Sports Betting Will Not Solve State Budget Crises

The coronavirus pandemic has left states and localities in dire straits financially and lawmakers are getting creative in their pursuit of new revenue sources.

Sports betting is one such source. However, it is very unlikely that revenue from sports betting will have any meaningful impact on budget shortfalls. States legalizing sports betting in the hopes of balancing their budgets might get a bump in revenue, but it is not a long-term solution to fix budget woes, including those caused by the coronavirus pandemic.

In California, where Senate Constitutional Amendment 6 had a hearing Tuesday, sports betting may eventually raise up to $500 million per year. While that is a significant amount of revenue, California is facing a $54 billion budget shortfall. The California proposal includes an excise tax of 10 percent on on-premise bets and 15 percent on online bets.

The Supreme Court’s 2018 decision in Murphy v. National Collegiate Athletic Association overturned the federal ban on sports betting, paving the way for legal wagering in the states in some form. Currently, 23 states and the District of Columbia have legalized wagering, and Louisiana, Massachusetts, and Ohio may soon follow. Oklahoma, Virginia, and Washington have legalized since the start of the pandemic.

Excise Tax Rates on Sports Betting

State	Tax Rate
Arkansas	13% of first $150 million in receipts, then 20%
Colorado	10% of revenue
Delaware	50% of revenue
District of Columbia	10% of revenue
Illinois	15% of revenue
Indiana	9.5% of revenue
Iowa	6.75% of revenue
Michigan	8.4% of revenue
Mississippi	12% of revenue
Montana	Lottery collects revenue minus expenses
Nevada	6.75% of revenue
New Hampshire	51% online; 50% retail
New Jersey (a)	8.5% of land-based revenue; 13% of online revenue
New Mexico	Tribal Lands
New York	10% of revenue
North Carolina	Tribal Lands
Oklahoma (b)	Tribal Lands
Oregon (c)	2.3%
Pennsylvania (d)	34% of revenue
Rhode Island	51% of revenue
Virginia	15% of revenue
Tennessee	20% of revenue
Washington	Tribal Lands
West Virginia	10% of revenue
Source: State statutes, Tax Foundation calculations. (a) New Jersey taxes revenue an additional investment alternative of 1.25%, which is not reflected in these figures. (b) Oklahoma will implement a fee of 1.1% of the handle (total wagers accepted). (c) Sports betting was never illegal in Oregon. No new bill has passed to legalize it. (d) Pennsylvania levies an additional 2% Local Share Assessment, which is not reflected in these figures. “Revenue” refers to adjusted revenue, which is net revenue adjusted for winnings.

The setting 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. rates should be carefully considered when states decide to legalize wagering, as setting rates too high could keep bettors in well-established untaxed markets. Similar to issues raised by marijuana legalization, brick-and-mortar sports betting facilities will be competing with black and gray markets. According to the American Gaming Association, Americans spend close to $150 billion on illegal bets each year.

Sports betting, especially online betting, may become more popular considering the possibility that many professional sporting events may take place without spectators in light of the pandemic. If moderate social distancing will be mandated for a prolonged period, brick and mortar casinos and physical sportsbooks will not be able to compete with online sports betting. This could be an issue for the seven states that do not allow online betting: Arkansas, Mississippi, New Mexico, New York, North Carolina, Oklahoma, and Washington.

In the long run, sports betting represents a real opportunity for new revenue for states—especially if they develop an appropriate regulatory and tax framework, which allows the industry to grow. However, it should be a guiding principle that excise taxes should only be levied when appropriate to capture some externality or to create a “user pays” system—not as a general revenue measure. Due to their narrow base, they are not a sustainable source of revenue for general spending priorities.

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