States are Betting on Revenue from Sports Betting This Year

January 25, 2019

Bill Bradley did not like sports betting. The former New York Knicks star forward felt it sent the wrong message to young athletes and undermined the integrity of the game. So when Bradley transitioned from the basketball court to the U.S. Senate, he championed a nationwide ban on sports betting.

It was not, perhaps, the most likely of causes for a Senator from New Jersey, home of Atlantic City, and then-Rep. Bob Torricelli was chagrined. To Sen. Bradley’s dismay, Torricelli engineered a carveout for New Jersey, with a grandfather clause that allowed continuing sports book operations in a handful of states that already allowed them, including Nevada.

However, a stalemate in the state legislature prevented New Jersey from legalizing sports betting in the narrow window granted them by the new federal law, the Professional and Amateur Sports Protection Act (PAPSA) of 1992. And so it came to pass that, two and a half decades later, a new generation of New Jersey politicians would unmake Bradley’s legacy, winning a victory in the Supreme Court to strike down PAPSA and open the door to state legalization—and of course taxation—of sports betting.

A Changing Playing Field

But sports betting has changed a lot since PAPSA was adopted because of something else coming into its own at the time: the internet. When PAPSA was signed into law, the only browser was Tim Berners-Lee’s line-mode WorldWideWeb, the user’s gateway to the world’s two dozen websites, give or take. Today, things look a little different. And so, consequently, does sports betting.

Once upon a time, betting on sporting events was relatively simple. If, in 1969, you wanted to cash in on Broadway Joe’s guarantee in Super Bowl III, you only had one bet: against an 18-point spread. You placed your bet before the game. If you chose to go with quarterback Joe Namath, you got a payout provided that his New York Jets came within 18 points of the heavily-favored Baltimore Colts. (The Jets won 16-7.)

If you were betting on that game today, you’d have many more options due to the rise of in-game betting. You could have bet, at just about any time during the game, on whether a Jets cornerback would make an interception (Randy Beverly did), or how many field goals Jim Turner would kick (three) for the Jets, or whether Colts quarterback Earl Morrall would be benched (he was, for Johnny Unitas). The possibilities are almost limitless.

Next year, there will be Washington Wizards broadcasts catering specifically to in-game bettors. And with Super Bowl LIII between the New England Patriots and Los Angeles Rams only days away, you can count on bettors across the country testing the many in-game possibilities the new online sportsbooks have to offer.

Because of the U.S. Supreme Court’s 2018 decision in Murphy v. National Collegiate Athletic Association, states are making this happen—and they’re taxing it.

Generally speaking, states legalizing sports betting are making both on-site and online sports betting available, though that isn’t always the case. Some states are exclusively focused on in-person sports betting, confined to casinos, racetracks, or similar venues, while others want to open the door to sportsbooks online as well. There is, after all, money to be had.

Online sportsbooks aren’t the only game in town. There’s also daily fantasy sports (DFS), a new spin on the much older fantasy sports leagues. A traditional fantasy league (the 1979 brainchild of Daniel Okrent, who much later became The New York Times’ first public editor) is played over the course of a season, typically with friends, and with a modest buy-in, if any. With daily fantasy sports, by contrast, you’re playing against an unseen army of competitors connected only by the internet, and you’re building a new roster for every game—however often you wish to play. Whereas winnings are usually secondary in traditional fantasy sports, the betting aspect tends to be the point of daily fantasy sports.

Just don’t call it betting.

Even before the Supreme Court’s decision, states were increasingly trying to get in on daily fantasy sports, typically characterizing it as a skills game rather than a game of chance. Regardless of whether they legalize sports betting more generally, states are increasingly allowing companies like DraftKings, FanDuel, and Yahoo to offer daily fantasy sports games to their residents, and in many cases, they tax the winnings. (Of course, the distinction between betting and gambling has always involved predictive skill, so this further distinction is a bit of a legal head-scratcher—including, apparently, to some judges.)

The industry has taken an aggressive approach, tending to operate wherever not clearly prohibited by law, and not waiting for specific legalization. As of early 2018, daily fantasy sport operators were active in 41 states, even though only 19 had statutes formally legalizing it, according to the National Conference on State Legislatures. Revenues, however, have been disappointing. In the first full year of legalization, DFS brought in a mere $3 million in New York, which imposes one of the nation’s highest-rate taxes on the industry.

Taxation of Sports Betting

The lackluster DFS revenue has many states hoping for better luck with a broader legalization of sports betting, but it should also be regarded as a warning. Sports betting should bring in more than DFS, but it shouldn’t be thought of as a solution to larger budget woes. (New Jersey brought in $24 million in its first month, but it is also the physical home of many major casinos and the two largest DFS companies, which operate their online sportsbooks out of two New Jersey resorts.)

States want a cut, of course, but so do sports leagues, and the rise of in-game betting has provided them with a legislative angle. These in-game bets enhance the importance of the integrity of in-game data, at least theoretically. That has been the crux of argument advanced by professional sports leagues—particularly Major League Baseball (MLB) and the National Basketball Association (NBA)—for so-called “integrity fees,” in which as much as 1 percent of the “handle” (the total amount of bets taken) would be remitted to the league to offset the costs of maintaining the data on which bets are based, and in compensation for generating the product (the games themselves) which makes betting possible.

Many policymakers have questioned the justifications for these integrity fees. (Are existing league statistics somehow unreliable?) Some proponents are increasingly calling them royalties, which comes closer to explaining the real basis of the claim. Actual royalties, though, would not require the state to act as collector; unfortunately for sports leagues, there is little legal precedent to support the notion that statistics and scores constitute intellectual property. Thus far, states have spurned league efforts to insert them into sports betting legalization bills, though that may change with pending legislation in Michigan and Missouri.

States which have already legalized casino gambling are particularly likely to permit sports betting, but they should be conservative in their revenue estimates. If states adopt particularly high taxes—like the 51 percent of gross gaming revenues (revenues less winnings) in Rhode Island, or the 34 percent chosen in Pennsylvania—they are likely to discourage in-person betting in competition with online alternatives which are far harder to tax. Or even competition down the road: Pennsylvania’s neighbor to the east, New Jersey, is taxing sports betting at casinos and racetracks at 8 percent.

Similar to issues raised by marijuana legalization, brick-and-mortar sports betting facilities will be competing with black and gray markets. Setting tax rates too high could keep bettors in untaxed markets. Initially, moreover, a state which legalizes sports betting may attract bettors across state lines, but this effect should dissipate as more states legalize wagering on sports. Early revenues may not be a good predictor as other states enter the arena.

To date, eight states have legalized sports betting—Arkansas, Delaware, Mississippi, Nevada, New Jersey, Pennsylvania, Rhode Island, and West Virginia—though Arkansas is still in the process of rolling out its regulations. Connecticut has an old law on the books permitting sports betting at four on-site locations, but regulators have asked the legislature for more detailed instructions, and no new legislation has been enacted thus far.

For most states, however, the 2019 session represents their first crack at the issue since the Court’s decision. According to an advocacy website, legislation legalizing and taxing sports betting has been filed in 18 states, and it’s likely to crop up in many more. It’s too early to say where it will take hold, but sports betting is already shaping up to be one of the major issues in state tax policy this year.

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