Sports betting has been spreading across the United States rapidly, with ten states legalizing online sports wagering in 2021 alone. As state governments are making changes and beginning to regulate the legal online gambling market, one of the biggest hurdles to cross is determining the set tax rate for sports betting operators. In the US, the sports betting tax rates drastically differ. Tax rates range from as low as 6.75% to 51% across legal sports betting markets.
While Michigan remains one of the states with a lower sports betting tax rate, it’s uncertain whether the low tax rate will lead to long-term growth down the road. As the sports betting industry continues to expand, how can regulators ensure tax rates are logical long-term?
A look at Michigan’s current sports betting tax rate
As mentioned, Michigan boasts one of the lowest tax rates for sports betting at only 8.4%. Both mobile and retail sports betting has the same tax rate in the state. Only four other states fall below the 10% rate. Iowa and Nevada have the lowest sports betting tax rates in the US, at 6.75%. Arizona is just below Michigan’s tax rate, at 8%, with Indiana landing at 9.5%.
On the other side, New York has a staggering 51% tax rate for sports betting. Pennsylvania and Tennessee are also among the states with higher tax rates, at 36% and 20%, respectively.
What do high tax rates mean long term?
The higher tax rates in these states may be bringing in a lot of revenue now, but the long-term impact associated with higher tax rates in the gambling industry may not allow sports betting providers to last in these states.
A survey was conducted in 2021 by the US Sports Betting Regulatory Survey, reviewing some common reasons why a state would face delays in the sports betting industry when launching. Overall, the survey reported that the primary reason states faced delays in sports betting growth was high state tax rates and license fees (21.1% of responses). The second highest reason states are slow to see iGaming growth was the unexpected delays that often happen with iGaming provider launches (14.1% of responses).
In some states, operators can use promotion credits to help reduce their taxable income. Some states are not as generous, and many online sports betting providers are unsure whether they can last in these states.
“If you don’t have an exclusion for promotional credits, from the taxpayers perspective, you are raising the effective tax on operators,” said Andrew Winchell, Director of Governmental Affairs at FanDuel. “Now, in states where the tax rate is small, it’s more workable. In states like New York with 51%, it really does create questions about the long-term viability of that,” said Winchell.
When it comes to online casino gaming in Michigan, operators are taxed at two different rates depending on gross revenue. Any revenue below $4 million is taxed at 20%. The rate tops off at 28% for any gross revenue over $12 million. Online casino gaming is only legal in six US states, however, the tax revenue already generated from online casinos and poker rooms is 26x more than sports betting in the Great Lake State.
“No government is going to make a lot of money from sports betting. It’s the iGaming, where the tax revenue will come from,” said Michigan Gaming Control Board Deputy Director David Murley.
The reason why sports betting doesn’t bring in as much tax revenue is due to the drastically different margins in each industry. Operators make a lot more money from online casinos and poker rooms than from sports betting.
“Unlike other pieces in the gaming industry — slots, table games, etcetera, [sports betting] is a low-margin business. There are times when sportsbooks make money, and there are times when sportsbooks lose money,” explained American Gaming Association President Bill Miller.
“And so the reality is, unlike with a slot hold or a table game hold, the percentage of revenue, vis-à-vis the overall handle, is always going to be a small number,” the gaming industry’s chief lobbyist added.
Determining which route is best when establishing new tax rates for up-and-coming sports betting states isn’t an easy decision. It’s clear, however, that Michigan’s market is only growing, and the current tax rate has brought in tremendous tax revenue for the state. Michigan operators are on track to become the largest online poker market in the US. Not to mention, interstate poker is on the horizon, and new iGaming partnerships are foaming weekly. With so much continued development in the state and year-over-year growth in both online casinos and sports betting, it’s apparent that Michigan’s tax rates are bringing in some of the best operators in the world, and they’re here to stay.
Mac Daniel is a South Carolina-based freelance writer for PlayOnlineCasino and PlayOnlineSportsBetting. He has experience writing about a wide variety of topics, including healthcare, tourism, non-profit organizations, and most recently casino and sportsbetting news. To check out more of his work, visit www.playonlinecasinomi.com or www.playonlinesportsbetting.com