Friday, March 1, 2024

Increasing Sports Gambling Taxes Through Regulation | The Regulatory Review

Must read

Scholars call for improved regulation of sports gambling.

Over 70 million Americans intend to bet on a National Football League game during the 2023-2024 season, a more than 50 percent increase from the previous season.

In 2022, sports gambling companies—known as “sportsbooks”—reported all-time high revenues of over $7.5 billion. Yet that same year, some of the largest sportsbooks reported over  $1 billion in losses.

Why is sports betting in the United States flourishing yet remaining largely unprofitable?

The federal Wire Act, uneven state licensing and taxation regimes, and inattention to problem gambling—dishonest or addictive gambling behavior—all contribute to failures within the legal sports betting marketplace, according to three experts.

In a recent article, John T. Holden, Marc Edelman, and Keith C. Miller propose repealing the Wire Act, issuing federal regulations, and generating uniform state law. They argue that this will increase profits for sportsbooks, raise tax revenue for states, and mitigate the impact of gambling addiction.

Prior to 2018, the Professional and Amateur Sports Protection Act restricted sports gambling in most states. In Murphy v. NCAA, the U.S. Supreme Court held that the Act unconstitutionally infringed on states’ rights, thereby permitting states to legalize sports betting. After Murphy, 38 states and the District of Columbia legalized sports gambling. The revenue from legalized sports betting grew every year after, despite states beginning to tax the industry.

Still, the revenue results of legalization are mixed.

Notwithstanding an explosion in revenue, sports betting remains largely unprofitable for sportsbooks with some reporting billions of dollars in losses. Although some states, such as New York, have collected over $1.2 billion in tax revenue from sports gambling since 2018, other states such as Kansas have only collected $6 million during that time.

Holden, Edelman, and Miller argue that the federal Interstate Wire Act of 1961 is to blame for reduced sportsbooks’ earnings.

The Wire Act prohibits the electronic transmission of gambling information across state lines. Even though the Court in Murphy determined that a federal prohibition on gambling within states was unconstitutional, the Wire Act remains in effect.

Furthermore, although large sportsbooks, such as FanDuel or DraftKings, may operate throughout the country, they must maintain separate server systems and brick and mortar establishments in each state at a very high cost. This state separation is inefficient and expensive for sportsbooks, according to Holden, Edelman and Miller.

They also note that inefficient licensing and taxation schemes contribute to meager state tax revenues.

Although all states tax some portion of a sportsbook’s hold—that is, money that a sportsbook keeps automatically from every wager—the tax rate varies from 51 percent in Delaware to only 7 percent in Nevada. In Nevada, a sportsbook only pays a $500 licensing fee, but in Illinois an online-only license costs $20 million.

Not only do these inconsistencies lead to different tax revenues between states, they also create inefficiencies for sportsbook operators attempting to comply with various state regulations. Holden, Edelman, and Miller also argue that high tax rates do not always result in more tax revenue because high taxes can prevent multiple sportsbooks from establishing operations in a state and creating a competitive gambling marketplace, which reduces the overall number of wagers.

Perhaps most troubling, according to Holden, Edelman, and Miller, is the inattention to problem-gambling under the current regulatory regime. After New Jersey legalized sports betting in 2018, for example, calls to the state’s gambling addiction helpline about sports betting increased 60 percent.

Most states require individuals to be 21 to place a wager, but several states permit 18-year-olds to place bets. The Wire Act hinders the creation of a unified list of problem gamblers across states, so those gamblers can simply place bets in another state to avoid state authorities. Furthermore, most states have no limits on the marketing behavior of sportsbooks, including during games, in turn allowing marketing campaigns that can further enable problem gamblers.

Holden, Edelman, and Miller argue federal regulation could address these problems of reduced earnings for sportsbooks, meager tax revenue for states, and gambling addiction.

The federal government could repeal the Wire Act and create a uniform system for legal sports gambling across the United States, they suggest. Similar to the Interstate Horseracing Act, Holden, Edelman, and Miller argue that the federal government could set minimum regulatory and consumer safety standards for states and companies to participate in sports gambling and any additional restrictions—including prohibitions—would be at the states’ discretion.

Major sports league executives, such as National Basketball Association Commissioner Adam Silver, have endorsed this solution, but federal attempts to regulate sports betting under a uniform law, such as the Sports Wagering Market Integrity Act, have yet to gain traction.

Any federal legislation, however, would have to account for the myriad of functioning state gambling systems currently in place, Holden, Edelman, and Miller note.

Alternatively, they argue that instead of all states operating under one system of federal gambling regulations, states could adopt a uniform system of state gambling laws. Although uniform state law would not eliminate the problems posed by the Wire Act, it could promote the sharing of information across states for bettor monitoring of problem gamblers as well as  reduce the difficulties for sportsbooks navigating disparate regulatory regimes.

Many commentators still question the legalization of sports gambling, but the industry’s explosive growth and the tax revenue it generates for states makes its future prohibition unlikely. Better regulation, however, can address many of the problems posed by legal sports gambling, conclude Holden, Edelman, and Miller.

Latest article