The Federal Excise Tax—a Ball-and-Chain for Regulated Gambling

A difference of opinion over modes of taxation could sink what should otherwise be a very popular proposal to allocate more money to problem gambling harm reduction. One of the most common arguments presented by gambling expansion proponents is that a portion of the tax revenue generated by legal gambling can be used to mitigate its impacts. Yet the American Gaming Association (AGA) opposes the new federal Gambling Addiction Recovery, Investment, and Treatment (GRIT) Act

The reason for the AGA’s resistance is that the funding in the GRIT Act comes from one tax in particular: the federal sports betting excise tax. The trade organization has long campaigned for that tax to be repealed. That would become more difficult if specific services like gambling treatment depended on that tax revenue specifically. As it stands, money from the excise tax goes into general coffers, so there are no such dependencies that would complicate its repeal.

Naturally, any industry trade organization would prefer lower taxes in general, and not to be doubly taxed at the state and federal levels. But that isn’t the problem here. Even very high levels of state taxation—such as 54% for online slots in Pennsylvania or 51% for sports betting in New York—don’t receive quite the same amount of criticism from the industry as the excise tax.

The trouble, from the industry’s point of view, is that the federal government calculates this tax using handle, rather than revenue. That is, the excise tax is based on the amount of money players wager, not the amount the sportsbooks win. In fact, US sportsbooks can have a losing month and still owe money to the federal government.

That ends up being bad for bettors, but understanding why requires looking at things from the point of view of the sportsbook.

What’s the Difference Between Taxing Handle and Revenue?

So why is taxing handle so bad? In a nutshell, it’s because it means the tax doesn’t remain in proportion to the thing operators care most about, which is their revenue.

To make this clear, let’s define the terms carefully:

  • Handle: The total money risked by players.
  • Revenue: The net winnings of the sportsbook.
  • Hold: Revenue as a percentage of handle.

So, imagine a sportsbook that takes $400 million in bets, and pays out $360 million in winnings.

Its handle is $400 million, but its revenue is only $40 million. The excise tax is 0.25%, so it will pay $1 million in federal tax on that $400 million handle.

But the operator only cares about how much of the money it keeps, not how much passed through its hands. That 0.25% becomes 2.5% when you calculate the effective rate as a proportion of revenue. This is fairly close to the actual national average for the excise tax, which was about 2.75% of total revenue in 2023.

That’s still not a big number when you consider that most states are charging 10% of revenue or more.

But now imagine a different sportsbook that offers better lines and consequently attracts more players. It takes $800 million in bets and pays out $760 million in winnings.

That second operator has the same revenue $40 million, but its hold is only 5%. It has double the handle for the same revenue.

As a result, it pays twice as much tax: $2 million instead of $1 million. Its effective tax rate as a proportion of revenue is 5%.

Taxing handle means that if you cut the hold in half, you double the effective tax rate, from the point of view of an operator who is focused on revenue.

Taxing Hold is Bad For Players and Good For the Black Market

Hold depends on two things. In the short term, it comes down to luck. If the teams favored by bettors (say, the state’s home teams) win a lot of games, the books will have a bad month. If they lose, the books will have a good month. But over the long term, hold is a function of what bet types the sportsbook pushes to players and what kind of “vig” they charge.

Just looking at 50/50 single bets, a book that’s offering -110 on each side will pay out $200 for every $220 in handle over the long term, which is 9.1% hold. If it’s offering -107, then it pays out $200 for every $214, which is 6.5% hold.

Higher vig means higher hold, which means that a smaller percentage of revenue goes to federal tax.

In effect, US sportsbooks have an incentive to offer worse lines to their players because of this tax. All other things being equal, operators would rather make their money from a smaller number of players paying a higher vig, because it means less taxation than lowering the vig to attract more players.

Not all players are very sensitive to these pricing issues. But those that are, often choose to play illegally at offshore sportsbooks. Those black market operators don’t pay tax, so they don’t have the same disincentive to offering lower-vig betting options.

Online Casino Lawmakers Haven’t Made the Same Mistake

In principle, there’s no reason lawmakers couldn’t decide to apply a similar tax to online or retail casinos. It would be an even worse idea, however, since most casino products have a lower hold than sports bets. For online casinos, the average is around 3.5%. A casino wagers tax would have the same effect on players that the excise tax does. Operators would likely tighten up their slots to reduce their effective tax rate, and some players would move to offshore sites in search of higher RTPs.

Fortunately, state lawmakers have avoided the federal government’s mistake when crafting their online casino laws. However, during the wave of sports betting legalization that began in 2018, several states considered handle-based taxes. Although all of them ultimately reconsidered and passed bills with revenue-based taxes, Tennessee went back to the idea of a handle tax, switching from 20% of revenue to 1.85% of handle in July 2023, to operators’ dismay.

This shows that, despite the AGA’s objections, taxing wagers is an idea that won’t quite die. Now that most states have sports betting and more are starting to consider online casinos, there’s always a risk that a casino wagers tax could crop up in a bill. Worse, the federal government could see the money states are making from online casinos, and expand the excise tax to include them.

For the most part, the AGA’s efforts to educate policymakers about the downside of a handle or wagers tax have been successful. However, it’s important for players to understand the negative impact it can have on the product offering in a market, and to do their own advocacy against the idea if it comes up.

About the Author

Alex Weldon

Alex Weldon

Alex Weldon is an online gambling industry analyst with nearly ten years of experience. He currently serves as Casino News Managing Editor for Bonus.com, part of the Catena Media Network. Other gambling news sites he has contributed to include PlayUSA and Online Poker Report, and his writing has been cited in The Atlantic.
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