As online sports betting continues to expand around the United States, states have had varying opinions on how to best tax the industry.
Sports betting tax rates for operators across the country range from as low as 6.75%, all the way up to 51%.
With more states on the horizon to legalize, tax legislation is one of the big issues that is holding up launches.
Michigan remains among the lowest in the nation when it comes to its sports betting tax rate. But, just what is the right rate for this quickly expanding industry?
Where Michigan sports betting tax rate sits
Michigan has an 8.4% tax rate for the sports betting industry. That applies to both mobile and retail betting.
Only Iowa and Nevada have a lower rate for both at 6.75%. Arizona has 8% for retail sports betting and 10% for online wagering.
Indiana is the only other state that has a tax rate below 10% (9.5%).
The peak comes from New York, which has implemented an eye-opening 51% tax rate. Pennsylvania isn’t far behind with 36%, while Tennessee is at 20%.
High rates may not be sustainable
While New York is happy to be taking in big monthly tax revenue pots from its new online sports betting market, the high tax rate could be preventing further growth of the gambling industry.
In the 2021 U.S. Sports Betting Regulatory Survey, high state tax rates and license fees was chosen as the issue most likely to impede growth. That came in at 21.1% of the surveys, with slower than expected rollout of iGaming coming in second at 14.1%.
In Michigan, operators are currently able to use promotion credits to deduct from their taxable revenue. That’s not the same case around the county. Those states not as generous with their promotion credits are a reason operators question whether they can succeed long-term in those states.
“If you don’t have an exclusion for promotional credits, from the taxpayers perspective, you are raising the effective tax on operators,” Andrew Winchell, Director of Governmental Affairs at FanDuel, said. “Now in states where the tax rate is small, it’s more workable. In states like New York with 51%, it really does create questions about the long-term viability of that.”
Winchell compared not having the ability to use promotional credits to running a pizza shop and having a promotion where you give away a pizza at half price, but you are still taxed for the pizza at full price. That essentially taxes the current tax rate the state applies, and makes it even larger in the grand scheme.
New York is projected to be the top U.S. Sports betting market in the years to come, and some operators fear their tax laws could be modeled by other major markets on the brink of legalization.
iGaming alleviates sports betting stress
Part of the reason Michigan doesn’t need to stress about its low tax rate for sports betting is its success with online casinos and online poker. The mitten is just one of six states with legalized online casinos.
When it comes to online casinos and poker, Michigan has a 20% tax for gross revenue less than $4 million. The rate grows to 28% for gross revenue greater than $12 million.
We’ve taken a look at just how much more tax revenue is generated from iGaming compared to sports betting. In Michigan, it’s 26x more.
“No government is going to make a lot of money from sports betting. It’s the iGaming, where the tax revenue will come from,” said Michigan Gaming Control Board Deputy Director David Murley.
Michigan’s iGaming tax revenue since the January 2021 launch sits at over $427 million. It has been a steady upward growth for Michigan, comparing well to its competitors in Pennsylvania and New Jersey.
Since Michigan launched, New Jersey has brought in $358 million in iGaming tax revenue, while Pennsylvania sits at $618 million.