $2,155 in cash wagers.
Regardless of whether Team 1 or Team 2 wins the event, the sportsbook will pay out $2,100 to the winning bettors—returning their $1,100 wager with the $1,000 in winnings. That yields a gross gaming revenue (GGR) of $100, or 4.5 percent of the $2,200 waged. Subtracting out the $45 in promotional wagers, the sportsbook is only left with $55 as its net gaming revenue (NGR), and this is before all operational, compliance, marketing, and other costs associated with running the business are covered.
Federal and State Sports Betting Taxes Can Combine for Heavy Tax Burdens
Hypothetical Wagers, Revenues, and Tax Calculations
| Hypothetical Wagers | |
|---|---|
| Team A (-110) | $1,100 |
| Team B (-110) | $1,100 |
| Cash Handle | $2,155 |
| Promotional Handle | $45 |
| Total Handle | $2,200 |
| Returned to Players (Winning Bettors) | $2,100 |
| Gross Gaming Revenue | $100 |
| Hold Percentage | 4.5% |
| Subtracting Promotional Wagers | $45 |
| Net Gaming Revenue | $55 |
| Tax Collections by Tax Design | |
| 0.25% Handle Excise Tax | $5.50 |
| 5.0% Handle Excise Tax | $110 |
| Tax Collections as a Percentage of NGR | |
| Federal 0.25% Handle Excise Tax | 10.0% |
| Combined with a 6.75% State GGR tax | 22.3% |
| Combined with a 15% State GGR tax | 27.3% |
| Combined with a 51% State GGR tax | 92.7% |
| Federal 5.0% Handle Excise Tax | 200% |
Under current policy, the sportsbook would remit $5.50 to the federal government for the 0.25 percent handle tax. That tax alone comprises 10 percent of net gaming revenue.
A 5 percent handle tax would be $110. That is more than double what the sportsbook makes off the wager, 200 percent of its net gaming revenue! The sportsbook would lose money with every such bet. At a minimum, sportsbooks would be forced to offer games with substantially worse odds for consumers and pass on the new tax burden to consumers. The likelier outcome, if the tax is so substantially increased, would be the death of the legal sports betting industry as it exists today.
When considering changes to the federal excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on sports wagers, analysts and policymakers should remember that federal sports betting taxes stack on top of state sports betting taxes too. States apply a wide range of sports betting taxes, from a low of 6.75 percent of GGR to 51 percent of GGR. Combining state taxes with the federal tax increases sportsbooks’ tax payments as a percentage of NGR to between 22.3 and 92.7 percent, depending on which state a sportsbook operates in.
Because many betters are attracted to higher-return, worse-odds bets that would yield lottery-sized payouts, we estimate the average hold across all wagering activity nationwide is roughly 7.83 percent. That margin would not nearly cover the combined state and federal tax burden with a 5 percent federal handle tax. The bottom line: exorbitant taxes could easily kill the legal market for US sports betting.
Alternative Policy Options
A quite different policy approach comes from the longstanding bipartisan efforts from the Co-Chairs of the Congressional Gaming Caucus, which would repeal the tax on legal wagers entirely (H.R. 1440 in the 119th Congress). Similar legislation was introduced in the 118th Congress by Senator Hyde Smith (R-MI) and Senator Cortez Masto (D-NV). A repeal would also equalize the treatment of sports betting with that of more traditional methods of gambling like state lotteries, poker, and slot machines, which are exempted.
Since federal sports betting excise tax revenues are not presently earmarked for any gaming-related government expenditures (the problem that ostensibly justifies an excise tax on sports betting in the first place), another approach—the GRIT Act—would keep the excise tax unchanged but earmark 50 percent of all revenue generated by the tax to fund grants for problem gaming.
If lawmakers are in search of additional revenue, a more neutral tax treatment could also be achieved by broadening the base to include other gambling activities. There would likely be political and legal challenges to levying the tax on state lotteries, but it might make more economic sense to tax lotteries than sports betting, as lotteries tend to return 60-65 percent of wagers to bettors, compared to an estimated average of 91 percent of wagers returned to players by sportsbooks.
Federal policymakers could also consider an increase in the tax on illegal sports wagers. The tax on illegal wagers was 10 percent before being decreased to 2 percent in 1974. While we have virtually no data on how much revenue the tax currently generates, it is possible that an increase in the tax would generate more revenue while simultaneously increasing the incentives for gambling activity to move to legal markets.
The unique complexities of tax design for sports betting excise taxes make optimal tax design particularly challenging. Any reforms to the federal sports betting tax should ensure that both bettors and operators find legal markets more attractive than illicit markets.
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