The suggested tax structure in new legislation to legalize sports betting in Texas could see the state lose out on half of its potential tax revenue due to promotional credits given to operators.
It’s happened in other states that have made sports betting legal. A low tax rate coupled with full credit for “free bets” early on can spell a low return to the state.
Tax rate in bills is lower than the national average
Two recent polls show that legal sports betting in Texas is supported by the majority of Texans. In one poll, only 11% of respondents oppose it. That’s why bills to legalize online sports betting are working their way through the Texas Legislature.
Bills HB 1942 and SB 715, sponsored by Sen. Lois Kolkhorst, R-Brenham and Rep. Jeff Leach R-Plano, propose to create a regulatory framework to oversee online sports betting in the state. This framework would govern a number of aspects, such as licensing requirements, consumer protection measures, and, of course, tax structure.
The measures features a 10% tax on online sports betting. This would provide a significant source of revenue for the state to fund education, health care and other vital initiatives. The low tax rate will delight operators as well, given that the national online sports betting tax rate averages out to 13%.
Promotional credits can cut tax revenue by 40%
Sports betting operators will also be pleased that the legislation sanctions promotional credit deductions. Permitting promotional deductions certainly helps proprietors stay profitable, but it won’t bode well for Texas tax coffers. States that allow promo deductions on sports betting revenue, see tax revenue on average cut by 40%-50%.
Texas lawmakers should consider this while debating sports betting legalization.
Promotional credits are usually given to first-time bettors for signing up to a sports betting website or venue. They’re often labeled “no-sweat bets”, “deposit match bonuses”, “free bets”, “sign-up bonuses”, and typically require bettors to place money in an account or make an actual bet with their own money to activate the promo credit. Operators include these promotional wagers in their sports gaming receipts when reporting the total amount received as wagers to state regulatory bodies.
And it’s quite likely that when sports betting finally comes to Texas, a large portion of the total wagers operators receive will come from promotional bets. Most bettors in Texas will be first-timers. Those free bets will be exempt from taxation unless the state declines to allow that.
PlayTexas previously projected sports betting revenue for the first full year in Texas. The projection considered scenarios where promotional deductions were both allowed and outlawed. In the case that they were allowed, the projection used a 25% tax rate to compensate. In the case that they were disallowed, the projection used a 15% tax rate.
The current legislation proposes both a very low tax rate AND allows for promo deductions, which gives back to the operators on both sides of the scale. As such, where PlayTexas’s previous projections saw the state netting tax revenue in the range of $210-$360 million, with the current legislation the state will be lucky to break $100 million in its first year.
By levying a low tax rate and allowing promotional deductions, as HB 1942 suggests, Texas would be leaving a lot of tax revenue on the table.
Maryland saw low returns early on
A few states that recently legalized sports betting have had to learn this lesson the hard way. In Maryland, for instance, online sports betting rolled out on Nov. 23. Before month’s end, bettors placed $186.1 million in wagers, A third of those bets were promotional. That left only a monthly tax revenue of $4,262.
Ohio, which ushered in sports betting on Jan 1, also has a 10% tax rate. However, the big difference with their tax structure is that it prevents operators from deducting promotional credits in the first four years of operation. After that, the state plans to limit the deductions of promotional credit wagers to 10% from 2027 through 2031, and to 20% in 2032 and beyond.
This structuring should lessen the adverse effect of these promotions on tax collections from operators in Ohio. It probably will, but Gov. Mike DeWine is already looking to double the sports betting tax rate to 20% in an effort to ensure tax coffers do not come up short.
Thankfully, Texas’ online sports betting tax structure isn’t written in stone. There’s still time to create a sports betting framework that works for players, operators and the state.