Study Estimates $5 Billion in Lost Tax Revenue for States Without Online Casinos

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Currently, regulated US online casinos serve six states, leaving 44 without such an option. Together, those iGaming products generated just shy of $1 billion in direct tax revenue in 2021.

That’s a healthy pile of change for public coffers. However, it also forces us to ask how much money the US is leaving on the table by not expanding online gambling further.

Online casino supplier Light and Wonder (formerly Scientific Games) has attempted to answer precisely that question. To do so, it enlisted the aid of Vixio Gambling Compliance to produce a study.

Their answer, in a nutshell, is that those current markets produce about 21.4% of the online casino tax revenue the US would see with full legalization. “Full” here does not even mean all fifty states, but just those 42 with either retail casinos or online sports betting. The implicit assumption is presumably that those without either of those options would be either too small and remote (e.g., Hawaii) or too conservative (e.g., Utah) to make any sort of online gambling plausible in the foreseeable future.

The six states in question are New Jersey, Pennsylvania, Michigan, Connecticut, West Virginia and Delaware. Vixio omitted Nevada because it has only online poker and no online casinos. Its current contribution is small in any case, with a low tax rate and just a single poker operator.

Vixio estimates those six will produce $1.36B in taxes in 2022. That seems reasonable, given continued growth and over $600 million in confirmed tax revenue through the end of June. The study estimates the figure would be $6.35B if the 42 states under consideration had already had online casinos coming into the year.

How Did Vixio Calculate Its Tax Revenue Estimates?

Revenue forecasts can be pretty simple or highly complex. Online casinos’ performance depends on many factors, some more predictable than others. Many of these involve government policy and corporate strategy and only become apparent after an online gambling bill passes.

Vixio’s researchers elected to skip a lot of that guesswork and go for a straightforward, “back of the envelope” style calculation. As a starting point, they took the average of the gross gaming revenue per adult resident of four of the current online casino states:

  • West Virginia: $56
  • Pennsylvania: $119
  • Michigan: $168
  • New Jersey: $215

They treated each of those states equivalently despite their different populations, arriving at an average of $139.5 per adult. The decision to omit Connecticut was because it launched so recently. The researchers also omitted Delaware because it is so tiny, different in its regulatory structure, and poorly performing.

They simply multiplied that average by each new state’s adult population to get a guess at a hypothetical online GGR. From there, they assumed all these new states would have a middle-of-the-road 20% tax rate and applied that to the GGR estimate.

(On both fronts, Vixio deems Nevada enough of an outlier to use a different approach. However, it’s also small enough not to have a huge impact on the total number.)

Of course, this leaves out many variables. However, such rough calculations can sometimes turn out to be surprisingly effective. Individually, some states might perform much better than Vixio expects, and others might perform much worse. Statistically speaking, the hope is that those errors would tend to cancel each other out.

Some Analysts Consider $6.35 Billion an Underestimate

Naturally, a company like Light and Wonder has a vested interest in promoting online gambling legalization. (To be fair, so do we at Bonus). One might expect that Vixio, acting on their behalf, would try to make its projections as optimistic as possible.

However, the immediate reaction by some industry analysts was to call the report an underestimate. Eric Ramsey, the Market Analyst Lead for Bonus’s parent company Catena Media is among these. His primary objection is to the assumption of a 20% average tax rate.

He says:

There are some well-reasoned assumptions baked into this forecast, but it broadly reflects a light-handed, operator-friendly approach to taxation that we think is unlikely to prevail in the current climate. We generally expect states to seek a larger share of the proceeds than the 20% ceiling the report suggests, with tax rates likely shading closer to Pennsylvania’s than Nevada’s in a number of key markets.

Pennsylvania’s tax structure is unconventional. It charges a mere 17% on table games but an eye-watering 54% on gross slots revenue. Despite fears that this would chill the market, it isn’t very far behind Michigan and New Jersey in per capita gross revenue and beats them for per capita tax revenue.

The high tax on slots hasn’t stopped operators from promoting them, with slots accounting for over 70% of gross revenue most months. That leads to an effective tax rate for the state of around 44%.

Despite early criticism, the success of PA casinos online suggests that operators will tolerate extremely high tax rates if the potential market is large enough. Ramsey and others believe that key states will take note of this in the future when deciding how to approach online casino legislation.

Full Legalization is Still a Long Way Off

That said, the report is hugely over-optimistic on another front. Six billion-plus in tax revenue sounds great, but don’t count on seeing 42 states with legal online casinos any time soon.

New Jersey and Delaware have had online casinos for nearly a decade. When the repeal of the Professional and Amateur Sports Protection Act (PASPA) made sports betting possible, Pennsylvania, Michigan and West Virginia all legalized both sports betting and online gambling in fairly rapid succession.

That led to hopes of a wave of legalization spreading across the nation. While that happened for sports betting, online casinos require more political capital. Connecticut was the sole success story of 2021. No new states have passed such bills this year.

Illinois was considered a favorite to be next but has faced stiffer headwinds than many expected. It legalized online sports betting in 2019 and launched it in 2020. That same year, lawmakers introduced the Internet Gaming Act, which stalled quite quickly. The effort will continue in 2023, but Illinois’s story illustrates the snail’s pace of progress we’ve come to expect for online casinos.

Realistically, only a handful of new states are likely to join the current six over the next five years. The US would require a massive culture shift in the coming decade to get anywhere close to the 42 states Vixio postulates.

However, while it’s possible to disagree with one forecast or another, there’s widespread agreement that online casinos are already a game changer. Even now, online casino revenue beats sports betting by a large margin, and the latter is present in five times as many states.

About the Author

Alex Weldon

Alex Weldon is the Casino News Managing Editor for Bonus. He’s a former semiprofessional poker player and has been writing about online gambling professionally since 2014. Prior to his current position, he was Managing Editor at Online Poker Report and, before that, the GameIntel Poker Update, a subscription newsletter for industry executives. Alex provides insightful content on the regulated online casino and poker industries, with an emphasis on legislation, regulation, responsible gambling and business strategy. His writing about poker has earned him multiple nominations for the American Poker Awards over the years.

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