By Skip Charles in Vegas

States across the U.S. are increasingly eyeing higher taxes on the booming $16 billion online sports gambling industry, which includes major players like DraftKings and FanDuel.

In Illinois, a recent change in tax policy will impose a progressive tax rate on online sports betting companies, ranging from 20 percent to 40 percent, up from a flat 15 percent.

This change reflects a broader trend as states such as New Jersey and Massachusetts consider similar tax hikes. New Jersey is contemplating doubling its rate to 30 percent, while Massachusetts recently failed to increase its rate from 20 percent to 51 percent.

DraftKings and FanDuel have secured partnerships with Major League Baseball and the National Football League, and even ESPN has entered the fray with its ESPN Bet, partnered with the National Hockey League. Traditional casino operators like MGM Resorts and Penn Entertainment have also ventured into online sports gambling.

According to the American Gaming Association, the industry’s rapid growth is evident, with U.S. sports wagering revenue jumping 22 percent to $3.33 billion in the first quarter of 2024.

This growth has piqued the interest of state governments looking to bolster their revenues. Illinois, for instance, earned over $1.5 billion in tax revenue from online sports betting and casinos last year, surpassing the $2.32 billion revenue from the state lottery.

Illinois’ new tax policy places its top rate for online sports gambling operations in the same league as New York’s 51 percent rate. This move could prompt companies like DraftKings and FanDuel to reduce local marketing and promotional activities, potentially revisiting partnership terms, according to MoffettNathanson’s analysis.

“The biggest question…would be which state is next and how realistic are higher taxes” across other states with legalized gambling, the report said.

DraftKings CEO Jason D. Robins expressed concerns that higher taxes could hamper the company’s competitiveness and drive customers to the illegal gambling market. “My expectation is that we’ll be able to convince them that it’s not a good policy decision,” he said.

The push for higher taxes comes after a 2018 U.S. Supreme Court decision struck down a federal ban on sports gambling, allowing states to legalize and regulate it. Currently, 30 states and Washington D.C. permit online sportsbooks.

The industry’s growth has also caught the attention of investors. DraftKings’ stock price more than tripled in 2023, with revenue surging over 60 percent. Despite an expected slight loss in 2024, the company is projected to post an annual profit in 2025. Other online sports gambling operations have also boosted revenues for broader gambling companies, including MGM Resorts with BetMGM and Penn Entertainment, which partners with Disney for ESPN Bet.

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