New Jersey Governor Phil Murphy has proposed that a partial solution to the state’s budget problems would be to raise the online gambling tax rate to 25%, starting in July. That would be a 10 percentage point bump for online casinos, currently taxed at 15% of gross gaming revenue, and an even larger hike for the sportsbooks, which pay 13%.
Murphy’s proposal appeared in his Summary of Budget Recommendations for FY2026 and isn’t law yet. However, there is support for the idea in the legislature, including from Sen. John McKeon, who introduced a bill last year to raise the rates even more.
The response from the industry has been mixed. The iGaming Development and Economic Association, a trade organization, came down against the suggestion, saying that the timing is bad for an industry facing competition from unregulated sweepstakes casinos. However, in a Caesars earnings call, CEO Tom Reeg downplayed the idea that the proposal threatens his business, saying:
I think it’s a headline cycle we’re in. It’s a function of where state budgets are versus where they’ve been in the last couple of years.
Aside from the widespread budgetary crises, one precipitating event for this trend appears to have been the launch of New York online gambling, where sportsbook operators agreed to a 51% tax rate to push the effort to success. Although the size and importance of that market influenced that decision, that eye-popping rate caused other state lawmakers to re-evaluate the decision.
Illinois, which originally passed its sports betting laws with a 15% tax rate, switched to a sliding scale last year that applies a rate of up to 40% to the largest operators, like DraftKings. Other states have considered doing the same.
Do online casino tax rates affect players?
When facing the prospect of higher taxes, a common refrain from business leaders is that they’ll have no choice but to pass the cost on to consumers.
DraftKings actually attempted to do that quite literally and overtly after Illinois changed its tax rate, proposing a direct surcharge on each bet. However, it soon walked that idea back in the face of backlash from customers, media criticism, and competitors’ decisions not to follow suit.
Online casinos have comparatively few options to charge more for their products. Most games have odds set by the developers. Although some slots have variable RTPs and can be made “tighter,” the highly competitive nature of the online casino space and overall lack of differentiation between products makes that difficult. If one site was offering exactly the same slots as another, but with worse odds, it would have a hard time attracting players.
That said, tax rates do impact player experience because they affect companies’ marketing decisions, which include promotional spending. Strategically, it makes sense to invest more in regions where profit margins are higher. That spending increases revenue but also lowers the margin.
In the long run, that means is that companies tend to balance out their margins using promotional spending. Higher taxes mean a worse margin to begin with and less incentive to spend to attract more players. Lower taxes probably result in more ads, but also more bonuses for players.
Compounding this is the fact that, compared to other jurisdictions with higher tax rates, New Jersey’s online gambling policies are conservative when it comes to allowing operators to deduct promotional bonuses from their taxable revenue.
Pennsylvania iGaming: a case study in high tax rates
One such jurisdiction with high taxes but liberal promotional deductions is neighboring Pennsylvania. Its online gambling revenue figures suggest that a higher tax rate in New Jersey wouldn’t be earth-shaking, but it would have some impact.
Pennsylvania is unusual in that it taxes slots at a much higher rate than other casino games: 54% vs. just 17%. One of those rates is higher than New Jersey’s proposed 25% rate and the other is lower, but they combine to create an aggregate tax rate that has averaged around 35% since 2021. Although slots make up the bulk of online casino play, they also receive the greater share of promotional deductions, which is why the aggregate tax rate falls squarely in the middle.
So, what is the impact of Pennsylvania’s tax rate on online casino use? With $2.71 billion in gross revenue in 2024, it’s the frontrunner for market size, but it also has the highest population, at 13 million.
New Jersey, with only 9.5 million residents, wasn’t far behind in revenue, pulling in $2.39 billion. On a per capita basis, New Jersey online casinos made a little over $250 per person in 2024, while Pennsylvania’s made less than $210.
Pennsylvania is the clear winner in total tax revenue, at around $73.40 per resident last year, almost twice New Jersey’s $37.70. So, it’s hard to argue that higher taxes wouldn’t benefit the state’s bottom line. However, it does suggest that operators are doing less to court players in the Keystone State because they keep less of each dollar won.
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