Impact of Increased Taxes on Online Gambling

As the United States witnesses a surge in online gambling, states tempted by the prospect of increased revenue are mulling over hiking taxes on these activities. However, this approach is certain to backfire, compelling players and bettors to inevitably seek refuge with unregulated offshore platforms.

Such a shift threatens to drain potential state earnings and jeopardizes consumer protections, creating a lose-lose scenario for both governments and gamblers alike.

The Current Landscape of Online Gambling in the US

In October 2018, the PASPA (Professional and Amateur Sports Protection Act) was repealed. This shift made online sports betting and iGaming state matters, lifting the federal ban.

The Role of PASPA for iGaming

While PASPA is mainly legislation for sports betting, it also includes online casinos. In fact, since the annulment of PASPA, the US online gaming industry has surged. It now exceeds the early years of internet gaming in the nineties.

Key Statistics – iGaming in 2024

• January – May 2024: Commercial gaming revenue (retail casino games, iGaming, plus in-person and online sports betting) reached $29.75 billion, up 7.1% from last year.
• May 2024: Online gambling revenue rose 27.8% year over year to $1.72 billion.
• May 2024: Sportsbooks generated $1.08 billion, a 24.7% increase from 2023.

The Consequences of Increased Regulations and Taxes

States aim to raise revenue and control the market better. Yet, these measures might alternatively afflict operators. New laws are targeting online gaming and sports betting with the goal of boosting state revenues. Instead, they cause unintentional harm to players.

Case Study: Taxation Means Higher Player Fees

The US online casino and sportsbook DraftKings will tax player winnings in 2024. CEO Jason Robins announced this due to higher taxes in Illinois, New York, Vermont, and Pennsylvania. Players will ultimately find that the cost of taxation will be passed on for casinos to stay afloat in high-tax states.

Case Study: Taxation Hurts iGaming Bottom Lines

DraftKings’ stock price also plummeted when Illinois lawmakers introduced a proposed gambling tax. Other states, including Ohio, have raised their tax rates (10%) to 20% in total. It is not as much as in other states. Still, it is enough to impact gaming operations like FanDuel, which operates in the state.

Case Study: Overtaxation and Overregulation Gives Bigger Brands the Upper Hand

In the US, operators with the largest market share pay the highest taxes. This means gamblers at FanDuel and DraftKings will feel the impact right away. Meanwhile, other operators like BetMGM and ESPN Bet face different state tax rates. For instance, BetMGM pays 25%, whereas Caesars is taxed at 30%.

A trend is emerging as high taxation on online gambling continues to rise. Only the biggest betting site operators can support high tax bills. This will edge out smaller competitors, leading to fewer legal iGaming sites, fewer sportsbooks, and ultimately, limited consumer choice for legal gambling options over time.

With limited choices, players are driven to unregulated offshore sites, putting them at risk—a pattern clearly demonstrated by the European experience.

The 2024 Sustainability Report from the European Gaming and Betting Association highlights this. In strict EU countries, a black market has emerged. For instance, France has 4 million illegal players, surpassing 3.6 million legal ones. 

Similarly, in Germany, nearly half of players (49.5%) play illegally offshore, just slightly less than the 50.7% who play with state-licensed operators. The state saw this change after the implementation of the new German Interstate Treaty on Gambling (ISTG), Glücksspielstaatsvertrag, in the original German. 

Changes within this legal document include:

• A €1,000 monthly deposit limit for bettors.
• €1 stake limits on online casino slots.
• A ban on popular live casino games (like roulette or craps) and progressive jackpot slots.
• An outright ban on live sports betting.

Suffice it to say, evidence indicates that states stand to lose big if betting sites close and move traffic offshore, and gamblers stand to lose even more.

Case Study: Offshore Betting Sites as an Alternative

A notable trend is emerging among betting sites. In the US market, operators offering casinos, sportsbooks, or both tend to succeed long-term if they are a US-based corporate entity.

Compare DraftKings, Bally’s, and FanDuel, all US-based entities, to some of the most well-funded Europe-based betting site operators who tried to bring their sportsbooks and online casino sites to the US market:

• Evoke’s 888Casino and 888Poker have closed and returned to Gibraltar. They partnered to run the Sports Illustrated (SI) sportsbook.
• Tipco Casino, sold to US-based MGM, has consolidated in Malta.
• Betway Casino has stopped sports betting in nine US states. The company now focuses on online gambling in New Jersey and Pennsylvania, and has shifted its operations to Malta. It aims to simplify its presence in the American market.

With few licensed casinos and sportsbooks, customers will seek alternatives. This shift could push them to black market sites or unlicensed operators. The American Gaming Association says nearly half of US online gamblers have tried illegal, offshore casinos and betting sites. With a lack of choices, this number will skyrocket.

Users and Offshore Betting Sites – An Unsafe Market

A 2020 study in The Journal of Gambling Studies found that, in states where it is illegal, offshore sports betting increased by 24% in a year. Even in states where betting is legal, 3% of players still turned to offshore sites. This shows that if people want to gamble, they will find a way. In fact, according to the American Gaming Association, nearly half (48%) of American players who gamble online have played slots or table games with illegal or offshore online casinos.

Many participants overlook the risk of fraud in offshore gambling, compounding the problem. A survey of Australian online gamblers showed this. The study Factors Influencing Internet Gamblers’ Use of Offshore Online Gambling Sites: Policy Implications found that both men and women preferred an iGaming site’s responsiveness and ease of use over safety.

