As the shot clock neared expiration on the Illinois legislative session over the weekend, a Democrat-led faction added a last-minute proposed hike on sports betting taxes.
Faced with a massive budget shortfall, Illinois lawmakers passed a $55.2 billion state budget on May 31 with minutes to spare. Along with tax increases on tobacco products and out-of-state income of businesses, the proposal contains a hike that will disproportionately affect the nation’s largest sportsbooks.
For the industry titans, the surprise proposal served as painful déjà vu from last spring when Illinois passed a progressive tax hike on sports wagering revenues. After this year’s bill passed, Illinois Gov. JB Pritzker vowed to sign it despite strong opposition from sports betting stakeholders across the state. The latest increase raises the question of whether top books will pass the tax burden on to their customers.
One option, according to Wall Street analysts, involves the embrace of prediction markets in which companies are able to offer derivatives on sports event contracts tax free.
Illinois already drew the ire of leading books last year by enacting a progressive tax policy on sports wagering adjusted gross revenues. Through the policy, Illinois established a tax floor of 20 percent on AGR, up from the previous level of 15 percent across the board.
But the state also established a sliding scale that increased the tax rate for operators generating the highest revenue in the market. The structure contained various step-ups with a ceiling of 40 percent for operators generating annual AGR of at least $200 million.
In response, DraftKings initially floated a proposed surcharge on customer wagers, taking a page from Uber, hotel chains and various airlines that have passed higher costs on to the customer. DraftKings abruptly pulled the idea last August, less than two hours after FanDuel informed analysts that it would not follow suit.
Under the newly proposed tax structure, Illinois sports betting operators will additionally pay a tax of $0.25 on each of their fiscal year wagers up to the first $20 million in handle. From there, operators will be taxed $0.50 for every wager above the $20 million threshold. While the new increase figures to have a modest impact on mid-tier operators, DraftKings and FanDuel are once more expected to feel the brunt of the hike.
Had the tax been applied to operators on a trailing 12-month basis, FanDuel would have faced a gross tax impact of $86 million, according to estimates from JMP Securities. The impact on DraftKings would have been $79 million. The two companies maintain a combined market share of at least 75 percent in Illinois.
The additional tax would place Illinois in the proximity of New York when it comes to the tax burden felt by the market’s two leading operators. In the Empire State, all operators pay a 51 percent tax on sports wagering gross gaming revenues. New York shares the nation’s highest tax rate with New Hampshire, where DraftKings is the lone operator.
While the tax changes would potentially present a combined negative tax impact of $165 million to DraftKings and FanDuel, the impact would be marginal for the state’s other eight operators. By JMP estimates, the remaining eight companies will face a combined levy of around $20 million. For fiscal year 2026, the gross tax impact will represent 5.4 percent of DraftKings’ projected EBITDA, according to JMP. None of the eight smaller operators would shoulder an impact above 0.5 percent.
Barry Jonas, an analyst with Truist Securities, outlined three potential scenarios for the two market leaders. One option involves imposing a floor for minimum bets, which Jonas believes would be greeted unfavorably by bettors. The companies, he noted, could also revisit the surcharge. The third option, he added, involves prediction markets.
By launching a Kalshi-style prediction market, the operators could sidestep the tax burden for now, Jonas writes. Both operators addressed the controversy surrounding prediction markets on recent earnings calls. DraftKings CEO Jason Robins indicated that the company will monitor the developments closely. Flutter, the parent company of FanDuel, noted that the company has brought on a team from Betfair’s exchange business to explore the opportunity.
