Missouri sports betting ballot measure highlights national debate about tax rates

The ads promoting a November ballot measure to legalize sports betting in Missouri tout the potential for millions of new tax dollars devoted to schools. If voters approve the measure, it's a good bet they will see even more ads offering special promotions for bettors.

Many of those promotional costs — in which sportsbooks provide cash-like credits for customers to place bets — will be exempt from state taxes, effectively limiting the new revenue for education.

The Missouri ballot measure highlights an emerging debate among policymakers over how to tax the rapidly growing industry, which has spread from one state — Nevada — to 38 states and Washington, D.C., since the U.S. Supreme Court opened the door to legalized sports wagering in 2018.

“It’s a fledging industry,” said Brent Evans, an assistant finance professor at Georgia College & State University who has taught classes on gambling. "So nobody really knows what is a reasonable tax.”

Since authorizing sports betting, Illinois, Ohio, Tennessee and Washington, D.C., all have already raised or restructured their tax rates. And Colorado and Virginia have pared back the tax deductions they originally allowed.

Tax rates range from a low of 6.75% in states such Iowa to 51% in states such as New York. That tax gap is even wider, because Iowa allows promotional bets to be deducted from taxable revenue while New York does not.

About half the states allow tax deductions for promotional costs. It's a common way of enticing people to start — or continue — making bets. But in the short-term, it also can decrease the tax revenue available for governments and schools.

Missouri's proposed 10% tax rate on sports betting revenue is below the national average of 19% that sportsbooks paid to states last year. Because of deductions for “free play,” there could be some months in which sportsbooks owe nothing to the state. Missouri's proposed constitutional amendment acknowledges that possibility, stating that negative balances can be carried over from one month to the next until revenue rises enough to owe taxes.

Unlike in some states, Missouri's amendment caps the amount of promotional credits that can be deducted from taxable revenue, at 25% of all wagers. But it appears unlikely that cap would come into play. An analysis conducted by consultant Eilers & Krejcik Gaming for amendment supporters projects promotional bets will comprise around 8% of total wagers in Missouri's first year of sports betting, declining after that.

The Missouri proposal “is very much in line with what has worked and been effective in other states,” said Jack Cardetti, a spokesman for Winning for Missouri Education, the group backing the measure.

After voters narrowly approved it, Colorado launched sports betting in 2020 with a 10% tax rate and full deductions for promotional bets. It logged $2.7 billion of total bets during its first full fiscal year, yielding $8.1 million in taxes, just slightly below legislative projections. But Colorado changed its law starting in 2023 to cap promotional tax deductions at 2.5% of total bets, gradually declining to 1 .75% by July 2026.

Colorado's sports betting tax revenue has since risen to over $30 million in its most recent fiscal year. That growth led lawmakers to place a proposal on the November ballot seeking permission for the state to keep more than the original $29 million limit on sports betting tax revenue.

Capping tax deductions for promotional bets is a good step, said Richard Auxier, a principal policy associate at the nonprofit Tax Policy Center. But he questions why some states exempt them from taxes in the first place.

“We don’t give out free samples of cannabis when a state legalizes cannabis,” Auxier said. “Is this something you want to be subsidizing through your state tax policy — to encourage people to gamble?”

The Missouri amendment was placed on the November ballot by initiative petition after legislation to legalize sports betting repeatedly stalled in the state Senate. The $43 million campaign — a record for a Missouri ballot measure — has been been funded entirely by DraftKings and FanDuel, which dominate the nationwide sports betting marketplace. If the measure passes, the companies could apply for two statewide licenses to conduct online sports betting. The amendment authorizes additional sports betting licenses for Missouri casinos and professional sports teams.

The $14 million opposition campaign has been funded entirely by Caesars Entertainment, which operates three of Missouri's 13 casinos. Although Caesars generally supports sports betting, it opposes "the way this measure is written,” said Brooke Foster, a spokesperson for the opposition group Missourians Against the Deceptive Online Gambling Amendment.

In some other states, sports betting is run through casinos. Though research is limited, a study of seven states released last year found that casino gambling revenue declined as online sports betting increased.

“There will definitely be a shift from placing bets in a physical space with a Missouri incorporated casino versus hopping on an app in your living room,” Foster said.

The effect of different tax rates can be seen in Illinois and New Jersey, which spearheaded the court challenge leading to widespread legal sports betting. People in each state placed between $11.5 billion and $12 billion of sports bets last year, resulting in $1 billion of revenue for sportsbooks after winnings were paid to customers, according to figures from the American Gaming Association.

New Jersey took in $129 million in tax revenue, based on a 14.25% tax rate for online sports bets and a 9.75% tax rate with some promotional deductions for sports bets at casinos and racetracks. Illinois took in $162 million of tax revenue — one-quarter more than New Jersey — with a 15% tax rate in most places and no promotional deductions.

But Illinois officials weren't satisfied with those results. Beginning in July, Illinois imposed a progressive tax scale, starting with a 20% tax on sports betting revenue of less than $30 million and rising to a 40% rate on revenue exceeding $200 million.

Some sportsbooks representatives had raised the possibility of leaving Illinois if tax rates rose. But that hasn't happened.

There's also not much evidence that sportsbooks worsen the odds for wagers in states where they pay higher taxes, said Joe Weinert, executive vice president of Spectrum Gaming Group, a consulting firm.

“The sports betting operators compete vigorously for bettors," he said, "and how you compete vigorously is to offer attractive odds and good promotions.”