How increased sports betting taxes impact states, sportsbooks and bettors

Several states, such as Ohio and Illinois, recently increased their tax rates on sports betting revenue, and more tax hikes are expected. These increased tax rates have wide-ranging impacts on state governments, sports betting operators and sports bettors.

The recent flurry of states increasing sports betting tax rates could just be the beginning of a larger trend, which would have wide-ranging implications on the industry.

In 2023, Ohio doubled its tax rate on sports betting from 10% to 20%. Earlier this year, Illinois increased its sports betting tax rate as part of its 2025 fiscal year budget, which went into effect on July 1. The Illinois tax rate increased from a flat 15% rate to a graduated rate based on revenue, which ranges from 20% to as much as 40% for the highest-grossing sportsbooks like DraftKings and FanDuel. New Jersey is also considering increasing its tax rate from 13% to 30%, and more states are expected to join this developing trend in the sports betting industry.

With the booming growth of sports betting, states are motivated to capture a larger share of the revenue pie in order to fund other government initiatives, but there could also be negative consequences. Sports betting operators unsurprisingly oppose the rate increases, which is squeezing their profit margins and forcing them to operate even more efficiently in states with higher tax rates. Those tighter margins also could lead to changes directly affecting sports bettors, who may see fewer attractive promotions and less competitive betting odds. 

Let’s explore the impact of increased sports betting taxes on states, sportsbooks and sports bettors in more detail.

A wide range of sports betting tax rates

With its recent increase, the maximum rate of 40% means that Illinois now has the third-highest tax rate for online sports betting. Four other states have higher rates: New York, New Hampshire and Rhode Island all have identical 51% tax rates for online sports betting. Delaware is close behind that triumvirate with a rate of 50%. 

Illinois’ progressive tax rate only applies to sportsbooks with adjusted gross revenue over $200 million, which so far only includes DraftKings and FanDuel. Other sportsbooks like Fanatics and BetRivers, whose tax rate in the state is now 30%, are still paying higher tax rates in some other states, most notably Pennsylvania. With a 36% tax rate, the Keystone State is still on the high end of the range of rates.

On the lower end of that range are Iowa (6.75%), Nevada (6.75%), Kansas (8%) and Michigan (8.4%). Most other states’ tax rates fall somewhere between 10% and 20%. Tennessee is a unique state when it comes to sports betting taxes, as it’s the only state that taxes the total betting handle (total dollars wagered) rather than revenue (dollar value of bets the sportsbook wins). Tennessee taxes on 1.85% of the handle, which equates to roughly the same amount of tax revenue as its previous 20% tax rate on betting revenue. 

It’s also worth noting that tax rates are not the only factor affecting what sports betting operators pay to each state in which they do business. Other factors like licensing fees and deductions on taxable revenue also affect how much sportsbooks pay to states every year. Several states also have different tax rates for retail sportsbooks and online/mobile sportsbooks.

States risk straining relations with sportsbooks to generate more revenue

The obvious motivations for states like Ohio and Illinois to increase their tax rates was to generate more tax revenue. Illinois is expecting to generate an additional $200 million in sports betting-related tax revenue every year, which will be split between its General Revenue Fund (58%) and its Capital Project Fund (42%). 

Other states earmark sports betting tax revenue for a specific purpose. For example, 98% of sports betting taxes in Ohio are dedicated to funding interscholastic athletics and other extracurricular youth programs in Ohio’s education system. In Nebraska, where they are considering expanding beyond retail sportsbooks to legalize online betting, one of the primary motivations is generating more tax revenue to help them reduce property taxes. 

While states cannot be blamed for wanting to generate revenue to support these worthwhile initiatives, they also risk straining their relationships with sportsbooks operating in their states. Sportsbooks like DraftKings and FanDuel have implied that the Illinois tax hike was tantamount to a “bait and switch.” 

DraftKings and FanDuel made investments in retail sportsbooks at Chicago’s Wrigley Field and the United Center, respectively, in order to launch as soon as possible in the state. Without making those capital investments, they would have been required to wait 18 months to launch after acquiring an online-only license. Those physical assets – not to mention the $10 million licensing fees – now make it much more difficult for DraftKings and FanDuel to exit the state following the tax rate increase. Billion dollar businesses don’t typically react well to being backed into difficult situations. 

While both DraftKings and FanDuel have publicly threatened to withdraw from Illinois following the tax hikes, Illinois Governor J.B. Pritzker has rebuffed those warnings. “They’re not leaving New York, and they’re not leaving other states,” he told ABC7 Chicago. “We’re the third largest sports betting market for sports betting companies, and we had a much lower tax rate than many of the largest of those markets.” He also noted that their tax rate is still lower than other top states like New York.

Complications for future state launches and legalization efforts

Time will tell if tax hikes like the ones in Ohio and Illinois could lead to dramatic moves like sportsbooks exiting those states. However, the impact of those increased tax rates could be felt in other states as well.

