Is New York’s 51% Tax Rate Jeopardizing Long-Term Success?

A year into New York sports betting, gaming executives spoke to state lawmakers at a joint legislative hearing, about the detrimental effects that the state’s 51% tax on mobile sports betting will have on the market if the tax rate is not lowered.

2022 By The Numbers

The first year of sports betting in New York was wildly successful – the nine licensed operators produced a near $16.2 billion handle and $1.36 billion in gross gaming revenue for the state. But looking at the revenue report for the year, the first quarter of the year was the most successful. From the launch in January through the end of March, the state took over $4.8 billion in wagers, accounting for 29.8% of the year’s handle.

In the second quarter, the $3.7 billion handle accounted for 22.8% of the year’s handle while the third quarter produced the lowest handle of $2.9 billion or 18.1% of the total handle. There was an 11% increase from the third quarter to the fourth, with a packed fall sports schedule bringing in a $4.7 billion handle from October through December, totaling 29.2% of the annual handle. Why then, despite significantly more betting opportunities in the fourth quarter than any other quarter, was the first quarter still the most successful?

“We believe this is happening because operators are pulling back on promotional spend in this market,” Senior Vice President of Spectrum Gaming, David Isaacson said in a report. “They’re more focused on their bottom line relative to the promotional blitz we experienced in Q1. We expect that under the current tax structure, operators will continue to limit promotional spending. So, in year two it is possible that the New York market could actually decline in terms of overall wagering volume, putting the state’s tax revenue at risk.”

FanDuel, DraftKings Air Their Concerns

DraftKings CEO Jason Robins and FanDuel President Christian Genetski testified at the joint legislative hearing.

“As legal operators struggle to make the numbers work, they will not only reduce marketing and generosity, but they may also be forced to adjust pricing in New York to ensure a higher hold percentage,” Genetski said in a written testimony. “Operators with lower share will likely elect to withdraw from New York altogether. For consumers, that means fewer options, less competition, and a much worse value proposition, all of which make the illegal offshore options more attractive.”

Robins echoed Genetski’s concerns: “With a 51% tax rate, regulated operators are at a massive disadvantage when compared to illegal offshore operators, who pay no taxes, offer no responsible gaming measures, and take no steps to ensure they are not offering bets to minors or excluded persons,” his written testimony said. “These offshore sportsbooks are able to afford to offer lavish promotions to entice customers to open accounts with them.”

Robins also commented on the possibility of having to scale back investments in their New York sports team partnerships.

Solution?

Last week, Sen. Joseph Addabbo, who chairs the Senate, Racing, Gaming, and Wagering Commission, authored a bill – SB 1962 – that would effectively lower the tax rate in the state.

If passed, the bill would expand the number of operators in the state from nine to 14 by January 1, 2024. At that point the tax rate would drop from 51% to 35%. Then on January 1, 2025, the number of operators licensed in the state would increase to 16. At that point, the tax rate would increase to 25%. It would also allow sportsbooks to deduct promotional bets from their gross gaming revenue that they report to the state for tax purposes.

That bill is being reviewed, however legislators face the daunting question of whether dropping the tax rate would hurt the state tax revenue from sports betting, which funds education in the state.

“We cannot go back to our constituency and say we did something that reduces revenue as well as education funds,” Addabbo said in the meeting.

There is a lot to consider here as New York settles into its second year as a host of mobile sports wagering. SB 1962 will be something to monitor; as are the decisions of operators as they try to remain competitive in a ferocious market.