Increasing taxes on sports gambling through regulation

Scientists are calling for better regulation of sports gambling.

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

In 2022, sports gambling companies – known as “sportsbooks” – reported record revenue of over $7.5 billion. But that same year, some of the largest sportsbooks reported losses of over $1 billion.

Why is sports betting thriving in the United States but remains largely unprofitable?

The Federal Wire Act, uneven state licensing and taxation systems and a lack of attention to problem gambling – dishonest or addictive gambling behavior – are all contributing to failures in the legal sports betting market, according to three experts.

In a recent article, John T. Holden, Marc Edelman, and Keith C. Miller propose repealing the Wire Act, enacting federal regulations, and creating a uniform state law. They argue that this will increase sports betting operators’ profits, increase states’ tax revenues and mitigate the effects of gambling addiction.

Before 2018, the Professional and Amateur Sports Protection Act restricted sports gambling in most states. In Murphy v. NCAA, the U.S. Supreme Court ruled that the law unconstitutionally violated states’ rights and thereby allowed states to legalize sports betting. After Murphy, 38 states and the District of Columbia legalized sports gambling. Revenue from legalized sports betting increased every year even as states began taxing the industry.

Still, the revenue results of legalization are mixed.

Despite the 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 responsible for sports betting operators’ reduced revenues.

The Wire Act prohibits the electronic transmission of gambling information across state lines. Even if the court in Murphy has determined that a federal ban on gambling within states is unconstitutional, the Wire Act remains in effect.

In addition, major sports betting providers such as FanDuel or DraftKings operate across the country, but must maintain separate server systems and brick-and-mortar locations in each state at very high costs. According to Holden, Edelman and Miller, this state separation for sports betting is inefficient and expensive.

They also note that inefficient licensing and taxation systems contribute to poor state tax revenue.

Although all states tax a portion of a sports bettor’s credit – the money a sports bettor automatically withholds from each bet – the tax rate varies from 51 percent in Delaware to just 7 percent in Nevada. In Nevada, a sports betting operator only pays a license fee of $500, while in Illinois an online-only license costs $20 million.

These inconsistencies not only result in disparities in tax revenue between states, but also create inefficiencies for sports betting operators trying to comply with various state regulations. Holden, Edelman and Miller also argue that high tax rates do not always lead to more tax revenue because high taxes can prevent multiple sports betting operators from setting up shop in a state and creating a competitive gambling market, reducing the total number of bets.

Perhaps most concerning, according to Holden, Edelman and Miller, is the lack of attention to problem gambling within the current regulatory system. For example, after New Jersey legalized sports betting in 2018, calls to the state’s gambling addiction hotline about sports betting increased by 60 percent.

In most states, individuals must be 21 years old to place a bet. However, in some states, 18-year-olds are allowed to place bets. The Wire Act prevents the creation of a uniform list of problem gamblers across all states, allowing those gamblers to simply place bets in another state to evade state authorities. Additionally, in most states there are no restrictions on sports betting operators’ marketing behavior, including during games, which in turn allows for marketing campaigns that can provide even more benefits to problem gamblers.

Holden, Edelman and Miller argue that federal regulation could solve these problems of reduced sports betting revenue, meager state tax revenues and gambling addiction.

They suggest that the federal government could repeal the Wire Act and create a unified system for legal sports gambling across the United States. 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 bans – would be at the discretion of the states.

Major sports league executives such as National Basketball Association commissioner Adam Silver have advocated for this solution, but federal attempts to regulate sports betting under a unified law such as the Sports Wagering Market Integrity Act have yet to make an impact.

However, Holden, Edelman and Miller point out that any federal legislation would have to take into account the variety of functioning state gambling systems that currently exist.

Alternatively, they argue that states could adopt a uniform system of state gambling laws, rather than all states operating under a system of state gambling regulations. Although a uniform state law would not eliminate the problems posed by the Wire Act, it could promote information sharing between states to monitor problem gamblers by bettors and reduce the difficulties for sports bettors navigating different 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 make a future ban unlikely. However, better regulation can solve many of the problems posed by legal sports gambling, Holden, Edelman and Miller conclude.

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