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Will Other States Follow New York’s Lead And Tax Sportsbooks Out The Wazoo?

One observer is afraid the golden goose will be killed before it even grows

Jeff Edelstein by Jeff Edelstein
January 26, 2022
in Analysis
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It was a seemingly innocuous quote, as these things go.

β€œWhat we did was copycat New York’s law. We wanted to follow New York but go with a higher tax,” Rep. John Mizuno of Hawaii told Sports Handle. β€œWe said, β€˜Hey, New York got it passed, so let’s do what they did.’ That was my request for the bill drafters.”

There was a slight twist, however, in the tax rate of the bill Mizuno filed last week in his attempt to bring sports betting to the island state: New York’s rate is a nation-high (along with Rhode Island) 51%. Mizuno’s bill bumps that to 55%.

β€œI thought that would be a little bit of sugar on the top, to try and get lawmakers to support it,” Mizuno said.

And that β€œsugar” may prove to be more like cyanide for the all-of-a-sudden spiraling stocks in the sports betting sector.

The bid to supply to NH Lottery, may have forever changed the outlook for the US sports betting industry. A tax rate/rev share to the state of 50% was set. New York used that as precedent and now Arkansas & Hawaii trying to follow. Not ideal for the #sportsbetting industry

— Dave VanEgmond (@Dave_VanEgmond) January 25, 2022

DraftKings? Trading below $20, after hitting $74 last March. Flutter, the parent of FanDuel? Trading at $70, down from its 52-week high of $119. Penn National, Barstool’s corporate honcho? Trading at $43, down from its own $142 peak.Β 

It’s been a race for market share in the sportsbook world, and many observers see it as a race to the bottom, where eventually — and it might be happening now, if these stock prices are to be believed — the actual bottom line matters more than the promises of potential future riches.

There will be consolidation for sure, and some big names — Disney, Amazon, Fanatics — are bound to pounce at some point or another.

$PENN CEO says he sees more consolidation in the sports betting space

— Market Rebellion (@MarketRebels) September 24, 2021

Probably.

Unless …

High taxes, bad outcomes

Unless those bottom lines look too ugly.Β 

And one sure-fire way for those bottom lines to bottom out would be for more states to follow New York’s lead and slap 50%-plus tax rates on operators.Β 

And why wouldn’t they? Early returns in New York point to the state overtaking New Jersey — possibly as soon as this very second — as the most robust sports betting state in the nation.

Pennsylvania, with its 36% tax rate, hasn’t exactly experienced lack of demand from operators seeking to offer their products.

Kind of makes you wonder … why aren’t other states revisiting their comparatively low tax rates? And, furthermore, what’s to prevent states that haven’t passed sports betting legislation — we’re looking specifically at you, California and Texas, home to over 20% of the nation’s population (and heck, let’s throw the Florida mess in there, bringing us to 27% of the population) — from following New York’s lead, just like Mizuno is seeking to do in Hawaii?

Maybe for New York, but …

β€œWhat I was very concerned about when New York did this is exactly what is happening. Other legislators around the country saying, β€˜Well, New York can do it, so can we,’” said Brandt Iden, the head of U.S. government affairs for Sportradar and a former Michigan state senator who spearheaded the push for legalization there.Β  β€œThere’s this great fanfare about New York, and it’s exciting and they’re certainly off to a great start, but this high tax rate is not something the industry is interested in replicating at all, and I don’t think legislators should be either.”

Iden points to New York as a one-of-its-kind situation.

β€œIt only makes sense in this particular jurisdiction, and it only makes sense for the operators who got involved because they didn’t want to not be in New York, even if they’re going to lose money at first,” he said.

Bill Pascrell III, a partner in the Princeton Public Affairs Group, echoes that sentiment, and then some.

β€œThe 51% tax rate makes New York the empire socialist capital for sports betting. New York essentially owns the books,” Pascrell said. β€œI think all the operators launched in New York because it’s got this cachet, it’s globally recognized. But right now New Jersey is the third largest sports betting market in the world, behind Germany and the UK. Maybe New York trampolines ahead of them, but I don’t think it happens. I think these sportsbooks are going to be buying limousine companies and pushing those players with promotional credits back to New Jersey.”

Pascrell said the tax rate is a state-by-state issue, and when he looks at the three big states still up for grabs, he believes at least two of them will end up with low tax rates.

Two out of three ain’t bad

β€œThe governor of Texas, Governor [Greg] Abbott — he’s up for reelection this year, and besides, you won’t see gaming there until at least next year because of the biennial legislative session — but there’s no way he’d OK a big tax,” Pascrell said. β€œCalifornia, you never know. Governor Gavin Newsom is pretty liberal, he might want to explore the New York option. And I will assure you Governor [Ron] DeSantis will not have a big tax rate in Florida, no matter what happens.”

As for existing states and their current tax rates? Iden thinks there may come a time when states with lower rates revisit the issue, but he doesn’t think that time is now.

β€œThere’s always the chance that legislatures can increase tax rates,” he said. β€œIt’s very difficult to do that, because now you have an established industry that will lobby against it, What I think will be interesting is legislators who are up to speed on these issues will realize these operators are not profitable currently, and I would hope any legislator diving into it would see that now is the wrong time to raise taxes, as this industry isn’t making money yet.”

Iden added, β€œThe last thing we want to do is end up in a situation where you kill the golden goose before it even starts to grow.”

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Jeff Edelstein

Jeff Edelstein

Jeff is a veteran journalist, working as a columnist for The Trentonian newspaper in Trenton, NJ for a number of years. He's also an avid sports bettor and DFS player. He can be reached at jedelstein@bettercollective.com.

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