The Floodgates Are Open

Illinois is adopting a new, more burdensome sports betting tax structure. The question is, will other states follow suit?

Illinois just pulled the rug out from under the US sports betting industry.

The industry is a formality away (Gov. J.B. Pritzker’s signature) from having the sports betting tax rate jump from a flat 15% to a graduated rate that starts at 20% and tops off at 40%. That will cost the industry (mostly DraftKings and FanDuel) nearly $200 million in additional taxes annually in Illinois — but the possibility of more states following Illinois’ lead is far more concerning.

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The Sports Betting Alliance, representing DraftKings, FanDuel, BetMGM, and Fanatics, wasn’t amused by the tax policy change. The group released a statement signed by SBA President Jeremy Kudon that calls the Illinois decision to increase the tax rate on sports betting operators “disappointing” and “penalizing sports betting operators who invested millions into the local economy and created jobs in the state.”

According to Kudon, the graduated tax hike (between 20% and 40% based on adjusted gross revenue) will not only result in worse products, promotions, and odds for Illinois bettors but also pose a significant threat to the legal, regulated sports betting market, potentially pushing players towards unregulated platforms. The veracity of these claims will be examined later in this column.

There are also murmurs that harsh statements are just the beginning.

“Already hearing that various entities that’ll be subject to the new taxes are planning to go to court over this vote,” Illinois political reporter Hannah Meisel reports. “But courts are loath to intervene in legislative matters and are likely to sidestep, citing separation of powers doctrine. But it’ll be a short-term pain for Dems.”

Did We Do Everything We Could?

After watching Ohio double its tax rate last year, the industry certainly took the threat seriously, going so far as to astroturf 55,000 emails to Illinois politicians. However, they may have overestimated their political clout and perhaps took their eye off the prize (at least for a moment) as they spent an inordinate amount of time and resources targeting DFS 2.0 over the last year. There is only so much political capital to spend.

During the DraftKings Q1 earnings call, CEO Jason Robins addressed the calls to increase tax rates, saying, “I expect that maybe there’ll be one or two here and there that look to do that, but I don’t think many of them will… And my expectation is that we’ll be able to convince them that it’s not a good policy decision.”

Those comments were echoed by Jeremy Kudon, who tweeted:

“PSA: The notion that a wave of states will increase their tax rate on online sports betting simply because 3 of the 38 states with legalized sports betting are or were contemplating tax rate increases at the same time is flawed and overly simplistic.”

Perhaps seeing a larger trend emerging, industry investor Chris Grove has a slightly different take, sensing a need for the industry to give a little on taxes to ensure the changes aren’t as drastic as they were in Illinois:

“Despite the respite in Mass, higher tax rates for OSB will be proposed in state after state after state.

“Not all of them will be quite as extreme as Mass. Many of them will have broad-based support. Many may be wrapped in a package of politically popular changes such as increased RG, marketing restrictions, consumer protections, etc.

“In most worlds, the blended tax rate for OSB across all current states will increase materially over the next three years.”

I’ll touch on the blended tax rate a bit later on in this column. Still, the overarching question is: Is Illinois the outlier looking to, as Kudon put it, “penalize” online sportsbooks, or is Illinois a herald, a sign of things to come?