In just two and a half years following the Supreme Court’s decision to end the near-nationwide prohibition on sports betting, more than half of the country has taken action to legalize it. Sports betting is currently offered in 20 states and the District of Columbia. It is legal but not yet operational in another five of them. A handful of states, including North Carolina, New Mexico and Washington, do not have state-approved gambling but have worked with Native American governments to authorize it at tribal casinos.
Sports Betting Growth
Only 26 states have legal casino operations, so when it comes to sports betting legalization one might think the craze is due to taper off. However, sports betting has blurred the lines between lottery and casino gambling. Many states that don’t have casino-style gambling, including Montana, New Hampshire, Oregon, and Tennessee, have legalized sports betting and offer it as a lottery product. Of the 15 states that have introduced sports betting legislation in 2021, at least nine of them do not have legal casino gaming.
Mobile Sports Betting
Intrastate mobile sports betting has been implemented or authorized in 14 states, D.C. and Puerto Rico, so bettors can place bets from their phone or computer. (In Tennessee, sports betting is only available online.) Of the states that have not broadly legalized mobile betting, three states allow it very narrowly: Mississippi, Montana, and Washington only allow bets from a mobile phone to be placed while on casino premises. The evidence suggests mobile gaming creates a more productive revenue stream, but there are potential costs to weigh, too. Lawmakers have expressed concerns that making gambling opportunities available online could lead to higher rates of gambling addiction and destructive personal financial decisions.
In general, sports betting is a relatively low-margin venture compared to other types of gaming. Most wagers received are paid out in the form of prizes; nationwide, the average hold for sportsbooks is 7.2 percent. Even in the most productive sports betting state, New Jersey, sports betting brings in roughly 20 times less revenue than the lottery and is only a fraction of total casino gambling revenue. Still, the potential revenue has been a big selling point for legalizing sports betting in many states. From that perspective, mobile options appears likely to increase.
New Jersey currently has the largest sports betting market. In calendar year 2020, it brought in $49.4 million in new tax revenue. Mobile betting accounts for the vast majority of total amount wagered in the state, almost 95 percent. In Pennsylvania, the state brought in a total of $38.7 million in state tax revenue in fiscal year 2020. Roughly three-quarters of that was attributable to mobile sports betting. Sports betting revenues have been relatively lower in states that don’t allow mobile wagering. New York brought in just over $1 million in all of calendar year 2020. Mississippi collected slightly over $4 million in sports betting tax in FY 2020. Part of the disparity between mobile and retail gambling numbers was surely exacerbated by the effects of COVID as retail sportsbooks had to close up shop for several months in the spring while mobile operators were able to stay somewhat buoyant.
In-Person Registration Required
The mobile numbers in several states (Iowa, Nevada, Rhode Island) have been notably less robust than in some of their peers. In Nevada’s case, this could be due to the magnetism of The Las Vegas Strip, but all three states require gamblers to register in-person at casinos to set up a mobile gaming account. This is a responsible gaming measure intended to better prevent underaged gaming or other unauthorized users that most of the mobile sports betting states have not adopted. There is a revenue trade-off Gaming industry research suggests that prospective gamblers find in-person registration to be inconvenient and even prohibitive in some cases. In Iowa, this measure was temporary and expired at the start of 2021. Rhode Island repealed the requirement over the summer and mobile revenues have grown as a share of total revenues in recent months. Additional revenue information is available in Table 1 below.
Tax Rates and Licensing Fees
The tax rates states have imposed on sports betting vary widely (see table 2 below). Most states have tax rates between 5% to 20%. In Pennsylvania, the state gets more than a third of all revenues and a few of the states with lottery-run operations take half of the total profit or more. In general, the tax rates for retail operators and mobile operators are the same. New Jersey is unique in that it charges a higher tax rate for mobile betting.
Higher rates may better maximize state revenues, however some states have pursued low rates to help ensure that legal sports betting products will be priced competitively with illegal market products and thus encourage more gamblers to leave the black market. Based on the revenue numbers in the states so far, there is no clear relationship between tax rates and revenue performance like there is between mobile wagering and revenues.
Some states have also generated fairly sizeablesums of money through licensing fees (see table 3). Illinois and Pennsylvania imposed an initial licensing fees of $10 million and Tennessee should generate several million each year through annual licensing fees as well.
Sports Betting Contributions to State Funds
Justifications for gaming expansion are often rooted in how the money will be used, and states have been known to direct gambling dollars to important spending categories such as education or retirement programs. However, expenditures in these areas often grow faster and gambling revenues cannot keep pace. (Gambling expansion typically results in a quick increase in revenue that plateaus or even declines over time, until a new game is introduced.) States looking to close budget gaps with sports betting revenue may be disappointed, especially as more and more states legalize and take their slice of the market.
A handful of states have chosen to deposit all or most sports betting revenue in the general fund. Others have designated the money for specific purposes (see table 2 below).
Official League Data Requirements
In the initial stages of sports betting legalization, the professional sports leagues vied for the implementation of “integrity fees” to be paid to professional sports leagues, essentially as compensation for increased anti-corruption policing within the league. While this idea did not gain momentum, three states (Illinois, Michigan, and Tennessee) have included requirements that sports betting operators use official league data for setting odds for certain types of bets (typically in-game wagers).