Kentucky Gov. Andy Beshear said the state’s first gambling expansion since 1989 would generate about $23 million in new annual tax revenue.
Beshear signed legislation at the end of March legalizing sports betting in Kentucky. The bill allows retail and online betting in the Bluegrass State. Most of the tax revenue would help fix Kentucky’s shortfall in the pension fund.
For Beshear’s projections to be correct, Kentucky bettors would need to wager about $2.13 billion yearly.
Tax Rates Are Modeled After New Jersey
HB 551 was the bill that legalized sports betting. The legislation was fairly bare bones. It didn’t establish much of the regulatory environment around the new industry, but it did enforce the tax rates.
The bill taxes brick-and-mortar sportsbook revenue at 9.75% and online sportsbooks at 14.25%. The Kentucky structure mimics New Jersey’s model, taxing online revenue at a slightly higher rate.
Other states used a similar tactic for their sports betting tax model. But Kentucky used the same 4.5% gap between the two that New Jersey did.
Kentucky Online Revenue Will Greatly Outpace Retail Counterparts
In most states, online betting comprises more than 90% of the total handle. In New Jersey, it’s a shade north of 95%.
For Kentucky, let’s use a more conservative 90%. As a result, we have a 90/10 split between online and retail betting.
In other words, 90% of the state’s revenue will be taxed at 14.25%, and the remaining 10% will take a 9.75% ding from the tax man.
But that’s revenue. Sportsbooks are left with revenue after grading and paying out winning bets.
The handle is the total amount wagered by bettors.
Thus, revenue is handle minus payouts. But to calculate the total handle, we must establish a hold rate for Kentucky sportsbooks.
Kentucky Could Easily Be on the Higher End of the Hold Spectrum
Hold rate is what percentage of the total handle was kept as revenue by the operators. If a sportsbook accepts $1 million worth of wagers and profits $100,000, its hold rate is 10%.
The average hold rate for any sportsbook in the U.S. is 6-8%. It’s slightly higher than in immature markets as newer bettors are making more wagers.
Even though Kentucky gamblers will be relatively new to sports betting, there’s a storied history with Kentucky horse racing.
The 2024 Super Bowl will be the first NFL championship game Kentuckians can legally bet on from home. But most of those same people have placed a bet on a horse race at some point. They also are surrounded by states with legal sports betting, making it more likely they’ve placed a bet in a different market.
Therefore, let’s estimate Kentucky sportsbooks achieving an average hold rate of about 8%.
It’s on the higher end of what a mature market would expect. By definition, Kentucky will be considered a new, immature market. But I think it will show signs of maturity.
How Did I Get to an Annual Handle of $2.13 Billion?
I reverse-engineered it like I was Bob Lazar at Area 51. Alien humor aside, we must make some assumptions before crunching numbers.
We will assume that the $23 million in taxes was divided proportionally between online and retail sportsbooks. Therefore, 90% came from online sportsbooks and 10% from brick-and-mortar operations.
With that math, Kentucky would collect $20.7 million from online operators and $2.3 million from retail.
Given the tax rates, $20.7 million is 14.25% of online revenue. And $2.3 million is 9.25% of the total retail revenue.
I’ll save you the actual math equations. But it means online revenue totals $145.26 million and retail revenue is $24.86 million.
Given the 8% average hold rate for sportsbooks, we know the annual online handle is about $1.82 billion. Retail operators will handle about $310.8 million in wagers.
Add those two numbers together, and you get a total handle of $2.13 billion.
Are Those Reasonable Projections?
In short, yes. The Kentucky sports betting market is unique in many ways. But Kentucky is most similar to Iowa in most of them.
Both states are devoid of a major professional sports franchise. Instead, major in-state NCAA Division I athletic programs are the big draw.
Additionally, the populations are comparable, with 3.19 million in Iowa and 4.5 million in Kentucky.
Last year, Iowa sportsbooks handled $2.3 billion worth of sports bets with a 7.1% hold rate. That’s right about where Kentucky would need to be to hit Beshear’s tax projections.