Illinois has introduced a new tax structure for sports betting operators, significantly increasing the tax rates. The new rates will range from 20% to 40%, depending on the volume of bets placed. This change is part of the state’s fiscal 2025 budget, which will take effect on July 1. The new tax plan aims to generate more revenue for the state, but it has also sparked concerns among major sports betting companies.
Graduated Tax Rates Explained
The new tax structure is graduated, meaning that the tax rate increases with the volume of bets. For companies with less than $30 million in betting volume, the tax rate will be 20%, up from the previous flat rate of 15%. For companies with revenue exceeding $200 million, the tax rate will be as high as 40%. This makes Illinois’ highest tax rate the second-highest in the nation, trailing only New York’s 51%.
Impact on Major Sportsbooks
The new tax rates have already had a significant impact on major sportsbooks. Shares of DraftKings fell by up to 14% during trading on Tuesday, while Flutter, the owner of FanDuel, saw an 8% drop in its shares. These companies dominate the Illinois market and are expected to pay the highest rates due to their large market share. The new tax structure will apply separately to retail and mobile betting, but both will follow the same graduated rates.
Stock Market Reactions
Other operators also saw their shares affected. Penn Entertainment, which operates ESPN Bet, saw its shares drop by 6%. On the other hand, smaller operators like Rush Street Interactive saw a slight increase in their share prices, as they are expected to benefit from the lower tax rates under the new structure.
Analyst Insights and Long-term Implications
Analysts have weighed in on the new tax structure, noting that it aligns with a previously proposed flat rate but benefits smaller operators more. Bernie McTernan, an equity analyst at Needham & Co., pointed out that the progressive tax proposal could help smaller companies like Rush Street Interactive and Penn Entertainment. However, the higher tax rates are expected to be a significant concern for investors in the long term.
Industry Reactions and Strategic Adjustments
The sports betting industry had anticipated higher tax rates but had hoped that this would lead to more approvals for iGaming, which is more profitable than sports betting. Taxes and customer acquisition costs are major factors that Wall Street focuses on when evaluating the financial health of sports betting businesses. In response to the higher taxes, DraftKings CEO Jason Robins mentioned potential strategies to mitigate the impact, such as reducing marketing spending and customer financial promotions.
Opposition to the Tax Hike
There has been notable opposition to the tax hike from within the industry. Major operators argue that the increased tax rates could stifle growth and innovation in the sports betting market. They also contend that the higher taxes could be passed on to consumers in the form of higher fees or reduced promotions, making it less attractive for bettors to participate.
Comparison with Other States
Illinois’ new tax rates place it among the states with the highest taxes on sports betting. New York currently holds the top spot with a 51% tax rate. The comparison highlights the competitive landscape of sports betting in the United States, where states are vying for a share of the lucrative market while balancing the need for revenue generation and industry growth.
Future Outlook
The new tax structure in Illinois represents a significant shift in the sports betting landscape. While it aims to generate more revenue for the state, it also poses challenges for major operators. The long-term impact of the tax hike will depend on how companies adapt their strategies and whether the state sees the expected increase in revenue. As the industry continues to evolve, stakeholders will be closely watching the effects of Illinois’ new tax rates on the market.
In conclusion, Illinois’ decision to raise sports betting tax rates to between 20% and 40% based on volume marks a major development in the state’s approach to regulating and profiting from sports betting. The move has already had significant repercussions for major operators and the stock market, and it will likely continue to shape the industry’s future in the state.
