The Illinois legislature recently passed a new bill unexpectedly that raises the tax on sports betting, shocking the industry. This tax increase aims to fill a huge budget deficit, but it could impose a heavy burden on large sports betting companies and prompt them to consider new business models to alleviate the pressure.
Significant Increase in Illinois Sports Betting Tax by 2025
As the 2025 state budget vote approaches, a faction within the Illinois Democratic Party proposed the tax increase at the last minute. The budget, totaling $55.2 billion, includes increases in tobacco and corporate taxes, with a focus on new taxes on the sports betting industry, expected to significantly impact the largest operators in the U.S.
This proposal continues last year's policy in Illinois of implementing a progressive tax on sports betting revenue, causing great pain to industry giants. In May this year, Governor JB Pritzker, despite strong opposition from the gambling industry, explicitly stated he would sign this bill. The ensuing question is whether operators will pass the additional tax burden onto players.
Industry Reaction Under Higher Tax Burden
Last year, Illinois already raised the minimum tax rate on adjusted total sports betting revenue from 15% to 20%, and set a progressive tax rate of up to 40% for operators with annual revenues exceeding $200 million. DraftKings tried to pass on the cost by charging players an additional fee, but quickly withdrew the plan after FanDuel denied following suit.
The new bill stipulates that during the fiscal year, an additional $0.25 tax must be paid on the first $20 million of each betting amount, and the excess part is increased to $0.50. This measure is expected to have limited impact on small and medium-sized operators, but giants like DraftKings and FanDuel will be hit hard.
Approaching New York State's Tax Levels
JMP Securities estimates that based on the past year, FanDuel will face about $86 million in new taxes, and DraftKings about $79 million. Together, they control over 75% of the market share in Illinois.
This brings Illinois's tax burden close to that of New York State, which imposes a high tax rate of 51% on total sports betting revenue, the highest in the U.S. Notably, DraftKings is the sole operator in New Hampshire, where the tax rate is also as high as 51%.
Exploring Prediction Markets to Avoid Taxes
Although the tax has a huge impact on giants, the other eight smaller operators are limitedly affected, with only about $20 million in total. Truist Securities analyst Barry Jonas suggests that top operators might face three options: setting a minimum bet amount, reconsidering charging customers additional fees, or entering the tax-free prediction markets.
Through platforms like Kalshi's prediction market, operators can offer derivatives related to sports events, temporarily avoiding traditional tax burdens. Both DraftKings and FanDuel's parent company Flutter have mentioned their focus and layout in this field during financial conference calls.
Strong Opposition and Industry Concerns
The new tax law has sparked strong criticism on social media. Voices supporting legal gambling worry that this move will stifle innovation and increase the risk of customers moving to illegal offshore platforms. FanDuel even invited former NFL star Rob Gronkowski to call on state legislators to withdraw the proposal.
This is also the first time since the 2018 PASPA ruling was repealed that the U.S. has implemented a fixed charge per bet on sports betting operators, seen by the industry as a severe blow to gambling innovation and technical services.
Political Maneuvering and Transparency Controversy
Although the state government celebrates achieving a balanced budget for the seventh time, Republican opponents criticize the tax increase process for lacking transparency. Republican Representative John Cabello bluntly stated that this "hidden" proposal deprives the public of the right to know.
Operators' Silence and Industry Alliance's Statement
DraftKings and FanDuel refused to comment on the new tax, instead suggesting focusing on the statement from the sports betting alliance representing multiple operators, including DraftKings, FanDuel, BetMGM, and Fanatics Sportsbook.
The U.S. Small Business Administration warns that the tax system is not only discriminatory but also punitive, potentially undermining the state's already invested over $1 billion in the legal gambling industry. The agency points out that the tax burden will ultimately be passed on to customers, especially small bettors, possibly forcing them to turn to unregulated, unprotected illegal gambling markets, harming consumer rights and state fiscal revenue.
