TAX POLICY
the effects of decreasing competition and incentives from the operators within the states. “Everybody wants to be in New York because it’s a trophy market in terms of the size of the state and its importance, but the tax rate is really prohibitive,” noted one New York author and businessman. “It’s very hard to make money in sports betting. Put 51% tax rate on it and it’s maybe a bit more like a fool’s gold rush than a gold rush.” 26 Furthermore, a Tax Foundation report studied the effect of taxing a sportsbook’s promotions as “phantom revenue” to be included with its gross gaming revenue, estimating that the effective tax rate for the operators in New York totals more than 77 percent, when taking federal taxes into account. 27 The American Gaming Association is currently challenging the 0.25 percent federal excise tax calling it an added operating cost to legal sportsbooks that illegal operators do not pay. 28 Whether or not they are successful will make little difference to operators in New York where the sky-high tax rate and inclusion of “phantom revenue” in operator’s gross revenue means they are taxed to the point of unprofitability. Furthermore, sportsbook operators believe that New York’s tax structure significantly hampers operators’ ability to compete with offshore, online sportsbooks and undercuts one of the core benefits of legalization, which is to bring bettors into the legal, regulated market. Sportsbook operators in New York have felt the detrimental effect of a state tax policy that includes promotional credits issued to bettors included in the operator’s total gross revenue, and so have wagerers who have received fewer promotional credits from online operators – and perhaps even worse odds – as a result. In fact, some New York operators may even
be encouraging their bigtime bettors to make the trek across the Hudson to wager their bets in New Jersey. Shortly after New York’s entrance into the sports betting market, one New York Senator expressed his hesitancy regarding the state’s success: “With a product as we have, I would expect we leapfrog over New Jersey…. But it is about sustainability and the long term.” 29 Interestingly, New Jersey has no professional football team, while New York has two – but both teams play in New Jersey. So, although bettors currently have the ability to place online sports wagers in New York, many New Yorkers may still find themselves next door in New Jersey when sports betting to watch Monday night football – or maybe even to escape New York’s constricting tax environment. Conclusion While New York and New Jersey both appear to have benefited from their respective tax policies on sports betting, as the market continues to grow and the initial period of heavy investment among operators is curtailed, the states are feeling the consequences of their decisions. An overreaching tax policy such as New York’s is unlikely to be sustainable as the progressiveness of the industry declines; while a conservative tax policy like New Jersey’s leaves valuable tax revenue on the table. In the long run, sports betting represents a significant opportunity for new revenue for states – especially if they develop an appropriate regulatory and tax framework, one which allows the state to enjoy the revenues while at the same time fostering growth of the lucrative industry by supporting the operators.
EMMA TOMPKINS Juris Doctor Candidate, University of Mississippi School of Law For information contact metompki@go.olemiss.edu
26 BUSINESS INSIDER https://www.businessinsider.com/what-new-york-sports-betting-tax-rate-means-gambling- companies-2022-1?r=US&IR=T 27 Ulrik Boesen, Large Spread in Tax Treatment of Sports Betting Operators, TAX FOUND. (Feb. 9, 2022), https:// taxfoundation.org/sports-betting-tax-treatment/. 28 AGA https://www.americangaming.org/policies/gaming-tax-policy/ 29 POLITICO https://www.politico.com/news/2022/01/22/new-jersey-new-york-online-sports-betting-1406000#
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IMGL MAGAZINE | APRIL 2023
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