NEW YORK (AP) — States are hoping to reap more revenue from the $16 billion online sports betting industry that is expanding across the country in partnerships with major companies.
DraftKings, FanDuel and other gambling apps face a larger tax burden in Illinois due to tax changes this year. New Jersey, Massachusetts and other states are also seeking or plan to increase taxes on the gambling industry.
DraftKings and FanDuel count Major League Baseball and the National Football League as their biggest partners. ESPN owner Walt Disney Co. has also gotten in on the action with its ESPN Bet partnership with the National Hockey League. Established casino operators like MGM Resorts and Penn Entertainment are also branching out into online sports gambling.
According to the American Gaming Association, U.S. sports betting revenue is expected to grow 22% to $3.33 billion in the first quarter of 2024. The industry’s growth has drawn the attention of state governments.
Illinois this month switched from a flat 15% tax rate on adjusted gross receipts for online sports betting companies to a new progressive tax rate of 20% to 40%. The state legalized sports betting in 2019 and earned just over $1.5 billion in tax revenue from online sports betting operations and casinos last year. By comparison, the state’s lottery, which began operating in 1974, was due to bring in about $2.32 billion in revenue in 2023.
The new policy would bring Illinois’ top tax rate on online sports betting businesses in line with New York’s, which has a top rate of 51%. New Jersey is considering doubling its rate to 30%. A proposal to increase Massachusetts’ tax rate from 20% to 51% was defeated in May.
DraftKings Chief Executive Officer Jason D. Robbins said in a conference call with investors that higher taxes could hurt the company’s competitiveness and draw customers away from the illegal gambling market.
“We hope we can convince them that this is not a good policy decision,” he said.
According to S&P Global, commercial land-based gaming, which includes casino slot machines, table games and retail sports betting, accounted for 75.3% of total revenue, or $50.02 billion, in 2023. Online gaming generated $16.43 billion.
According to MoffettNathanson’s analysis, Illinois’ new tax rate could prompt DraftKings and FanDuel to take steps such as scaling back local marketing and promotional deals, as well as revising the terms of contracts with existing partners.
“The biggest question is which state will be next and how realistic tax increases are in other states where gambling is legal,” the report said.
In 2018, the U.S. Supreme Court struck down federal laws banning sports betting. Prior to that, sports betting was legal only in Nevada. Online sportsbooks are now allowed in 30 states and Washington, D.C., according to the American Gaming Association. For investors, FanDuel owner Flutter Entertainment is a powerful company with a market capitalization of over $33 billion, while DraftKings has a market capitalization of about $20 billion.
Investors are watching that growth: DraftKings shares have more than tripled as revenue soared more than 60% in 2023. The company is expected to post a small loss in 2024 but should finally post an annual profit in 2025 as revenue continues to grow. A number of other online sports gambling ventures, including MGM Resorts’ and BetMGM and Penn Entertainment’s partnership with Disney on ESPN Bet, are helping to drive revenue growth for a broad range of companies focused on gambling.
