National Sports Betting Integrity Fee: Predicting the Impact

The House version of a bill recently introduced in Indiana seeking to legalize sports betting has been modified to include a 1% “integrity fee” payable to the major sports leagues if the effort to legalize sports betting is successful. After receiving input from the NBA and MLB, Rep. Alan Morrison has modified the bill to include the fee.

If the proposal sticks and the bill becomes law, betting operators based in Indiana would be subject a 1% surcharge on all betting handle payable to the major ports leagues. Money collected by the fee would presumably be used by the major sports leagues to offset costs associated with protecting the integrity of sports in a world where betting on them is now legal.

Realistically, the significant sums expected to be raised by such the so-called integrity fee would likely dwarf any costs incurred by the leagues as they seek to address the potential integrity issues associated with sports betting. If I may be so bold, we could also consider the integrity fee a consolation prize for the sports leagues that have (for the most part) opposed the expansion of sports betting in the USA.

American Gaming Association CEO and President Geoff Freeman came out strongly against the proposal in a statement:

“While we applaud Representative Morrison’s efforts to bring legal, transparent sports betting to Indiana, handing sports leagues 20 percent of what’s left over after winnings are paid out, undercuts its economic viability. Doing so will ensure the illegal market continues to thrive in the state, and gut the tax revenues available to fund essential public services. We believe Indiana taxpayers deserve better.

“We encourage Indiana to reject this short-sighted, misinformed idea, which simply replaces a failed federal prohibition with bad state policy. Our goal is to eliminate the illegal market, protect consumers and strengthen the integrity of the game. We invite all stakeholders to join us in working together in a thoughtful and transparent fashion.”

In any case, the integrity fee has been added to the bill and what we can do is look at how that fee would work, how it would impact betting operators and how it would impact the sports leagues. We’ll be looking at two sources in particular for today’s discussion. One source has an excellent write-up on the potential amounts of money we’re looking at while the other is chock-full of useful information regarding the impacts this would have on operators.

How the Integrity Fee Would Impact the Sports Leagues

The integrity fee included in the House version of the bill is the first of its kind in the United States.

A 1% fee does not sound like much, but the fact that it is applied to total betting handle makes it much larger than it appears. The term “betting handle” simply refers to the total value of wagers placed by gamblers at any sportsbook. This is not gross revenue or net profit after expenses; this fee would come out right off the top before the books even have a chance to count their profits.

Pundits have put together some estimates of what types of money would be raised if integrity fees catch on and spreads to other states that are considering legalizing sports betting. These estimates are based on a previous study by Eilers & Krecjik Gaming that looked at a range of possible future outcomes should the federal ban be repealed.

Legal Sports Report took betting handle numbers from Nevada and extrapolated those to a regulated US market. In all, LSR came to a number of roughly $2 billion going to the leagues based on a median estimate of $200 billion in total betting handle across the United States in the future.

Additional educated guesses have the NCAA getting the lion’s share of that money, with about $600 million going to college football and basketball. One can’t help but wonder if the NCAA being headquarted in Indiana and strongly opposed to sports betting has anything to do with Indiana being the first state to come up with the idea of an integrity fee. The other major sports leagues would likewise be looking at nine-figures per year each just from the integrity fee.

How the Fee Would Impact Sportsbooks in the USA

We have looked at how the sports integrity fee would affect the major sports leagues, and naturally they are loving the idea. Now, let’s take a look at this from the point of view of licensed bookmakers and betting sites in the USA.

I. Nelson Rose from GamblingAndTheLaw.com has an informative post detailing how such a fee would impact betting operators with numbers derived from past examples of similar sports betting fees. The post details exactly how bookmakers make their money with the vigorish and digs into a little history detailing past efforts to enact similar fees.

That post is also a great read and I highly recommend it. The details in there paint a very clear picture of how various past fees of this type played out in the real world and how much they cost sportsbooks in the past.

To summarize the findings, we learn from the post that Nevada took in an total of about $22.5 billion in total bets over a ten-year period. Of that amount, the sportsbooks reported gross gaming revenue of about $938 million. This means Nevada only kept 4.16% of the total amount wagered over that period.

If we use 4.16% as a baseline for estimating how much money sportsbook are making, we can see that a 1% fee on total betting revenue is huge. It works out to having about the same effect as a 24% tax on gross gaming revenue.

When we add to that the bill proposed tax rate of 9.25% plus other taxes, betting operators would subject to a total effective tax rate of nearly 40% on gross revenue.