Is New York’s 51% Tax On Sports Gambling A Model For Other States?

Analysts say state may have unique population and politics that don't translate elsewhere
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Thus far, New York’s online sports gambling hasn’t validated any of the dire warnings about the power of its 51% tax rate to kill the golden goose.

Lawmakers seem thrilled with the $91.5 million it has brought the state treasury for education and other programs through the first seven weeks. The state’s gamblers seemed satisfied enough so far, judging by the $2.8 billion in bets they have made. There has been a bit of grumbling from sportsbook operators, but nothing too explosive.

So, does that mean New York’s tax policy is a model for other states to follow as they look to maximize their haul from sports gambling, just as New York imported the high rate from Rhode Island and New Hampshire? While other states might be tempted to adopt New York’s approach, most analysts consider it unlikely to be replicated elsewhere. And many of those observers think the pressure to adjust eventually will swing back toward lowering the tax rate in New York.

“I don’t think it’s a unicorn, but I think as a model it’s going to be very selectively applied,” said Daniel Wallach, a gambling industry legal analyst.

California and Florida follow different path

Of the 32 states with some form of legal sports betting, New York and the two New England states have by far the most burdensome tax rates for sportsbook operators.

Wallach points out that the two biggest unplucked fruits for sportsbook operators — California and Florida — are following an entirely different model from New York’s. Rather than relying on politicians to craft legislation, those states are allowing tribes or other stakeholders to draft the guidelines for new sports betting. Voters might end up choosing their preference in a referendum.

“For the large part, they are operating through tribal entities,” Wallach said of the other large states. “The tribes are not going to be paying 51 percent to the state of California. That’s a non-starter, as I think it is in Florida.”

When a Hawaii legislator, John Mizuno, first proposed legalizing mobile sports betting there, he told Sports Handle he was simply replicating New York’s model. Since then, however, Mizuno has admitted the 55% proposal was simply an “opening salvo” and that the real tax rate could be lower.

Massachusetts bears watching

Wallach thinks Massachusetts is worth watching as another New England state continuing to work through the legislative process of legalizing sports gambling.

“Some of the bills have had higher tax rates in large part because of how New York was approaching it,” Wallach said. “You may see attempts to inch up the tax rates in Massachusetts based on how the experiment so far is going in New York. Maybe in Massachusetts, Hawaii, and Arkansas you could see some traction, but I think it’s going to be very limited in how it proliferates beyond New York.

“State governments are laboratories for experimentation, but what works in one state doesn’t necessarily mean it works in all states.”

The problem with using New York as a model, some say, is that New York might not have reached its equilibrium when it comes to the most sustainable long-term approach. The timing of New York’s launch — during the NFL playoffs, with the Super Bowl and March Madness on the near horizon — proved fortuitous. Also, New York simply could be a market unlike any other when it comes to sports gambling.

New York is uniquely important to operators

“It’s a very important market, especially for something like sports betting,” Ulrik Boesen, a policy analyst at the nonprofit Tax Foundation, said of New York. “There are a lot of sports teams, there’s a lot of interest, it’s a huge media market. It’s very important to be [operating] there, which is why they spent the kind of money they have despite these tax rates. I do think in the longer term, there’s a risk with this kind of tax rate, and it will limit the ability of the industry to prosper and for competition to be healthy. Right now, you’ve got to have a lot of capital to operate. It’s prohibitive.”

New York law provides a mechanism for the tax rate to come down to as little as 35% if the state awards more than the nine licenses it currently maintains. Otherwise, it would need to be legislated all over again, a process that could take years. One bill, introduced by state Assemblyman J. Gary Pretlow, would restrict books from requesting lower tax rates.

Thus far, seven operators — led by early market-share leaders FanDuel, DraftKings and Caesars — are taking bets in New York. Two more operators are licensed and expected to launch in the coming weeks.

Boesen points out that New York’s 51% rate is effectively much higher, because promotions such as free bets are counted among the gross gaming revenue even though they net the books nothing. Most corporations are taxed based on income. In some states with relatively high tax rates, such as Pennsylvania and Virginia, sportsbooks are taxed based on net gaming revenue, which Boesen suggested offers a more realistic approach.

“Depending on their promotions, New York operators might be spending 70 percent, 60 percent, or 80 percent. We don’t really know,” Boesen said. “A number of other states allow exclusions for revenue after promotions are deducted. That way you’re closer to taxing the actual revenue.”

Will taxes come down in New York?

Boesen said that the states with the highest tax rates typically have them because that’s how legalizing the activity was initially justified. Other states deemed it a way of regulating a previously dark portion of the economy and obtaining revenue to help problem gamblers.

New York Gov. Andrew Cuomo predicted early on that sports gambling could produce $500 million a year for state coffers, a projection that’s well on its way to fruition. Boesen said he doesn’t expect any downward pressure on the tax rate in New York for the time being, but over time, he thinks operators will bring it to bear more forcefully.

“I just worry about the prohibitive nature of it and the ability of these giants to compete properly,” Boesen said. “Maybe New York is important enough that they will lose money there, but then make it up somewhere else in the country. That’s bad for everyone else.”

Photo: Shutterstock

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