Both halves of the Illinois legislature have passed this year’s budget bill, which includes a new progressive tax on sports betting revenue. The largest operators, who will suffer the heftiest tax increase, have warned that it will change how they do business in the state. Unfortunately, these same operators are also a driving force for iGaming expansion, leading to the question: will higher sports betting taxes hurt the Illinois online casino effort?
Technically, Illinois’ tax overhaul isn’t quite a done deal. The budget bill still awaits Gov. J.B. Pritzker’s signature. However, the Governor has been pushing for higher spending and higher taxes, making a veto unlikely.
Currently, Illinois taxes operators a flat 15% on revenue. Under the new system, operators will pay:
- 20% on their first $30 million in annual revenue
- 25% on revenue from $30 million to $50 million
- 30% on revenue from $50 million to $100 million
- 35% on revenue from $100 million to $200 million
- 40% on all revenue over $200 million
These are marginal tax rates, meaning that even an operator in the highest bracket still pays only 20% on their first $30 million, etc.
That works out to an effective tax rate of 30.5% for an operator making exactly $200 million in a year. Most Illinois sportsbooks will pay less than that. Only FanDuel and DraftKings made over $200 million in Illinois last year. Their tax rate will creep higher, closer to 40% the further beyond $200 million they go.
Naturally, those companies have been among the most vocal detractors of the change. Both saw their share values plummet when the budget passed. Through the Sports Betting Alliance (SBA), they’ve warned that higher taxes will force them to offer worse odds, potentially driving customers to the black market.
As it is, the odds of iGaming expansion in Illinois seem slim. A souring relationship between those companies and lawmakers can only hurt those chances.
The Rise and Fall of Hopes for Illinois
Illinois was barely on the legislative radar for online casino expansion this year. Technically, the latest version of the Internet Gaming Act was still an active piece of legislation for the 2024 session. However, it hadn’t moved in 2023, and its sponsors see the effort as a “long-term project.”
Industry observers have largely moved on from Illinois, but there was a time when it seemed like a top contender to be the next big iGaming state.
It’s socially liberal, business-friendly, and has a well-established retail casino industry. It was pretty quick to legalize online sports betting, albeit with a temporary in-person registration requirement. At the time, in 2019, many assumed that online sports betting would provide a natural springboard for iGaming.
Illinois joining the online casino movement would have also fit with the geographical trend of the time. Pennsylvania had embraced New Jersey’s online gambling model in 2018, followed by Michigan in 2020. Illinois seemed like it might be next in line for that westward march.
Unfortunately, the web of competing local interests has proven tricky to navigate. The state’s retail casino unions are one problem, as they have been elsewhere—New York being the prime example.
Another important obstacle is the video gaming terminal (VGT) industry and its retail partners. Small business owners who host VGTs have perhaps more to fear from online casino cannibalization than anyone else, and politicians do not want to lose their support.
Finally, there’s Rush Street Gaming. Although it is in favor of iGaming expansion in general due to BetRivers’ success, it still has a grudge against FanDuel and DraftKings dating back to the days of unregulated daily fantasy sports. Its desire for legislation that provides a leg up for retail operators adds another layer of complication.
High Tax Rates Aren’t a Nonstarter for iGaming
Whether the tax change negatively impacts the market or the SBA’s warnings prove hollow remains to be seen. However, running a sportsbook entails a lot of overhead and risk.
It’s widely suspected that operators’ decision to accept a 51% tax rate in New York is the reason other states are looking to increase theirs. However, the industry has already begun complaining that the New York rate has forced them to scale back promotions. Operators haven’t yet adjusted their betting lines to add more juice but have been threatening to, in the same way they’re warning about in Illinois.
And yet, a high tax rate on its own wouldn’t be enough to squelch interest in online casino expansion. The house edge might be smaller for online casino games (between 3% and 3.4% on aggregate), but overhead is lower, month-to-month variability is lower, and overall customer spending is higher.
Pennsylvania is the relevant case study for high online casino taxes. It only charges operators 17% of their revenue from table games but a whopping 54% on online slots, which typically account for about three-quarters of revenue. Over the past two years, the effective combined tax rate for online casino revenue has averaged to just over 35%, more than any sports betting operator in Illinois is likely to pay under the new system.
The impact of that is noticeable but not a deal-breaker. Pennsylvania is the biggest legal online casino market in the US in terms of population and gross revenue. In per capita terms, however, it trails Michigan and New Jersey, which have lower tax rates. Here are the year-to-date figures for those states:
- New Jersey (15% tax): $0.70 per day per resident
- Michigan (25% effective tax): $0.64 per day per resident
- Pennsylvania (35% effective tax): $0.54 per day per resident
From these figures, we can see that a higher tax rate does appear to chill the market, but not so much that it offsets the gains for the state. New Jersey’s share of the iGaming revenue equals about 10.5 cents per day per resident, while Pennsylvania gets nearly 19 cents—and without too much complaining from operators.
Bad Faith Might Be an Issue
And yet, although a high tax rate might not sink hopes for iGaming, a loss of good faith between operators and legislators might. Both parties have valid reasons to feel aggrieved.
Lawmakers likely feel that the industry got the better of them, negotiating a 15% rate in Illinois before turning around and accepting 51% in New York. From the operators’ perspective, however, the sudden change may be as problematic as the rate itself.
Companies make strategic decisions based on market factors, including the tax rate. They’ll typically invest less if there’s less money to be made.
Illinois waited until after operators made their investment to increase the taxes. It’s not unreasonable, from their perspective, to feel like they’ve experienced a bait-and-switch.
Companies don’t have an inalienable right to expect market conditions to remain the same in perpetuity. However, the Illinois market has only been open for four years. That’s a very short timescale over which to see one’s taxes double.
Even if Illinois can surmount its union and VGT issues, the sudden change in sports betting taxes will cast a shadow over future online casino negotiations. Lawmakers will want to feel sure that the industry isn’t lowballing them. On the other hand, operators will want some guarantee that they won’t have the screws turned on them as soon as they’ve committed themselves financially.
The best hope for Illinois gamblers is that everyone’s political memory will be short.
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