As they look to plug budget holes, states across the country are eyeing legal sports betting’s successes in the US. But what about the roughly two dozen states that have already pumped the legal sports betting well? Where can they look for new tax revenue?
Some of those states are exploring ways to tweak the sports betting laws they already passed, while others turn their attention to a sports-betting-adjacent product: online casinos.
Legal online casino and poker predate the expansion of sports betting in the US by some five years. However, the legalization of online poker and online casino games has taken a backseat to sports betting since the Supreme Court opened the door for states in May 2018.
That’s unfortunate. Sports betting has proven to be an easier sell, but online casino is where the real revenue opportunities reside.
That said, the two verticals also complement each other, and lawmakers looking to maximize revenue potential should view them as two sides of the same coin.
Sports Betting Is Nice, but Online Casino Is Better
Online casino is inarguably the better revenue opportunity for operators and the state. But again, it shouldn’t be a binary choice. In fact, it makes very little sense to legalize one and not the other. And any statehouse that willfully chooses sports betting over online casino should be charged with legislative malpractice.
Here’s evidence from three markets with both products to prove this point (Michigan online casino and sportsbooks launched on January 22, 2021).
More importantly, from the state’s perspective, there is an even greater divide in tax revenue, as the chart below shows.
The Industry Is Fortunate States Aren’t Playing Hardball
Any state looking for immediate and ongoing revenue from online gambling should pick up the phone and call Pennsylvania.
A comparison of the above two charts clearly shows Pennsylvania’s different approach to expanded gambling. Despite being thoroughly outpaced by New Jersey when it comes to revenue, Pennsylvania collects significantly more tax revenue from online gambling and sports betting thanks to the two states’ disparate tax rates.
Online sports betting in New Jersey is taxed at 13%, whereas in Pennsylvania, that burden is 36%. New Jersey taxes online casino revenue at 15%. Pennsylvania uses a bifurcated system with slots taxed at 52% and table games taxed at 16%.
Up-Front Licensing Fees are a Huge Revenue Generator
In addition to its high tax rates, Pennsylvania managed to extract exorbitant licensing fees for online casino-poker and sports betting.
Pennsylvania charged operators:
- $4 million for an online poker license
- $4 million for an online slot license
- $4 million for an online table game license
- $10 million for an online sports betting license
The state was nice enough to make a one-time $2 million discount for an all-inclusive online poker, table games, and slot machines. Basically, to offer all four forms of online gambling in Pennsylvania, an operator had to fork over around $20 million.
In Michigan and New Jersey, licensing fees are measured in six-figure numbers. If we amortize Pennsylvania’s $20 million licensing fees for offering a comprehensive suite of online gambling over five years, the already high tax rates are pushed even higher.
What Tax Burden Will Operators Accept?
One of the most debated elements of gambling expansion is the licensing fee and tax rate. What percentage of revenue will the state receive?
Operators and industry folks are keen on lower tax rates and licensing fees and tend to get their way. That is thanks to a nonstop torrent of doomsday scenarios about an uncompetitive market if the burdens are too high, and in some cases, implying that a particular threshold will cause them to reconsider applying for a license.
Based on Pennsylvania’s experience (and some other heavy burden jurisdictions), that doesn’t seem to be an argument that holds much water.
That said, Pennsylvania was a first mover, which increases the state’s appeal. Even still, it appears to have only slightly crossed the imaginary line of what an acceptable operating burden looks like. Still, if I’m a state looking at online gambling expansion, I’m using Pennsylvania as a starting point and letting the industry negotiate me down a little.
But more importantly, I’m prioritizing:
- Online casino and sports betting in tandem
- Online casino-only
- Sports betting-only
As I said earlier, sports betting is nice, but online casino is better. At least when it comes to revenue.