Jersey’s Jumpin’ But PA Earnin’

Like its experience with iGaming, New Jersey quickly took advantage of sports betting once the Supreme Court cancelled the Professional and Amateur Sports Protection Act (PASPA) as a result of a lawsuit brought by the state. But who’s the real winner when it comes to revenue garnered for the state?

Jersey’s Jumpin’ But PA Earnin’

New Jersey is by far the new king of sports betting —New York Post, January 28, 2021

New Jersey Tops Nevada as King of Sports Betting in 2020—Action Network, January 29, 2021

New Jersey, New Record: NJ Sportsbooks Handle $668M In August, Destroy Previous Nationwide Record—Sports Handle, September 14, 2020

There you have it: New Jersey rather quickly has become top dog in sports betting.

Or has it?

I am betting that C. Daniel Hassell would disagree. He is Secretary of Revenue for the Commonwealth of Pennsylvania, charged with collecting and counting fiscal receipts. And his fiscal receipts from sports betting are trouncing those collected by Elizabeth Maher Muoio, State Treasurer for New Jersey.

For the last six months of 2020—when sports resumed normal play after the pandemic stoppage—New Jersey generated 74 percent more sports betting handle ($4.5 billion vs. $2.6 billion) and 44 percent more sports betting gross revenue ($289.6 million vs. $201.2 million) than Pennsylvania, but the Keystone State collected 40 percent more tax on that revenue ($50.7 million vs. $36.1 million), including the 2 percent local share assessment.

Becoming the king of sports betting is all about perspective.

Sports betting operators—who are legion and who are adept at winning over legislators—have succeeded in promoting and promising big numbers. Top-line numbers, that is. And they have delivered. From a performance standpoint, sports betting is an unqualified success. Those operators would tell you that Pennsylvania and other higher-tax and/or fewer-choices states could generate even bigger top-line numbers. Like New Jersey.

But the question begs: Has New Jersey, and other states, left money on the table? New Jersey imposes a 13 percent tax on digital sports betting and 8.5 percent on retail. Next door, Pennsylvania imposes a 34 percent tax across all channels plus a 2 percent local share assessment. Pennsylvania casino and sports betting operators complained mightily about the tax during the legislative stage, saying that the activity would be marginally profitable at best. (“PA’s sports betting taxes so high legal bookmakers may shun state,” the Philadelphia Inquirer reported in July 2018.) Nonetheless, they’re all in.

Although perhaps overlooked in times of rapid and widespread gaming expansion – such as the pandemic-induced fiscal crunch period states are experiencing now – state-sanctioned gambling remains an act that allows its citizens to lawfully engage in an activity that would otherwise be considered a misdemeanor or felony. Therefore, states can dictate the terms. Fiscally, some states do it more effectively than others.

The state of New York retained our firm, Spectrum Gaming Group, to undertake a comprehensive, statewide study of current and potentially future gaming in the state. Throughout the process, the state’s budget team continually emphasized to Spectrum the need to evaluate gaming from a fiscal perspective; in other words, what is best for the state? While the state of course wants all gaming operators to earn a healthy profit, it recognizes that the State itself can earn a healthy “profit.” Spectrum projected that statewide sports betting revenues could reach $1.1 billion under the most widespread scheme.

That same Spectrum report for New York report also notes: “The history of legalized gaming in the United States … shows that tax rates are largely determined through a combination of political and market realities. The rates are effectively a function of what can be achieved politically in combination with what any specific market can bear. However, neither market nor political realities remain fixed over time.”

Our New York study, as many of our other studies have shown, demonstrates that tax rates can be assessed to promote economic growth as well as fiscal growth. Spectrum recommended a tax policy in New York that would require operators to clearly and comprehensively justify any form of tax relief, demonstrating how a different (presumably lower) rate would result in a different (presumably greater) economic benefit.

New York incorporated much of that suggestion in its FY 2021 budget. Clearly, the goal in New York is to develop a new tax policy that results in a healthy, well-capitalized gaming industry that promotes a variety of goals, such as employment, that do more than grow one fiscal stream.

What may work in New York may not be the right prescription in every state, but every state needs to recognize that different tax rates on sports betting, casino gaming or any vertical can produce different results. Tax rates are not inconsequential, but are rather an important determinant of the type of business model that an operator can pursue.

While Pennsylvania managed to grow sports-betting revenue despite a high tax rate, that result is not assured in every state. Pennsylvania is large and economically diverse, with multiple metropolitan areas. Few states have those benefits.

So, having a low tax rate may not necessarily mean a state is leaving money on the table. It could indeed mean that the benefits will show up elsewhere on the economic horizon.

Spectrum has stated many times and in many forums an essential question: What is your gaming policy, and what is the best way to make that policy a reality? That will drive your tax policy. If you ask the right question, you are more likely to get the right answer.

To put that another way, states can indeed choose to squeeze lemons, and they may wind up concocting some tasty lemonade. Or they can plant a lemon tree, and find a different way to quench that fiscal thirst.

Articles by Author: Joe Weinert

Joe Weinert is executive vice president of Spectrum Gaming Group. He has been analyzing the gaming industry since 1996.