We Need to Talk About Illinois: Who the Sports Betting Tax Hike Really Hits?

If you spent the last week living under a rock, you might have missed the news that Illinois has officially decided to increase the tax on sports betting. The decision was made at lightning speed, and on Thursday, Governor JB Pritzker signed a $53.1 billion budget package for the fiscal year 2025, introducing new tax rates for sportsbooks. The new taxation method will take effect in less than a month, on July 1st.

Calling it a mere tax hike is somewhat misleading because Illinois is actually shifting from a flat to a progressive tax model for sports betting. Operators will now pay a tax rate based on their adjusted gross revenue (AGR) according to the following tiers:

• Up to $30 million: 20%
• $30 million to $50 million: 25%
• $50 million to $100 million: 30%
• $100 million to $200 million: 35%
• Over $200 million: 40%

Ultimately, it is indeed a tax increase, as even the smallest operators will now pay a 20% tax, compared to the previous flat rate of 15% that applied to everyone. While this increase will certainly make things more challenging for some, a 5% hike is not as objectively shocking as the more than double increase that the largest operators, FanDuel and DraftKings, will face. According to preliminary estimates, the state budget will now receive nearly $200 million more, with a significant portion of that amount coming from these two major operators.

As usual, the industry has not disappointed, already outlining various potential scenarios describing the future impact of this change. Some predictions are more dramatic, while others are less so. However, before we dive into these and attempt to identify the most realistic outcomes, let’s analyze the current situation and understand how the tax hike in Illinois affects the state itself, the operators, the bettors, and the entire U.S. sports betting industry.

Stop the Tax Hike!

The threat of a tax increase has loomed over operators for some time. The reality of this began to materialize in February this year when Governor Pritzker proposed a hike to 35%. Drawing from experiences in Ohio, which doubled its tax from 10% to 20% last year, operators quickly began subtle or more overt actions to combat this change.

In April, FanDuel users in Illinois received an alert on their app encouraging them to voice opposition to the tax increase. The message stated (exact quote): “STOP THE SPORTS BETTING TAX HIKE! We NEED your HELP! The Illinois legislature wants to MASSIVELY increase the tax rate on your favorite form of entertainment—placing bets on the teams, players, and games that you love!”

FanDuel’s CEO, Amy Howe, also voiced concern about the planned changes, emphasizing that the company is engaged in educational efforts to show regulators “how to get that balance right.”

Amy Howe (FanDuel)

Local lawmakers were quickly inundated with emails, with reports indicating the number reached 55,000!

Ultimately, these efforts proved futile. Even though the proposal for a flat 35% tax rate was dropped, a new idea quickly emerged. The concept of a progressive tax swiftly passed through all legislative stages and landed on Governor Pritzker’s desk along with the budget package. No plot twists were expected, and none occurred. A strong advocate for increasing the tax on sports betting, Governor Pritzker signed the budget bill into law on Thursday.

The Sports Betting Alliance, representing DraftKings, FanDuel, Fanatics, and BetMGM, did not hide their disappointment with the development. The group of operators issued a joint statement, signed by SBA President Jeremy Kudon, describing the tax hike as “penalizing sports betting operators who invested millions into the local economy and created jobs in the state.”

Lawmakers and Governor Pritzker were not deterred by the potential consequences of the tax hike, which were hinted at in discussions. Some of these consequences included the possibility of the largest operators shutting down their operations in the state. Others indicated that ultimately, it would be the bettors who would bear the brunt of the increase, facing less favorable odds or fewer promotions as operators pass on the additional costs.

It was also emphasized that such decisions ultimately lead to unintended support for the black market and a mass exodus of players to operators who do not pay taxes in Illinois and can afford to offer better deals.

However, the die has been cast.

Will Other States Follow Illinois’ Lead?

The tax changes in Illinois have also sparked a broader discussion about whether a wave of tax hikes might now sweep from the East Coast to the West Coast. Discussions about increasing taxes are ongoing in many states.

Concurrently with Illinois, a similar proposal emerged in Massachusetts. Although it had little chance of success and was quickly dismissed, its mere presence in public discourse could be unsettling for operators.

Equally troubling are assertions that U.S. legislators have historically been very “generous” to sports betting operators, suggesting that this approach might change as the market matures.

