December 5, 2017

Sports Betting Should Be Legal, but It's Bad Tax Policy

Adam Millsap

Affiliated Scholar

On Monday, the U.S. Supreme Court heard a case involving sports betting in New Jersey that could pave the way for legal sports betting throughout the country. Many states are excited about the revenue sports betting could bring in, but they should temper their enthusiasm. While there don’t seem to be any compelling reasons for the federal government to prevent states from legalizing sports betting, legalization is also unlikely to be the revenue windfall states hope.

Currently, betting on sports (other than dog and horse racing) is permitted in some form or another in only four states: Delaware, Montana, Oregon and Nevada. But anyone who has participated in an office pool for March Madness knows that it’s much more widespread than that.

Estimates for the total value of underground sports betting range from $150 billion to as much as $400 billion, and one report estimates that expanded legal sports betting could generate around $12 billion per year in gross gaming revenue, which is the amount of total wagers less the amount paid out to winners.

Like state lotteries and casinos, states would look to tightly regulate and tax any legal sports betting, bringing in additional government revenue in the process. This is a big reason why some government officials favor legalization. But optimistic projections about gaming revenue rarely materialize. New York Governor Andrew Cuomo touted revenue potential when he signed a 2013 law authorizing seven new casinos in New York, but so far they have failed to meet projections.

Additionally, government revenue from taxes and fees on gambling is generally a small portion of any state’s budget. Even in New Jersey, which has a relatively large casino industry, gaming revenues only account for 4% to 7% of total state general revenue. Gaming revenue is also an unstable tax base, which increases the complexity of the budgeting process and makes it more likely that states will have to regularly patch unexpected holes in the state budget.

Another pushback against government revenue generated from gambling is that it functions as a regressive tax, meaning that low income people bear an outsized burden. This runs counter to one of the components of good tax policy, vertical equity, which is the idea that the tax burden should rise with a person’s ability to pay.

Of course, no one is forced to gamble, so perhaps vertical equity isn’t as important in this case. Still, there are more efficient and more equitable ways to raise revenue than special taxes on gambling, such as a broad sales tax that applies to all goods and services, and it seems reasonable for states to optimize the taxes already in place before implementing more regressive options.

Other officials, including some in New Jersey, hope that legal sports betting will boost their struggling casinos. The idea is that people who come to casinos to gamble on sports will also play slot machines or table games. But there is evidence that different types of gambling cannibalize each other rather than complement each other. If sports betting and casino games are substitutes rather than complements, legal sports betting may not provide much additional revenue for struggling casinos.

Even if legalizing sports betting doesn’t bring in a windfall for states or save struggling casinos, there are still good reasons for doing it. First, even though the financial and economic benefits are usually overblown, the financial positions of state governments and casinos don’t stand to become worse off due to legal sports betting.

There’s also evidence that sports betting provides a consumption benefit to people, meaning they enjoy the act of betting even if they don’t expect to win. Fining or throwing people in jail for doing something they enjoy that doesn’t directly harm anyone else seems like a poor use of scarce police resources. For these reasons, even though legalizing sports betting is bad tax policy, it’s still a good idea.