It took less than a month for New York to become the largest sports betting market in the country.
That should be good news for operators. But in the same period, New York also set a record for highest-ever tax take in a single month. That might be a problem.
In just three weeks after launch, NY sportsbooks generated $57.6 million in tax revenue. That blows away the previous high for a single state.
NY sports betting copycats
The explosive start already inspired copycats. Hawaii’s bill sponsor said he modeled his new sports betting legislation with a 55% tax rate after New York.
The danger is not just in new states. New York is juxtaposed against states like Arizona, where betting promos are tax-deductible and tax revenue is a fraction of handle.
Arizona collected just $4.2 million in tax over the first three months of sports betting on $1.24 billion in handle.
That is “far below the high expectations set by Gov. Doug Ducey and other proponents of the new gambling law,” according to one Arizona news outlet.
There is similar grumbling over in Colorado.
House Rep. Alec Garnett told the NCLGS gaming conference at the end of 2021 that tax breaks for promos might not last indefinitely.
“It might make more sense after a certain amount of time to start taxing those boosts and incentives that are offered to players,” Garnett said. “When you’re allowing all those boosts to not be taxed, you’re leaving some money on the table.”
Regulatory change is afoot
Legislation to that effect is already moving in Virginia.
VA lawmakers introduced HB 1103 at the end of January. The bill would limit sportsbook operators to just 12 months of promotional deductions from taxable revenue.
So operators face potentially two looming tax burdens: new states mimicking the New York model and existing states chopping tax breaks for bonuses.
Which should they be more concerned about?
Gaming lobbyist John Pappas said bonus exemptions could come under the microscope in the coming months.
“If tax projections come in lower than expected, there’s some egg on lawmakers’ face,” Pappas said. “You may see them coming back to the table and wanting to revisit things like promo deductions. But I am not of belief those efforts will succeed, at least not this year.”
Pappas points out that promo write-offs are always worse in a state’s first few months as operators fight for market share.
Give it time?
That is already happening in Arizona. In September, promos equaled at least 100% of GGR That fell to 73% in October, then 37% in November.
Consider Pennsylvania, which had the previous highest tax month despite allowing bonus write-offs.
“The industry needs the ability to invest in the market and attract consumers to legal offerings,” Pappas said. “Those 1 million sports bettors in New York did not come out of thin air.
“Maybe some came from other legal jurisdictions, but many would have come from the black market and the promos help facilitate that.”
Compromise on promos and bonuses?
Operators have spoken about needing two years for a state to get to profitability. That kind of timeline makes sense for taxes too, as promos are gradually phased out and taxable revenues go up.
One industry source, who asked not to be named, said they would not be surprised to see more states try to phase tax deductions for promos out.
For example, in year one when the market is new, 100% of bonuses are tax-deductible. In theory, that could then fall to 70% in year two, then 50% in year three.
Given the trends outlined above, that should be manageable for operators.
Has New York sports betting set a precedent?
Whether there will be more New York copycats is a different question.
The industry might have shot itself in the foot somewhat in NY.
Offering such big bonuses out of the gate helped to create that massive handle and massive taxes.
Not likely, insider says
However, Brendan Bussman, the director of government affairs at Global Market Advisors, is skeptical other states will follow New York.
For one, NY is a unique draw for operators given its scale and prestige. It is unlikely nine books are going to offer 51% of revenue to Hawaii for instance.
Likewise, a key state like California already has a 10% tax rate written into the ballot initiative that operators are trying to pass, meaning it cannot copy New York.
Other key states are also more pro-business.
“New York and Hawaii have the same mindset but that is a lot different to Texas and Florida,” said Bussman. “They are much more reasonable with lower taxes. That’s just fundamentally who they are. New York is not a model for anybody.
States have also shown time and again, they want to write their own playbook rather than copying existing models.
Keep calm and carry on
All told, then, it seems operators then can put looming tax hikes near the bottom of their worry list.
Some states could look at reducing bonus tax breaks over the next couple of years, but politicians’ concerns should dissipate as states mature.
And New York looks to be the exception rather than the model for big remaining states to follow. Now if only investors would stop worrying …