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COMMENTARY | Taxes on online betting and gambling can help government leaders boost their budgets and create sustainable economic growth.
State revenues for fiscal year 2020 sank 1.6%, and they’re projected to decline 4.4% in 2021. Legislators will be looking for ways to balance their budgets in the short term and create sustainable economic growth in the long term. Online sports betting and casino gaming can be valuable tools on both fronts, becoming major sources of tax revenue for federal, state and local governments.
However, for this to work, legislators must create a smart foundation for legal online sports betting and gambling. If legislators tax them too heavily, it will drive gamblers to untaxed illegal markets. State-run monopolies aren’t advisable either because they fail to capture market share and result in lower tax collections.
For the best results, states should create a legal online sports betting and gambling system built around competitive licensing. That was already a trend before the pandemic. Given the success seen by states that have adopted it, government leaders should expect many more to adopt this approach in the coming months and years.
States With Legal Online Sports Betting and Gambling
Almost two dozen states plus Washington, D.C., and Puerto Rico have adopted some form of sports betting. Three more states are in the process of implementing laws after November 2020 sports betting ballot initiatives received tremendous support. However, it’s important to distinguish between states that allow in-person sports betting versus states that permit online wagering.
Online casino gaming isn’t as ubiquitous in the United States as it is in other countries. However, 90% of sports betting revenue comes from online sources, meaning states like Mississippi and Arkansas that initially implemented measures that applied only to in-person venues missed out on significant revenue streams. But the success of the online market in Pennsylvania, New Jersey and now Michigan should make several more states reconsider implementing statewide mobile sports wagering so they don’t leave money on the table.
New Jersey, in particular, represents a model of what legal online sports betting and casino gaming can do for state fortunes with the right approach in place. Instead of tightly controlling online sports betting and gambling, the state applied a free-market framework that allowed multiple operators to set up shop and compete for business—and the plan worked.
New Jersey surpassed Nevada in 2020 for the amount of revenue collected through sports betting. Proceeds helped support property tax relief to alleviate pandemic-related budget struggles. The appeal of robust gambling options also helped New Jersey attract tourists from New York and revitalize racetracks throughout Northern New Jersey and casinos in Atlantic City. Not surprisingly, these results are appealing to other states.
Opponents of addressing revenue shortfalls through taxes on online sports betting and gambling believe that any expansion in gambling will lead to addiction. However, the data concludes the opposite. Problem gambling hasn’t gone up in states that allow online sports betting and gambling.
Some industry insiders also worry that online sports betting and gambling will cut into casino and lottery revenues, but this hasn’t happened either. By all indications, the benefits of online gambling and sports betting have been real and substantial for all states that have embraced them. Consider this proof of concept for the states that have yet to embrace these practices.
A Win-Win for States
People tend to frame online sports betting and casino gaming as expansions of gambling. It’s more appropriate to think of them as gambling transfers—from illegal settings into legal ones. Underground channels for sports betting have existed for ages. And accessible offshore betting options have been around for about a decade.
People are already betting lots of money on sports; they’re just doing it in a setting that can’t be taxed or regulated. Legalizing online sports betting and gambling helps to shut this illegal market down and turn criminal profits into tax revenue that goes to the public good.
In that context, it’s easier to see why legal online sports betting is good for all, including nongamblers. States should run with that mindset and create a business-friendly environment with strict regulations to ensure customers are protected while allowing operators to market world-class entertainment products.
Online sports betting and gambling is just the start. As new technologies blur the lines between passive and interactive entertainment and skill and chance, the traditional frameworks between gambling and other forms of entertainment will also blur. States that embrace emerging entertainment technologies will be rewarded with tax revenues and business development opportunities. On the other hand, those that limit consumer choice will miss out on economic growth and could push consumers into dubious gray market alternatives.
Gambling revenues have already helped state budgets as more states embraced casino gaming. Now, they’re poised to transform again and on an even greater scale as legal online sports betting and gambling change the face of the market as we know it. The timing couldn’t be better: States need a plan for pandemic recovery just as online sports betting and casino gaming becomes legal, viable and extremely in demand.