Today is the dawning of a new era in the world of sports, as well as the national tax landscape. As of June 5, Delaware has become the first state to allow gambling on sports since the Supreme Court overturned the federal law that restricted such activity.
When I first explored the topic, I speculated that this could be a huge tax boon for states around the country. But one expert I recently spoke to – David G. Schwartz, the Director the Center for Gaming Research at the University of Nevada Las Vegas (UNLV) – said talks of a potential tax windfall could be overblown. Schwartz pointed to the gambling industry in his home state of Nevada to illustrate why.
“Sports betting has traditionally been a small part of Nevada gaming. The reason why they have it at all is because it used to happen in these turf clubs outside of casinos, and they didn’t want a big casino player to leave the casino to go gamble elsewhere, so it’s more of an amenity than anything else,” he explained. “It’s a lot like poker in that regard: they don’t make a ton of money. One bank of machines can produce 10 times the revenue.”
Schwartz explains that games that have more balanced odds, or are more unbalanced in the house’s favor, are usually the big revenue makers. For a multitude of reasons, that isn’t the case in sports. For example, local fandom where the bets are being taken is a major factor.
“If you’re a Vegas casino taking Stanley Cup Final bets, 90 percent are probably going to be on the hometown Golden Knights, and that’s a problem because it’s only 10% on the other side. That makes it very easy to lose money,” he explained. “Even if the book is evenly balanced, you should make about only 5 percent. But often the book is not balanced. “
Still, that hasn’t stopped casinos from taking gambling off premises, and Schwartz concedes that point. But, he says, of Nevada’s 11 billion gaming industry, only 250 million comes from sports betting, just two percent of the total industry, and gaming is only a third of casinos’ business (the other two thirds coming from hotels, conventions, etc.). As a result, states looking to rake in some new public financing shouldn’t start counting their money just yet.
Complications In Cross-State Bets
There are also the complications. With these books going online, it could create a problem of players trying to make cross-state bets. Even if both states have a law on the books that makes the activity legal, might we see a similar circumstance to what we’ve seen with Amazon and its struggles with its affiliate sellers not being able to scale for different states sales tax rates? I asked Schwartz about those possibilities, and he believes state books will be prepared for such issues.
“Lawmakers faced a similar problem with horse race simulcasting,” Schwartz said. Noting that states would likely use IP address tracking to ensure a bettor’s location is accurate. “People could come to my race track after racing season. And bet on a feed from California and the two tracks would share the revenue. That was made illegal, and I could see a similar solution to that, for both the legal and tax reasons.”
So will this be a transformative time, for the sports, gambling, and tax worlds alike? Schwartz says it’s possible, but not to expect a major change right away.
“I’m not sure it’ll have a huge impact in state revenues out of the gate. Because if you look at other forms of gambling, it usually takes some time,” Schwartz concluded. “Now, does it have the potential to explode like we saw with daily fantasy sports in 2015? Sure. A lot of it depends on the popularity of the sport and the local teams, but I think it definitely could catch on.”
Time will tell. In the meantime, if you’re headed to Delaware. You might want to see if you can get your hands on Biff Tannen’s Sports Almanac.