A number of mantras emerged in the wake of the 2018 U.S. Supreme Court decision to overturn the ban on sports betting.
One said legal sports betting would boost casino revenues. The second said sports wagers would boost tax revenue for states that legalized sports betting. The third said legal betting would do away with the illegal variety. Here’s the batting average so far:
- Cite New Jersey as Exhibit A.
- Again, New Jersey, Exhibit A.
Two out of three ain’t bad, but legal sportsbooks may never eliminate illegal bookies, for a couple of reasons.
“People may choose to bet illegally because it’s easier, because they can bet on credit, or because they aren’t taxed on wins,” said David G. Schwartz, professor and gaming historian at the University of Nevada, Las Vegas, in an interview with GGB News.
To make legal sports betting as competitive as possible, states should consider keeping tax rates low, according to Andrew Silver, an associate with Ifrah Law. By doing so, “States are more likely to drive illegal operators out of the market and increase tax revenues in the long run.”
The legal sports betting industry has inherently low profit margins—operators win slightly more than 50 percent of wagers—and licensed operators continue to be squeezed by competition from underground bookies. For one thing, illegal bookies can offer more attractive odds than legal operators, who must build tax payments into their revenues and adjust their odds accordingly.
When underground bookies have better odds, they can retain high-volume bettors, and “thus possess a competitive advantage,” according to Silver. That advantage helps them survive, especially if state taxes are too high.
Which leads us to Pennsylvania. The Keystone State levies a tax rate of 36 percent for both brick-and-mortar and online sportsbooks. In February, based on taxable revenues of $4.7 million, the state received $1.7 million. In March, on taxable revenues of $6.9 million, it received $2.4 million. According to Silver’s hypothesis, a lower tax rate could yield even higher returns.
David Purdum, who covers gaming for ESPN, believes the biggest advantage of the underground bookmaking market is credit. “I think the amount that is bet on credit is often underestimated,” he told Silver, for an article in the April 7 edition of Forbes. “It’s going to be difficult for regulated U.S. books to overcome, especially if they’re burdened with exorbitant tax rates.”
Of course, legal bookies have the law on their side, and enforcers will crack down on shady operators as they find them. The Pennsylvania’s Gaming Control Board (PGCB) gets an annual $2 million grant to investigate violations of and enforce laws relating to unlawful gambling, Doug Harbach, PGCB communications director, told GGB.
But states can foster market conditions that enable legal operators to naturally attract consumers.
The illegal market has been valued at between $50 billion and $200 billion in aggregate bets placed, according to such groups as the American Gaming Association, Eilers & Krejcik Gaming and H2 Gambling Capital.
“Although not all bettors will immediately shift from illegal operators to legal ones,” in Silver’s view, “research indicates that many individuals who do not currently wager on sports would start betting if it became legal.
“Similarly, survey results show that gamblers who presently bet through illegal channels would be likely to wager even more with legal operators if sports wagering were to become legal in their state.”
In short, “A favorable tax and regulatory environment could make legal sports wagering operators more attractive than their counterparts in the illegal marketplace.”
Don’t discount consumer protection benefits associated with placing a wager with licensed, legal operators, Silver noted. “The risk of funds on deposit is close to zero. The same cannot be guaranteed in the illegal marketplace.”
Results from a 2018 National Research Group poll illustrate the legal market’s potential:
- 46 percent of people who already wager on sports would likely wager more if gambling was legalized in their state.
- 27 percent of those who watch sports would like to wager on sports if it were legalized.
If the 46 percent increased their wagers by 25 percent, that would represent an estimated increase of $5.75 billion to $23 billion over illegal market estimates. If the 27 percent bet on sports, that could add from $7.8 billion to $31 billion over illegal markets.
Can the two sides, the yin and yang, attract the same clientele? Sure, Silver said.
“It’s a combination of making the legal marketplace both economically attractive, in addition to it being viewed as less risky than illegal operators.”
Until it’s inconvenient and less financially beneficial for people to bet illegally, the illegal component will maintain a place at the table, Schwartz said.
“It’s certainly possible that some consumers may continue to wager with illegal operators, while simultaneously shifting some of their business to licensed, legal ones,” he told GGB. “But states that make it less expensive for licensed sportsbooks to do business will have more success in getting their residents to shift to the legal marketplace.”
Alas, the conversation at the moment is more informational than practical, given the lack of sports to bet on, thanks to the coronavirus pandemic. But once the outbreak abates and most traditional sports return in some form, sports betting will rise to the occasion.
According to Purdum, “There’s little certainty right now, but a case can be made that sports betting, because of its popularity online, could explode, post-pandemic.”
