Could Sky-High Taxes Crush America’s Legal Sports Betting Boom?

A Betting Boom Under Threat

America’s legal sports betting scene has been rolling since the 2018 Supreme Court ruling that axed the federal ban, sparking nearly 40 states to launch markets with $150 billion in wagers in 2024, per Adam Hoffer and Jacob Macumber-Rosin’s Tax Foundation article, “Exorbitant Sports Betting Taxes Could Kill the Legal Market.”

But a push to hike the federal tax on bets from 0.25% to 5% could slam the brakes, driving bettors back to shady offshore sites. With states like New York already taxing sportsbooks at 51%, the combined tax burden risks choking the industry.

Right now, every legal sports bet faces a federal tax of 0.25% on the handle set in 1951 to curb illegal gambling. Back then, it was a hefty 10%, but Congress slashed it by 1982, adding a 2% tax on illegal bets.

Revenue was a dud at first, dropping from a $400 million projection to $9 million in six months, and the IRS doesn’t even track exact collections, per the authors.

Why a 5% Tax Spells Trouble

A Bipartisan Policy Center proposal to jack the federal tax to 5%, a 1,900% hike, aims to curb gambling’s social harms and raise cash, but it’s a risky bet.

In 2024, the 0.25% tax pulled in $373 million, peanuts against a $7 trillion federal budget, per the Tax Foundation. A 5% tax might juice revenue short-term, but it could crush sportsbooks’ razor-thin margins.

The authors break it down: for a $2,200 handle bet (with $45 in promos), a sportsbook nets $55 after payouts, but a 5% tax would cost $110—200% of net revenue.

“The likelier outcome, if the tax is so substantially increased, would be the death of the legal sports betting industry as it exists today,” they warn, as sportsbooks might offer worse odds or fold entirely.

State Taxes Pile On

The federal tax isn’t the only hit. States layer on their own, from 6.75% to 51% of gross gaming revenue. Combine a 5% federal handle tax with state taxes, and sportsbooks could face tax bills eating 22.3% to 92.7% of net revenue, per the Tax Foundation.

In high-tax states like New York, where $1.2 billion in betting taxes rolled in since 2018, smaller operators like Betr and WynnBet have already bailed.

The authors note the industry’s average hold is 7.83%, nowhere near enough to cover such burdens.

Heavy taxes sting bettors, too. To offset a 5% federal tax, sportsbooks might worsen odds, turning a -110 bet (wager $110 to win $100) into something less juicy. This could push bettors to unregulated sites offering better payouts but no consumer protections, undoing the post-2018 shift to legal markets.

The authors stress that “any reforms to the federal sports betting tax should ensure that both bettors and operators find legal markets more attractive than illicit markets.”

Smarter Policy Options

Instead of a tax hike, Hoffer and Macumber-Rosin point to alternatives, like the Congressional Gaming Caucus’s push to repeal the 0.25% tax entirely, as proposed in H.R. 1440, per the Tax Foundation. This would level the playing field with lotteries and casinos, which dodge the tax.

Another idea, the GRIT Act, keeps the tax but funnels half to problem gambling grants, addressing social concerns without killing the market. Raising the 2% tax on illegal bets could also nudge more action to legal platforms, though data on its revenue is scarce, per the authors.