On May 14, 2018 the State of New Jersey won a landmark ruling from the Supreme Court of the United States overturning the Professional and Amateur Sports Protection Act (PASPA) that had effectively prohibited states outside of Nevada from allowing full sports betting.  PASPA exempted states (Delaware, Montana, Nevada, and Oregon) that had existing laws related to legal forms of sports betting already in place.  Of those four states, Nevada was the only state where traditional, single-game sports betting on all professional sports through licensed bookmakers was legally permitted.

The illegal sports betting market in the United States on all sporting events is projected to be $150 billion annually, of which New York is estimated to comprise between $2.8 billion to $8.7 billion. Operators retain between 5 percent and 6  percent of the total amount wagered after distributing winnings, so legalizing sports betting could generate $8.25 billion in Gross Gaming Revenue (GGR is the amount retained by the sports betting operator after the payment of prizes) that would be available as taxable revenue for states.¹ In New York GGR is forecasted between $155 million to $475 million.²

Several states in close proximity to New York, including New Jersey and Delaware, have rushed to enter the sports betting arena following the Supreme Court ruling.  New York’s legislators also took the first steps: bills drafted in the 2018 legislative session would permit and regulate sports betting and authorize and require casinos, and their potential affiliates, to pay a state tax of 8.5 percent of gross sport wagering revenue and a royalty fee of 0.2 percent of the handle (the amount wagered) to the State that would be directed to the governing bodies of the various professional and collegiate athletic leagues.³  The sponsors of the legislation estimated tax revenue from the GGR in New York State would be between $10 million and $30 million annually.⁴  Governor Andrew Cuomo argued that the issue is complicated and that there was insufficient time to work out details before the end of the legislative session on June 20, 2018. Accordingly, the bill did not come up for a vote and the legislature is not due back in session until January 2019, which provides time to analyze this complex issue and draft appropriate legislation. 

State leaders should consider these four guidelines as they decide whether and how to expand sports betting in New York:

1. Revenue estimates should be conservative. While a new source of revenue would be welcome, the State should estimate conservatively revenue benefits from sports betting.  Since sports betting has been illegal, it is difficult to predict how much of the illicit activity will transition to the legal market and how many new participants will engage.  Furthermore, behavior will vary from state to state or in areas within states based on demographic factors such as adult population, per capita disposable income, and ease of access to gaming markets.

   Previous estimates on other types of gambling revenues in New York have been overly optimistic.  On November 5, 2013 New York State voters approved a constitutional amendment to expand casino gambling, and subsequently four commercial casinos were opened (Tiago Downs in Nichols, del Lago Resort and Casino near Waterloo, Rivers Casino and Resort in Schenectady, and Resorts World Catskills).  In New York State Fiscal Year 2017-2018, the casinos, with the exception of Resorts World Catskills which was not open until late in the year, generated gaming taxes of $112 million; however, these results were far short of projections.⁵  Resorts World Catskills was downgraded by Moody’s Investors Service this past June and reported losses of $58 million for the six month period ending June 30, 2018.⁶  Many critics attribute the poor performance of the casinos to the oversaturation of the gaming market due to the number of casinos that have opened in the northeast.

2. Taxes should be designed thoughtfully in a competitive marketplace. Many states, including several in close proximity to New York State, are entering the sports betting arena.  Initial tax rates on GGR vary widely, and the economic impacts are uncertain.  New Jersey set its sports betting tax rates at 8.5 percent for land-based sports betting revenue, 13 percent for online wagering run by casinos, and an additional tax of 1.25 percent on gaming revenue received by racetracks.  In Delaware the state lottery administers sports betting in a revenue sharing agreement, and the state receives 50 percent of the remaining GGR after paying its sports betting contractor.

   Lower tax rates would arguably enable operators to spend more on marketing and customer service, invest more in technology, and potentially set odds that are more attractive to bettors.  Conversely, setting higher GGR tax rates may result in fewer operators willing to enter the local marketplace, less investment in infrastructure and marketing, and less attractive odds.  Ultimately this may result in fewer people transitioning from illegal to legal sports gambling.⁷ 

3. Sports betting’s potential impact on other gambling revenues should be considered. In addition to falling short of revenue expectations, the recently opened commercial casinos in upstate New York have also taken a large share of revenue from competitors including racinos at Finger Lakes Gaming, Vernon Downs, and Saratoga Springs that feature slots and electronic table games.  The trend of newcomers taking share from incumbents is consistent with what has been occurring in other gaming markets, particularly in the northeastern portion of the United States.⁸  In Atlantic City, New Jersey, competition from new casinos that opened in neighboring states, coupled with impacts from Superstorm Sandy, contributed to gambling revenues falling by half from $5.2 billion in 2006 to $2.6 billion in 2016, resulting in the layoff of 11,000 workers.⁹

   There is also the potential that sports betting could impact other types of gambling including state run lotteries, which generate more than $3 billion in revenue for education aid in New York State.¹⁰

4. Legislation should take into account that gambling taxes are regressive, and increased prevalence of gambling will impose social costs. Taxes on GGR are regressive since low-income people bear an outsized burden, violating the principle of vertical equity in taxation.¹¹ Expanding the opportunities for gambling in New York is likely to increase the prevalence of “problem” gambling, which has been shown to be at its highest level in disadvantaged neighborhoods and is associated with a range of behaviors, including crime, abuse, job loss, and bankruptcy, that impose social costs on others.  Furthermore, pathological gamblers are more likely to suffer health problems.¹² 

   To address this concern, the New York State Office of Alcoholism and Substance Abuse Services (OASAS) announced in January 2017 that inpatient residential care would be available at six Addiction Treatment Centers granted waivers allowing them to admit and treat individuals with problem gambling as their primary diagnosis.¹³  In addition the New York State Commercial Gaming Fund allocated $3.5 million in the Fiscal Year 2019 Enacted Budget for problem gambling services.

Sports betting in New York presents an economic opportunity. In addition to revenues from taxing sports betting, there are potential economic benefits from job creation, including additional income and payroll, and sales taxes.  Nationally, the estimated state and local benefit is estimated at $3.4 billion, of which $254 million is attributable to New York.¹⁴  Furthermore, the demand for illegal sports betting could decline as bettors shift to a legal alternative, generating law enforcement savings as the costs associated with investigation and prosecution of illegal activity decline.

The legalization and taxation of sports betting must be carefully considered. It is important that revenue estimates are prudent and account for market saturation and substitution from other forms of gambling.  The tax structure should provide stability and the potential for continued economic growth. The State also needs to account for the harmful social impacts and costs that likely will ensue.