Illinois Advances Proposal for Higher Sports Betting Tax, Affecting DraftKings and Flutter
"Recently, the Illinois Senate approved a budget that Increases the state's tax rate on sportsbook operators significantly. This news caused shares of DraftKings (NASDAQ: DKNG) and Flutter (NYSE: FLUT) to drop by 12% and 6.6% respectively.
In the first trading day since the fiscal 2025 budget was passed, DraftKings and Flutter faced the prospect of a new progressive tax scheme starting July 1. According to this scheme, revenue leaders would be taxed at up to 40% while smaller firms would pay 20%. This is a sharp increase from the current 15% tax rate for sports wagering.
Previously, Governor J.B. Pritzker (D) had proposed increasing the sports betting tax to 35%. The new rates would, however, make sportsbook operators subject to a levy that ranks second-highest in the country, with only Delaware, New Hampshire, New York, and Rhode Island having higher betting taxes at 51%. The Sports Betting Alliance (SBA), an industry trade group, has warned that the new policy may lead to worse odds and products for bettors and might drive business to unregulated offshore sportsbooks.
SBA President Jeremy Kudon criticized the Illinois Senate for approving a higher tax rate, saying in a statement "Instead of heeding the cry from tens of thousands of residents who opposed more than doubling sports betting taxes, the Illinois Senate has chosen to increase this tax, making Illinois' sports betting tax the second-highest in the country and punishing sports betting operators who invested millions into the local economy and created new jobs."
Research firm BTIG has estimated that the new tax rates DraftKings and Flutter will face in Illinois would be 36% and 37% respectively.
Other States Could Follow
Deutsche Bank analyst Carlo Santarelli cautioned that other cash-strapped states might be encouraged by Illinois' move and feel compelled to raise their sports wagering taxes. He additionally mentioned that Michigan and New Jersey could potentially implement "punitive" tax hikes. Santarelli further mentioned Arizona, Indiana, Iowa, and Massachusetts as other possible tax boosters.
Contrary to this pessimistic view, Morgan Stanley maintained that DraftKings and Flutter could counter the headwinds caused by the higher tax by cutting down on marketing and promotional spending in Illinois. In a report to clients, Morgan Stanley said the new tax policy could create a 'shadow' over the operators.
Optimistic Views on Illinois Sports Betting Tax Increase
FanDuel and DraftKings have established themselves as leading operators across the US and enjoy a duopoly in the market. They have the brand recognition, customer base, and financial resources to potentially cope well with increasingly unfavorable tax regimes.
Oppenheimer analyst Jed Kelly told clients that the two operators could use the rising taxes to drive consolidation. He also rated DraftKings "outperform" with a $60 price target, which would imply a 71.8% increase in value from its current standings.
Needham analyst Bernie McTernan observed that companies like Penn Entertainment (NASDAQ: PENN) and Rush Street Interactive (NYSE: RSI) might see their taxes decrease due to lower market share and revenue in Illinois."
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