The American state of Illinois has endorsed a progressive taxation system, specifically designed for the thriving online sportsbook industry. This novel tax scheme implies that the most successful companies, in terms of revenue, will be subjected to heftier taxation than their lesser-earning counterparts.
The repercussions of this taxation regime, due to take effect from July 1, has generated apprehension across the board. The fears stem from the possibility that other financially crunched states might mirror the precedent set by Illinois, and consequently, increase taxes for online gaming and sports betting, in order to support their economic needs. Several experts opine that a ripple-effect of similar tax hikes could possibly ensue, though it is unlikely that the exact model implemented by Illinois will be replicated across the board.
Renowned Stifel analyst, Jeffrey Stantial recently spoke to clients about the matter. According to Stantial, gaming giants can cushion the blow of escalated taxes by slashing marketing and promotional overheads. However, this approach has caused jitters among investors, precipitating a dip in the stocks of DraftKings and FanDuel’s parent company, Flutter Entertainment.
The implications of the Illinois-initiated tax scheme are manifold. Higher taxes on online sports bookmakers are likely, though less frequent than previously feared. The good news is that lessons drawn from global case studies suggest, that the adverse impact of a small tax hike on companies can be effectively managed. Furthermore, the gloomy investor sentiment brewing around this tax increase could potentially present attractive buying opportunities.
As per the updated tax regime, two of the largest online sportsbook operators in America, FanDuel and DraftKings, are set to witness a significant surge in their tax rates to 37% and 36%, respectively, from the prior rate of 15%.
The changing sports betting tax landscape however, hasn’t reverberated nationwide as yet. Attempts to introduce massive sports wagering tax hikes in Massachusetts and New Jersey soon after Illinois, failed to come to fruition. This has helped quell the fears of imminent tax hikes in New Jersey.
However, as pointed out by Stantial, potential tax hikes across other states approving online gaming and sports betting could be even more unsettling. Presently, the states of Delaware, New Hampshire, New York, and Rhode Island impose a 51% tax on sports betting with Pennsylvania and Illinois next in line with the highest rates. The silver lining is that the potential increase in sports betting taxes may encourage some states to legalize online casinos, potentially lifting the current tally from six.
Stantial further stressed that any forthcoming tax hikes on sports betting could indeed mark a reinvigorated movement towards expanding online casinos that can generate significant tax revenue.
To mitigate the impact of elevated taxes within Illinois’s jurisdiction, operators are considering a reduction in promotional outlay. It is estimated that nearly 70% of the profit erosion faced by operators due to a theoretical 10% tax surge in any state can be effectively counterbalanced by lower promotional costs.
As per current circumstances, the chances of other states following Illinois’s lead in tax hikes remain slim, with only Pennsylvania and Michigan, where legislative sessions are still underway, are potential contenders. It remains to be seen how the sports betting and online gaming industry adapts to these burgeoning tax regimes, both in Illinois and potentially, across the nation.
