July 21, 2024

Illinois recently passed a graduated tax scheme for online sportsbook companies operating in the state, meaning the largest by revenue will pay significantly more taxes than their smaller counterparts.

Illinois sports betting
A welcome to Illinois sign. An analyst says the state’s recent sports betting tax hike could inspire other states to follow suit, but the Illinois model probably won’t be copied. (Image: OZinOH/Flickr.com)

That tax hike, which goes into effect on July 1, sparked fears of a contagion in which other cash-strapped states would follow the lead of Illinois and potentially raise iGaming and sports wagering taxes to fund other needs. At least one analyst believes that while it’s possible, perhaps likely, that other states will increase levies on sports betting, the good news for operators is that the Illinois model isn’t likely to be mimicked in a widespread fashion.

In a new report to clients, Stifel analyst Jeffrey Stantial pointed out that while gaming companies can deal with higher taxes by paring marketing and promotional expenditures, investors are more pensive. Hence, one-month declines by DraftKings (NASDAQ: DKNG) and FanDuel parent Flutter Entertainment (NYSE: FLUT).

Our key takeaways include: 1) additional OSB tax rate hikes are likely to occur, though less frequently than feared with IL’s graduated structure unlikely to proliferate, 2) various international case studies indicate the majority of contribution profit impact from a modest effective tax rate hike likely proves mitigable for scaled operators, and 3) negative sentiment shifts around tax hike risk may yield attractive buying opportunities for DKNG given a continued upside bias to estimates,” wrote Stantial.

Under the new tax scheme in Illinois, FanDuel and DraftKings, the two largest online sportsbook operators in the US, will see their tax rates surge to 37% and 36%, respectively, from the current level of 15%.

The Good, Bad, and Ugly of Sports Betting Tax Outlook

Some investors are concerned that other states will be inspired by Illinois. However, a massive sports wagering tax hike proposed in Massachusetts soon after the Illinois increase was approved didn’t advance, and New Jersey’s recently proposed budget didn’t include a sports betting tax increase. For now, at least, that allays fears that New Jersey is primed to boost sports wagering levies.

But as Stantial observed, it’s not just the specter of existing sports-wagering states lifting taxes. Investors are potentially rattled by the idea that when new states approve iGaming, sports betting, or both, they’ll employ higher tax rates than the industry is accustomed to.

Currently, Delaware, New Hampshire, New York, and Rhode Island apply a 51% tax to sports betting, with Pennsylvania and the highest levels in Illinois next on the list. On the bright side, boosting sports betting taxes could compel some states to approve online casinos, potentially boosting the number in that fold from the current six.

“We believe OSB tax rate hikes may serve as a precursor for renewed iCasino expansion efforts, which can provide more meaningful tax revenue uplift,” added Stantial.

How Operators Can Deal with Higher Sports Betting Taxes

As noted above, the primary avenue through which operators are likely to deal with higher taxes in Illinois is to reduce promotional spending there. Stantial noted that in a base case scenario, 70% of the profit pinch operators endure by a theoretical 10% tax increase in any state can be offset by lower promo expenditures.

Regarding other states that could lift sports betting taxes over the near term, the list is short but comprised of marquee jurisdictions.

“Pennsylvania and Michigan appear the only potential candidates to consider tax hikes among the limited states with CY24 legislative sessions still ongoing,” concluded the analyst.

The post Sports Betting Taxes: More Coming, but Not In Illinois Style appeared first on Casino.org.

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