Jeremy Kudon, President of Sports Betting Alliance strikes a more optimistic tone, writing on X: “the notion that a wave of states will increase their tax rate on online sports betting simply because 3 of the 38 states with legalized sports betting are or were contemplating tax rate increases at the same time is flawed and overly simplistic.”

“Will a couple of states increase their tax rates in next 24 months? Possibly. There are states that have always looked to penalize online sportsbooks, like Iowa and Illinois–both of which had on-site registration mandates. But other states, like Massachusetts and New Jersey will be hard pressed to raise taxes on sportsbooks that have offices or HQs in the state,” adds Kudon.

While discussions about future tax hikes in other states are inevitable, the case of Illinois is unlikely to have a significant influence on these debates. Lawmakers in some states are inherently more supportive of such proposals, while in others, particularly those with GOP-controlled legislatures, similar initiatives are unlikely to gain traction.

DraftKings CEO Jason Robins expressed a similar viewpoint during the Q1 earnings call: “I expect that maybe there’ll be one or two here and there that look to do that, but I don’t think many of them will… And my expectation is that we’ll be able to convince them that it’s not a good policy decision,” said Robins.

However, Eilers & Krejcik Gaming (EKG) has identified Pennsylvania and Michigan as states where the proposal to increase sports betting taxes might succeed.

EKG analysts also highlight an interesting point: tax hikes in other states may not occur under circumstances similar to those in Illinois. Take Pennsylvania, for example, where the current tax rate is a relatively high 36%. At first glance, there seems to be little room for lawmakers to maneuver. However, considering promotional deductions, the effective tax rate is closer to 25%. By changing these deductions, lawmakers could increase the tax burden on operators without altering the flat 36% rate.

Discussions about tax hikes in Illinois were very direct, but future debates in other states may take different forms. Equally detrimental to operators could be recent trends toward implementing stricter marketing regulations or initiatives related to responsible gaming policies.

Panic Reaction in the Stock Market

Despite the complex nature of discussions about the future of sports betting taxation, the stock market reacted to the events in Illinois in its typical fashion.

Following the approval of the tax changes, shares of FanDuel and DraftKings experienced a sharp decline. Investors were not solely concerned about the nearly $200 million in additional taxes that these operators might have to pay in Illinois. The greater worry was that similar amounts could soon impact the budgets of these industry giants in other states as well.

Shares of Flutter, FanDuel’s parent company, fell nearly 10% on the London Stock Exchange within five days following the announcement of Illinois’ legislative plans. During the same period, DraftKings’ stock also plummeted by 12%.

DraftKings share price (Yahoo Finance)

While stock prices appear to be gradually recovering to their initial levels, these reactions underscore the significance of the Illinois events for the industry.

The impulsive nature of investors and the stock market’s reaction should not come as a major surprise. In the long run, however, this reaction might prove to be overblown. While the tax increase in Illinois and potentially in other states might complicate operations for sports betting companies, industry giants like FanDuel and DraftKings are likely to weather the situation without significant harm.

What’s Next?

Despite the loudest opposition to the tax hike in Illinois coming from major operators, the impact on them may actually be relatively small. The most significant effects will likely be felt by smaller operators and the bettors themselves.

Large, well-established businesses like FanDuel and DraftKings can easily handle additional costs by passing them on to their customers. Most players might not even notice the changes. These companies have the financial flexibility to absorb higher taxes without major disruptions.

The Illinois tax hike will primarily affect the market’s attractiveness to bettors. Ultimately, FanDuel and DraftKings will likely adjust by increasing their margins and reducing odds on events. They may also cut back on promotional and bonus costs. Given their strong market positions, they can afford these changes to some extent.

Even though the progressive tax system means smaller operators will face lower rates than the industry giants, those in the lowest tax bracket will still see a 5% increase. How these businesses handle the increased tax burden will be crucial.

Smaller operators face tough choices:

1. Reduce offerings: Limit their services and operate at a lower level in Illinois
2. Invest more: Invest more to better compete, although this is challenging against dominant players
3. Exit the market: Some might choose to leave Illinois altogether

Two of these scenarios—reducing offerings or exiting the market—would lead to further consolidation of the local sports betting market. While much focus has been on the potential exit of FanDuel or DraftKings, it is more likely that smaller operators will consider leaving.