US states should allow online wagers to increase sports betting tax revenue, which will always be volatile

Since the U.S. Supreme Court green-lighted states to legalize sports betting, just over half of states with statewide sports betting are in line to meet tax revenue projections. Richard Auxier, a research associate at the Urban-Brookings Tax Policy Center, points out that while the resulting tax revenue will be “the boon some politicians promised, if done prudently, taxing sports wagers can be a winner for states.”

In a new article, the author of a previous report this earlier this month which details state sports betting revenues says that all seven states with operating sportsbooks passed legislation before the Supreme Court decision, and since PASPA’s repeal, Arkansas, the District of Columbia, Indiana, Iowa, Montana, and Tennessee have approved sports betting, though they are still setting up their sports gambling systems.

Some of the other states were slowed by procedural hurdles, Auxier says, including ballot initiatives, opposition from tribal organizations or residents who object to all forms of gambling. “However, some tribal organizations support sports betting because they see it as a way to get gamblers into their casinos, and gambling opposition ultimately did not stop legislation in several conservative states,” he adds.

In terms of tax rate, advocates for sports gambling emphasize that setting the rates too high may encourage illegal betting and thus depress state tax revenue. A 2017 Oxford Economics study set the “high” tax rate scenario at 15 percent, but Delaware, Pennsylvania, Rhode Island, and Tennessee have tax rates at 20 percent or higher. Auxier considers states may alter future sports betting tax rates as more states approve sports betting and compete for gamblers.

Furthermore, the specialist underlines that states can collect millions of dollars in tax revenue from legal sports betting, but that tax revenue “will always be relatively small and volatile.” Some state officials set the tax revenue bar “absurdly high” despite cautious state revenue projections. For instance, in Mississippi and Rhode Island, tax revenue is well below estimates. Rhode Island demonstrated how fickle the game is when its casinos lost money on sports betting in February because too many New Englanders bet on the Super-Bowl winning Patriots.

In addition, the research associate says that if states want to increase tax revenue from sports betting, they should allow online wagers. Nevada and New Jersey were the only states that raised USD 20 million from taxes on sports betting over the past year, being also the only ones that offered widespread online betting.

New Jersey collected more than three times as much tax revenue from online wagers (USD 13.8 million) than it did from in-person bets (USD 4.2 million), even though in-person betting had a two-month head start. In March, the state collected six times more revenue from online operators than from in-person operators.