Illinois Governor J.B. Pritzker is preparing to sign a new budget. Another grenade in this budget is a jaw dropping 50% tax on online sports betting, catching many in state and industry stakeholders off guard. This late-in-the-game budget insertion wallops this fast-growing industry with a surprise new tax. It is the second year in a row that Illinois has moved to do so. The state has other needs it is trying to address fiscally. This tax increase would have devastating effects on the future of sports betting.
It’s crucial that the budget they approved so that beginning in 2024, it provides these resources. Second, it introduces a tax rate that has a massive amount of variation across the United States. Neighboring states of New Hampshire, New York, and Rhode Island set high 51% rates on digital sports wagers. By comparison, Nevada and Iowa members have their rates capped at significantly lower levels at 6.75%. This wide disparity asks a lot of tough questions surrounding competition as well as the profitability of online sports betting operators.
Digital market leaders DraftKings and FanDuel are just one piece of the competitive landscape. They are on pace to pass 20 million bets within the next year. Now, they’ll face a much steeper tax bill on some of those bets. This shift is a result of Illinois’ recent tax overhaul. Truist Securities analyst Barry Jonas expressed concerns about the new tax’s potential effects. He thinks it will hurt larger operators worse than their little competitors. Jonas noted that the larger firms may be the ones to experience a deeper bite. By comparison, the impacts on smaller market actors will be more modest.
Stock prices for both DraftKings and their competitor Penn National have already started to factor in these changes. Entain was down almost 2%. At the same time, Penn Entertainment—a quarter owner in the ESPN Bet platform—fell as much as 1.6%. These moves are a reflection that investors have little confidence regarding the effects of a dramatic increase in taxation on profitability.
The environment for online sports betting is still very tricky, as only 27 states and Washington D.C. have legalized online sports gambling. Illinois is in the midst of implementing the new tax, and some on Wall Street are watching intently. They’re hoping that other states will follow their lead by passing or increasing their own online sports gambling taxes to alleviate their faltering budgets.
Both of these companies operate the BetMGM platform through a 50/50 joint venture with MGM Resorts. These changes and new appointments will undoubtedly influence the company’s future direction. The growing concern among investors highlights an ongoing unease within the industry about how state-level taxation policies can impact overall market dynamics.