Courtesy of Jenny Kramer
Audio By Carbonatix
The legal sports-betting market finally went live in New York State in early January, marking a huge moment for the American sports-betting industry…and signaling good times ahead for that state’s budget. In the first 23 days of legal sports gambling in New York, the state made a whopping $57.6 million in tax revenue. And with the March Madness men’s college basketball tournament now underway, New York should continue to score.
The initial haul for that state makes Colorado’s first year of sports-betting tax revenue – $6.6 million from $2.3 billion worth of total bets – look like pocket change.
Thanks to the passage of Proposition DD by a slim majority of voters in November 2019, Colorado has a legal sports-betting market that taxes casino and sportsbook winnings at 10 percent. “The thing that stands out to me is that Colorado still has a great policy, but the tax rate is too low,” says Ian St. Clair, a local sports-betting expert and analyst with PlayColorado.com.
New York State’s tax rate on sports betting is 51 percent, which helps explain why the Empire State was able to generate so much money in the first 23 days. Around thirty states now have legal sports gambling; eighteen of them allow online mobile betting.
For its size, Colorado has a robust sports-betting market. The state boasts 25 online sports-betting operators, which offer betting through mobile apps, and 17 in-person sportsbooks at casinos in the gaming towns of Black Hawk, Central City and Cripple Creek. When the first bets were allowed in May 2020, though, the pandemic had put many major sports on hold. As a result, among the more popular athletic events for bettors was Russian table tennis. But on March 5, the Division of Gaming suspended any betting on Russian and Belarussian leagues, teams and players. By now, though, major American leagues are back in play.
While the amount that Colorado can expect from sports-betting taxes will continue to grow as the market matures, the maximum amount the state can collect is $29 million annually, as set by Proposition DD. Because of Colorado’s Taxpayer Bill of Rights (aka TABOR), the state would need to ask voters for approval in order to raise the tax rate on sports betting, raise the ceiling above $29 million, or both.
Colorado is on the lower end of the sports-betting tax rates. Michigan is at 8.4 percent and Indiana is at 9.5 percent. New Jersey taxes sports betting at 14.25 percent, while Pennsylvania has a sports betting tax rate of 36 percent. New York is the extreme outlier.
Jay Kornegay, the head of Superbook and a Colorado native, believes that states like New York that tax too heavily risk eventually sending bettors back into the offshore sports-betting world.
“I can understand the thinking on both sides. However, things have been overregulated and overtaxed before,” Kornegay says. “When that happens, that cost is usually passed on to the consumer. In this case, it would be the players or the bettors. For someone to operate and give half of their profits to the state, it costs them more to operate. When you incur those expenses, you’re most likely going to have to pass that on to the consumer. … In that case, you would have a rippling effect into those players wishing to go offshore and go through illegal channels rather than play with regulated books.”
The argument that Kornegay offers about wanting to prevent people from going back to the black market, as well as the need to get voter approval, is exactly why Colorado settled on such a low tax rate.
“One of the things that is big with this is that operators, sportsbooks, were the ones in the ears of most of the people who were drafting the bills and lobbying the lawmakers in 2017, 2018 and 2019,” says St. Clair.
During its 2019 session, the Colorado Legislature approved the legislation that sent Proposition DD to the ballot. Current Democratic House Speaker Alec Garnett, who is a massive Broncos fan, was the House champion of the bill.
Does he think the legislature set the tax rate too low? “It’s a fair question,” Garnett says. “The goal was to create a competitive marketplace. It’s good for consumers.”
This is Garnett’s last session in the House before he terms out; he’s considering running for Denver mayor in 2023. But he wants to close a tax loophole in the sports-betting market before he finishes his legislative tenure, one that allows sportsbooks to write off free bets and promotions, deducting the cost of promotions from their winnings before taxes.
“When you’re first, sometimes you don’t get it exactly right. I think this is one area where there was an incentive to allow the regulated market to offer these types of incentives to bettors to draw them out of the black market into the regulated market. What has happened is it has become more of a way to retain and acquire players. And that’s fine, but that’s not a public-policy reason for not taxing them,” Garnett says, noting that sportsbooks are “furious” at him for pursuing this legislation.
“I think if you take away operators being able to deduct promos, that would more than double Colorado’s annual haul right there,” suggests St. Clair.
Once that loophole is closed, Garnett says, it’ll be time to monitor tax revenue and see how the state does. “If people all agree that it’s not enough, I think it’s up to the voters. I’m totally cool with people having that conversation,” he notes.
The vast majority of the tax revenue generated from sports betting – around 94 percent – is earmarked for the Colorado Water Plan, a product of the John Hickenlooper gubernatorial administration that’s designed to ensure that the state has water for drinking, farming and recreation for decades to come.
“The Colorado Water Plan is the state’s framework for solutions to its water challenges. It guides future decision-making to address water challenges with a collaborative, balanced, and solutions-oriented approach,” reads the water plan’s website. Until the passage of DD, the plan had relied on oil and gas severance tax funding for its budget, and that was drying up. Brian Jackson of the Environmental Defense Fund was a major proponent of the proposition. “Without DD,” he says of the plan, “they’d have just limped along.”
And could a flood of increased taxes help the plan move faster? Asks St. Clair, “Does the state legislature say, ‘Hey, let’s increase to 13 percent?’ It would be interesting to see what the taxpayers do at that point. The more that the state brings in, the more that it benefits water. That would be one way to sell it to the voters: ‘If we increase the tax rate that comes off of the sportsbooks, more goes back to Colorado water.'”
