Enhanced Sports Wagering Taxation: Expanded, Yet Avoiding Illinois' Unique Approach
Illinois recently enacted a progressive tax system for online sportsbook companies operating within the state, with the largest revenue earners facing significantly higher taxes compared to smaller competitors. This change, effective from July 1, has sparked concerns that other cash-strapped states might follow suit, potentially increasing iGaming and sports wagering taxes to fund other necessities. However, one analyst believes that while it's possible and perhaps likely that other states will increase sports betting taxes, the widespread adoption of the Illinois model is unlikely.
In a report to clients, Stifel analyst Jeffrey Stantial highlighted that gaming companies can manage higher taxes by trimming marketing and promotional expenses. However, investors show more apprehension, leading to a decline in DraftKings (NASDAQ: DKNG) and FanDuel parent Flutter Entertainment (NYSE: FLUT) shares by one month.
Key takeaways from the report include: 1) additional sportsbook tax rate hikes are probable, though their spread might be less than initially feared due to the unusual Illinois graduated structure, 2) several international case studies suggest that the majority of contribution profit impact from a moderate effective tax rate hike can be effectively managed by scaled operators, and 3) the shift in negative sentiment around tax hike risk could create attractive buying opportunities for DKNG with a continued upside bias to estimates.
Under the new tax scheme in Illinois, FanDuel and DraftKings, America's leading online sportsbook operators, are set to see their tax rates skyrocket to 37% and 36%, respectively, from the current rate of 15%.
The Pros, Cons, and Ugliness of Sports Betting Tax Forecast
Some investors worry that other states may be inspired by Illinois. Yet, a substantial sports wagering tax hike proposal in Massachusetts soon after the Illinois increase was rejected, and New Jersey's recently proposed budget did not include a sports betting tax increase. At least, for now, this has alleviated concerns that New Jersey is planning to increase sports wagering taxes.
However, Stantial pointed out that it's not just the fear of existing sports wagering states raising taxes. Investors might also be apprehensive about new states approving iGaming, sports betting, or both with higher tax rates than the industry is accustomed to.
At present, Delaware, New Hampshire, New York, and Rhode Island impose a 51% tax on sports betting, with Pennsylvania and the highest rates in Illinois coming next. On a positive note, a hike in sports betting taxes could encourage some states to approve online casinos, potentially expanding the total number from the current six.
"We believe sportsbook tax rate hikes could serve as a catalyst for renewed iCasino expansion efforts, which can provide more significant tax revenue growth," added Stantial.
How Operators Can Handle Higher Sports Betting Taxes
As mentioned earlier, operators are likely to tackle higher taxes in Illinois by reducing promotional spending in the state. Stantial noted that, in a base case scenario, around 70% of the profit squeeze experienced by operators due to a theoretical 10% tax increase in any state could be offset by cutting promotional expenses.
Regarding other states that might increase sports betting taxes in the near term, the list is limited but includes notable 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.
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