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This is the fourth of a five-part series leading up to May 14, 2023, the fifth anniversary of the US Supreme Court’s decision to repeal the Professional and Amateur Sports Protection Act (PASPA), which allowed states to pass their own sports betting laws.
Revenue is a definition of success in the US sports betting industry. Some may say it is the only definition. But reaching maximum revenue potential takes time. Few states (very few) can generate billions of dollars in handle in their first year.
One state that comes to mind is New York. The Empire State has generated over $22 billion in online sports betting handle alone since it added mobile in early 2022, with $1.6 billion in handle wagered in the first month online. Another top achiever is New Jersey, where sports betting revenue is holding relatively steady five years post-launch.
Pennsylvania, Colorado, Illinois, Indiana, Virginia, Tennessee, and Michigan are consistently near the top of the revenue charts as well.
Look at the sports betting laws from these states, and you will find most have a moderate tax rate (New York and Pennsylvania notwithstanding) and strict consumer protections, including required responsible gaming (RG) plans from operators, self-exclusion lists, and safe apps. Competition in the market also plays a role.
So while revenue is important, it’s not the only thing that factors into a successful state sports betting program. The question is, which states are doing the best job with their sports betting programs?
On the fifth anniversary of the US Supreme Court’s decision to strike down PASPA, Gaming Today talked to two sports betting industry insiders this week to find out which five states they believe have gotten sports betting right.
A Look at the States by Two Industry Experts
Nathan Click, spokesperson for the Sports Betting Alliance (which includes BetMGM, FanDuel, DraftKings, and Fanatics Sportsbook) and mobile gambling analyst Steve Brubaker both shared their insights – but they are not in total agreement.
The sports betting industry represented by Click believes states win when they enact a modest tax rate and allow plenty of competition – which is why consumers get promotions. Brubaker favors states that have done well at balancing marketing and betting restrictions with revenue success.
The five states that seem to meet both experts’ expectations by those measures are Colorado, Illinois, Michigan, New Jersey, and Virginia.
Colorado
Colorado has become a golden child in the US sports betting industry for its competitive online market tied to the state’s commercial casinos. Twenty-five mobile sportsbooks now operate in the Centential State, which launched sports betting in 2020 at a low-to-moderate tax rate of 10 percent. That tax rate helped Colorado generate $352 million in commercial sports betting revenue in 2022 – a 41 percent increase over 2021.
Responsible gaming restrictions in the state include a prohibition on any false or misleading advertising, a required RG plan, and a self-exclusion database. The state also has a phase-out, or sunset, on promo deductions.
Brubaker said Colorado isn’t “super tough” on the regulatory end compared to some newer markets, like Ohio. He said the sports betting industry loves Colorado because it’s inexpensive to do business there. But the industry also favors promotional deductions, which are being gradually phased out under a 2022 Colorado law.
That resonates with Brubaker, who says promotions have a definite impact on consumer behavior.
“(Sportsbooks) just throw cash at people – you’ve seen all the ads. They give you a bet that you are certain to win. And it makes you ingrained to go out and keep betting.”
Click said Colorado’s ability to increase sports betting revenue a few years post-launch is a good sign. The industry expects the Colorado sports betting market to maintain growth as it matures, he added.
“In early markets you often don’t see much tax revenue generation because everybody is investing so much in getting new bettors from the illegal market,” he told Gaming Today. “But in a state like Colorado, people are starting to say ‘yeah, this is actually generating some significant revenue for the state’ a few years after legalization.”
Illinois
There’s no doubt that Illinois is an established gambling state. Commercial casino gambling has been legal there since 1990. Legal sports betting tied to casinos, racinos, and major sports arenas was legalized in 2019, followed by statewide mobile sports betting tied to casinos and tracks. By revenue standards, it’s a smash.
Today the Land of Lincoln is a massive sports betting market with $795 million in commercial sportsbook revenue in 2022 – an increase of 51 percent over 2021. The state’s tax rate on sports betting is 15 percent, which is at the upper end of the 10 to 15 percent tax range enacted by the majority of legal states, but modest compared to New York’s 51% tax rate or Pennsylvania’s 36%
What you won’t find in Illinois are bonus deductions. It is one of nine states that don’t permit promotional play deductions. Another regulatory rule in Illinois prohibits online betting on Illinois college teams. Not surprisingly, prop betting on Illinois college athletes is illegal in the state. Self-exclusion programs are in place, as are most standard RG policies.
Brubaker – a longtime Illinois gambling lobbyist – credited the state’s gambling infrastructure and cautious regulatory approach with its success. He said having a state legislature that understands gambling issues is another plus.
Illinois ‘Understands Gambling’
“Illinois has been a gambling state forever and ever. It has a legislature that understands gambling and is supportive of gambling. Illinois is (also) one of those states that don’t spend a lot,” according to Brubaker.
The exception is state spending on problem gambling: Illinois’ spend is higher than most on that front, with $6.8 million dedicated to compulsive gambling services in 2021 alone.
For Click, Illinois may not fit perfectly into what he referred to as a “tax rate, promos, and a full range of legal operators” formula for industry success. The lack of bonus deductions is not beloved by operators. But the state’s 11 retail and six online sportsbooks seem fairly competitive at a tax rate of 15 percent.
