With Legal Sports Gambling About To Surge, Are State Tax Revenue Jackpots Ahead?

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by: Legg Mason

Summary

The U.S. Supreme Court cleared the way for states to benefit from legalized sports gambling last month in favor of NJ's challenge to the federal Professional Amateur Sports Protection Act.

Rob Amodeo, Head of Municipals at Legg Mason affiliate Western Asset, notes that legalizing sports betting allows states to capture a new source of tax revenue.

Sports betting will provide a new source of revenues, but it will not - cannot - single-handedly drive the fiscal fortunes of any state.

By Rob Amodeo, Head of Municipals at Western Asset, a Legg Mason affiliate.

The U.S. Supreme Court effectively cleared the way for states to benefit from legalized sports gambling when it ruled in May in favor of New Jersey's challenge to the federal Professional Amateur Sports Protection Act of 1992.

The ruling is expected to lead to a legal market that will cut into established, but unlawful, sports wagering estimated by the American Gaming Association at $150 billion annually. Legalizing sports betting will allow states to capture a new source of tax revenue. These additional revenues will be welcomed by state officials but are unlikely to significantly alter their fiscal conditions.

Estimating the range and size of illegal betting on sporting events, as well as how many players will move their bets to a legal market, is an imprecise science. The American Sports Betting Association indicates that legalized national sports wagering could add $26 billion to the U.S. gross domestic product and create new 152,000 jobs. That's hardly penny slot money.

Many states want to get a piece of the action. Currently, only Nevada and Delaware offer legal, regulated sports betting. Sport books are expected to enhance spectator interest in professional sports. Fantasy sports have boomed as well. This may help the gaming industry attract new customers. Sports betting outlets can provide economic benefits beyond direct tax revenues.

New Jersey is attempting to exploit a first-mover advantage. Former Governor Chris Christie signed a law in 2011 allowing sports betting. In anticipation of the Supreme Court ruling, the state's casinos and racinos have been installing infrastructure to handle sports gambling's complexities.

Whereas total gambling revenues in New Jersey over the past several years have been flat to declining, online gaming has been on the rise. This hints at the possibility that sports betting will enjoy similar popularity. Yet New Jersey's competitive edge may prove short-lived: a handful of states are close to entering the market, and at least a dozen more are actively discussing sports gambling legislation.

Gambling revenues play a minor role in typical state budgets, ranging around two percent of own-source general revenues. A Pew Foundation study showed that, excluding lotteries, in 2016 gaming contributed $8.85 billion to state and local taxes. Legalized sports gambling is projected to increase state revenues by approximately $5 billion, spread across the country. This is a tiny fraction of the $2 trillion spent by states in fiscal year 2017.

In Nevada, sports betting is already operating legally and without competition. Taxable sports winnings in 2017 amounted to $250 million, out of total statewide winnings of $11.5 billion, according to a report produced by the UNLV Center for Gaming Research. These numbers are subject to substantial change in any new legal framework for gambling. However, the numbers indicate that initial tax collections from sports betting will be small relative to state budgets.

State revenue growth from gambling has been volatile and usually slows in the long run, or even reverses and declines. Looking ahead, tax revenues collected by a state from sports gambling will depend upon many factors.

These include the definition of transaction domicile (offshore versus onshore, physical location versus online), tax rates and structure (existing income tax versus new tax levied on winnings), and the types of events open to betting (game outcome versus "first pitch is a strike" or "points scored in specified five-minute intervals"). The size of the market and the growth rate will also determine revenues.

Sport gambling legalization is appealing to officials who wish to enhance revenue without raising traditional sources, including personal, sales or property taxes. Critics will always point out the potential social costs, such as increases in crime, gambling debts and personal bankruptcies. Some, including the major college and professional sports leagues, argue that widespread sports wagering presents risks to the integrity of the games themselves.

Sports betting will provide a new source of revenues, but it will not - cannot - single-handedly drive the fiscal fortunes of any state.

Robert Amodeo is Head of Municipals at Western Asset, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.

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