Following the Illinois tax increase, investment analysts at Deutsche Bank warned that other states are likely to consider similar increased tax structures “when budget needs arise.” The threat of increased tax rates could make it more difficult for other states to attract new sports betting companies to launch operations in their states. It also could complicate legalization efforts in the states where sports betting has not yet been legalized, which includes two of the largest potential markets in California and Texas.

“If the rules of the game are so volatile and everyone is waiting for the ‘other side’ to do something different, that’s not a good way to do business,” sports betting industry consultant Brian Wyman said. “You’re going to see a backlash as other states come on.”

A trend towards higher tax rates could not only be a hindrance to operators entering new states, but it could also lead to much higher initial tax rates in states that have yet to legalize. 

Sports betting operators suffer declining stocks, reduced investments

The most immediate impact of the Illinois tax increase on DraftKings and on FanDuel parent company Flutter was felt in the stock market. On the first trading day after the tax increase passed (May 28, 2024), DraftKings (DKNG) tumbled more than 10% and Flutter (FLUT) dropped more than 7%. 

It was DraftKings’ biggest one-day decline since November 2022, and Flutter’s worst day since March. FanDuel represents roughly 40% of Flutter’s total revenue, which explains the slightly smaller decline. While each company’s stock has since recovered to different degrees, that immediate and dramatic price drop reflects the negative outlook that the increased tax rates create for sportsbooks. It is not an increased cost that they can simply absorb into their margins.

Sports betting companies operate in each state based on a particular budget, which includes the current tax estimates. An increase in the tax rate naturally leads to offsetting reductions elsewhere in the budget.

The Sports Betting Alliance (SBA) – a coalition between DraftKings, FanDuel, BetMGM and Fanatics Sportsbook – warned that the Illinois tax increase would lead to “worse products, worse promotions, and inevitably, worse odds.”

“In the end, the cost has to get absorbed by the consumer if the government raises taxes,” DraftKings CEO Jason Robins said on a call with investment analysts. “So there’s various levers to that. Also, we could lower external marketing, which I think will be partially just driven by the fact that if taxes go up, we’re going to have to create better margins.”

Some of those levers include reducing or eliminating promotions and cutting back on investments in product innovation. Sports bettors will directly feel the effects of those changes.

Bettors may face reduced promotions and worse odds

Bettors in states like Ohio and Illinois will feel the most tangible and immediate effect of the increased tax rates in the form of sportsbook promotions. Sportsbooks in those states could reduce the value they offer in their sign-up bonuses, and may also offer fewer daily promotions like odds boosts and free bets for existing users.

Look no further than New York to see the effect that high tax rates can have on promotions. In the state with the highest tax rate in the country, BetMGM notably does not offer sign-up bonuses. In other states, the “King of Sportsbooks” is known for offering some of the most lucrative sign-up bonuses in the industry, frequently including as much as $1,500 in deposit matches or bonus bets. 

While sportsbooks can respond to tax hikes by reducing their available promotions in each state, currently they cannot make any changes to their betting odds in those states. However, that could be changing soon. Sports Betting Alliance president Jeremy Kudon recently told The Washington Post that sports betting operators are developing technology that will allow them to offer different odds in different states. That change could be coming as early as 2025.

Of course, sportsbooks do not have to wait until that technology is ready to start offering lower odds to compensate for rising tax costs. While they still need to offer odds that are competitive in the market, it’s possible that tax increases could already be impacting betting odds. If that’s the case, it would be impacting bettors across the country, not only in states with recent tax increases.

The same thing applies to reductions in product innovation and support budgets. While sportsbook websites and mobile applications vary slightly from state to state depending on the laws in each state, the overall design, user experience and underlying infrastructure is virtually the same across the country. If sportsbooks are forced to slash their product development budgets, then lagging features or reduced performance on those products would be felt by sports bettors nationwide. 

Operators fear bettors may flee to dangerous illegal sportsbooks

Beyond the potential impact on sports bettors’ experience, one of the main concerns that Kudon’s SBA statements emphasized was that increased tax rates could provide “a massive leg up to dangerous, unregulated, and illegal offshore sportsbooks.”

The Campaign for Fairer Gambling – an anti-gambling lobby group – presented various counterarguments to the SBA’s warnings about the impact of tax hikes, including calling concerns about illegal gambling overblown.

While some data may challenge a direct correlation, it is not hard to imagine that sports bettors whose betting experience is negatively affected after a tax increase may seek other alternatives. A long-time leader of the New Jersey Division of Gaming Enforcement, David L. Rebuck recently published an essay for Crain’s Chicago Business about the risks of increased sports betting taxes. He writes that after sports betting was legalized in 2018, “customers left the illegal market in droves as they flocked to the legal market.”

Rebuck contends that the primary benefit of legalized sports betting is not generating tax revenue, but rather giving regulators the ability to provide oversight and consumer protection for the sports betting industry. Raising taxes, he asserts, risks “driving customers back to illegal sites that provide no consumer protections and no responsible gaming measures.”

If that proves to be true, then the perils associated with illegal sportsbooks could be the biggest impact that sports bettors feel from the developing trend of increased sports betting taxes.