“Our guidepost is, is there a competitive marketplace? Because when you have a really competitive marketplace, operators are able to attract bettors from the illicit market,” Click told Gaming Today. “If you have an uncompetitive marketplace where there’s a single operator, there just isn’t the kind of competition that creates incentives for folks to come over from the illegal provider.”
Michigan
The state of Michigan legalized sports betting and online casinos at the same time, putting the Wolverine State into a class with top-ranked New Jersey. Online sports betting specifically, through commercial casinos and federally-recognized tribes, has been legal in Michigan since 2019 and live since 2021. Michigan commercial sportsbook revenue for 2022 alone totaled $419 million – a whopping 31 percent growth over 2021.
Click appreciates Michigan’s modest 8.4 percent tax on online sports betting revenue (and retail) and deductions for bonuses and other promotions. Also favorable to the industry is the competitive online market with 15 apps live through top brands like DraftKings, FanDuel, BetMGM, and Caesars.
‘Political Success Story’
“I think Michigan is kind of an example of a political success story where all the stakeholders came together to pass sports betting and iGaming, which is an important piece,” said Click. He mentioned that Detroit has used the gambling tax revenue it receives under state law to fund public services from police to job creation”
Michigan also allows full promotional play deductions for sports betting only, which has helped to make it competitive. But it hasn’t forgotten about problem gambling. The Mitten currently ranks 10th among states in per capita funding for problem gambling services, with $5.5 million appropriated for those needs in 2021.
Brubaker said he is impressed by Michigan’s progress on another front – its success at blending the state’s gambling interests with tribal interests. Michigan, like Arizona, allows its tribal nations to offer statewide online sports betting with state oversight. Brubaker said a lack of agreement with tribes is what’s (in part) standing in the way of legalization in other states with large tribal interests, notably California and Minnesota.
“Arizona’s doing well and Michigan’s doing well because they have figured out how to work with the tribes and give them something they wanted,” he said.
New Jersey
The home state of Atlantic City was the first state to legalize sports betting after the fall of PASPA. That’s not surprising, considering that it was New Jersey that challenged PASPA leading to the 2018 US Supreme Court decision to overturn the federal law. The Garden State has been a powerhouse in the industry ever since, consistently ranking at or near the top in commercial sports betting revenue year to year. In 2022 its commercial sports betting share totaled $763 million on $10.9 billion in handle.
Competition from New York (which launched mobile in Jan. 2022) has rattled New Jersey’s top sports betting revenue standings a little bit, leading to recent reforms on promotional play and more. But the state is far from a free-for-all.
First, there’s New Jersey’s sports betting tax rate of 14.25 percent across the board– a rate that’s neither high nor particularly low. There’s also New Jersey’s opposition to betting on in-state teams. Even after state lawmakers approved legislation in 2021 to allow betting on New Jersey college sports team games played in-state against teams from other states, voters rejected the proposal that fall.
‘Established Gambling Industry’
Brubaker seems to think New Jersey’s spot in the rankings is pretty secure. New Jersey, like Illinois, has a strong infrastructure and legislative knowledge base that allows it to stay near the top of the game amid fierce competition, he said. Lawmakers have learned how to tweak the system without sending it into a tailspin. And, like Michigan, New Jersey has online casinos which traditionally net more than sports betting and provide a nice cushion.
“New Jersey is always going to be big because they have an established gambling industry,” said Brubaker. Likewise, New Jersey is one of the most competitive states in the nation with around 21 online sports betting operators now live.
It’s that kind of competition that resonates with Click and the sportsbooks he represents.
“Success is a healthy competitive marketplace for the long term,” he told Gaming Today. “States that demonstrate long-term competitive market health depend on a full range of legal operators, especially those who are spending on marketing and have a fair tax rate that allows for competitive odds, and some sort of promo deductions to ensure that the market takes off. I think New Jersey is a great example of this. You have a market that continues to grow, even in its sixth year.”
Virginia
Virginia has become a breakout star in the sports betting realm since launching online sportsbooks in Jan. 2021. In 2022, the Old Dominion State generated $481 million in commercial sports betting revenue – an increase of 68 percent over its first year of operation.
Currently, there are 15 mobile sportsbook apps in Virginia operating at a tax rate of 15 percent. The state has retail sports betting now, too, with more retail likely on the way. That allows for plenty of competition in the young Virginia market.
Virginia does allow promotional play deductions, but not indefinitely. Operators are allowed to fully deduct their bonuses and other promotions for up to 12 months after launch. No deductions are allowed after that first year. Also notable are Virginia’s strong RG protections across the board.
Brubaker said that dropping promo deductions after the initial rollout is a trend among states now. A reduction in promos causes a drop in handle since promos are counted as actual bets. He emphasized that those kinds of tweaks play into the larger revenue picture.
“When you see a big reduction in handle, it’s not because bettors are losing interest in betting. Well, it could be, I won’t say that definitively. But when you see that drop it could be related to (a reduction) in promotions,” he told Gaming Today. How well a market performs from that point is an indicator of its strength.
Click called Virginia “another good example where you have an untethered license and a 15 percent tax rate (with) year after year market maturity and increase in tax revenue.” From an industry perspective, marketing (promotions) and having a choice of operators has a lot to do with that.
“There’s a real upside to it,” said Click.