Additionally, the American Gaming Association’s report estimates the US loses over $510.9 billion yearly to illegal sportsbooks and casinos. This includes $3.9 billion in lost operator revenue and $13.3 billion in lost tax revenue.

The reality is that increased regulations and taxes make offshore sites more attractive to players, driving traffic to unregulated, fraud-prone, and unsafe sites.

Technological and Market Innovations

The Personal Income and Outlays report for June 2024 produced by the Bureau of Economic Analysis shows a rise in disposable income and spending. Consumers are favoring smaller, frequent expenses over large, one-time ones. This trend benefits online casino and sportsbook operators alike. Why is this important?

In today’s market, betting site operators focus on keeping current customers. They aim to avoid high costs for new ones, except in new markets. TransUnion found that 54% of mobile sports bettors earn over $100,000. Similarly, a National Council on Problem Gambling study showed that 26% of iGaming respondents also earn above that mark.

Additionally, 25% of those making between $49,000 and $75,000 gamble. For operators, retaining bettors and encouraging them to spend more is more crucial than constantly attracting new ones. In many ways, operators are expected to operate in a way that reflects a shrinking or stagnating market, which is far from the truth.

When it comes to iGaming, for example, every state has seen gambling revenues grow outside a few select conservative states, according to the American Gaming Association’s Commercial Gaming Revenue tracker.

In-person gambling at the Las Vegas strip, as a demonstrative example, saw fewer visitors in 2022 compared to pre-pandemic years, according to the American Gaming Association’s State of the States 2023 presentation. Players today prefer to play remotely.

Public Health and Problem Gambling

Online gambling in the US has surged, leading to a rise in gambling disorders. The National Council on Problem Gambling says 2.5 million American adults have severe gambling addictions. Meanwhile, 5-8 million have mild addictions.

Online platforms offer unparalleled accessibility and convenience, ensuring user privacy beyond the necessary KYC protocols. Apart from the data collection required for compliance, one’s activities as an online player or bettor remain discreetly shielded from public view. This has fueled a rise in gambling addiction, especially among younger, tech-savvy users already spending a lot of time online. The US economy bears a $14 billion cost from this addiction, according to The National Council on Problem Gambling.

In response to the public health crisis, new laws to combat gambling addiction have been proposed and enacted, a key example on the federal level being the Gambling Addiction Recovery, Investment, and Treatment Act. This federal bill aims to fund programs for treating gambling addiction, support research, and create awareness campaigns, drawing inspiration from successful efforts in Europe.

Solutions to Gambling Addiction at the State Level

States have taken steps to reduce problem gambling as well. For instance, New Jersey requires online gaming sites to offer problem gambling tools. These tools help players set limits, take breaks, or exclude themselves. Meanwhile, Michigan has directed some iGaming tax dollars to fund addiction programs as part of the Compulsive Gaming Prevention Act.

States like Nevada and Pennsylvania have run campaigns to raise awareness. Nonprofits across the US are educating the public about gambling risks and offering help as well, setting up support groups and helplines. 

The evidence is clear: programs for problem gamblers can work well in conjunction with safe online gambling.

Lessons from International Markets

Countries in Europe, such as the UK (online gambling was legalized in 2005), the Netherlands (online gambling was legalized in 2021), and Belgium (online gambling was legalized in 2011), provide valuable insights into effective online gambling regulation and taxation strategies.

iGaming Regulation in the United Kingdom

The UK has made gambling a part of its culture. Betting on horse races and sports has been legal for nearly seventy years. The country now has a robust online gambling framework managed by the Gambling Commission. This includes strict licensing, strong consumer protections, and plans for a levy on operators that will fund responsible gambling initiatives starting in 2024-2025.

The new proposal targets to control online spending by:

• Setting a betting limit between £2 and £15.
• Requiring affordability checks, similar to those for loans or credit cards.
• Improving access to resources for problem gamblers.

However, bettors feel partially constrained by these regulations, being told how much they can bet and when.

iGaming Regulations in The Netherlands

In 2021, the Netherlands launched its Remote Gambling Act. This marked a major step towards regulating online gambling. The Act imposed strict licensing rules, implementing measures to prevent gambling addiction and protect vulnerable groups. Also asserting that iGaming site operators must contribute funds toward addiction prevention and treatment. 

On top of these regulations, operators are also taxed based on the size of their player base. Players’ winnings are not directly taxed, increasing the potential tax bill for companies offering betting options in this European state. 

In the Netherlands, despite efforts to create a safe gambling environment, high taxes and strict regulations have raised concerns that players might turn to unlicensed offshore platforms for more options.

iGaming Regulations in Belgium

Belgium has taken a cautious stance on online wagering. Starting July 1, 2023, advertising for online gambling sites was banned. However, a study found that SEO-based search ads still target users. So, those who search related terms can see ads. In 2022, Brussels imposed a €200 weekly betting limit to combat addiction.

Belgium’s high taxes and strict rules have mixed results. They protect consumers, but also push some to unregulated sites, says BAGO, the Belgian Association of Gaming Operators.

Warnings from an International Market

• The UK model strikes a balance, offering insights on market health and consumer protection.
• The Netherlands’ recent changes show how hard it is to shift from low to strict regulation. It highlights the need for balance in taxes and rules.
• Belgium’s case emphasizes avoiding heavy burdens that drive businesses away.
• Germany’s strict ISTG regulations show the risk of driving players offshore, pointing out the need for flexible policies to keep the legal market competitive.

The US can learn from these examples. It should protect consumers while keeping the market attractive for legal operators.

Conclusion

States face a complex challenge in regulating and taxing betting sites. While higher taxes and stricter laws aim to control the market and increase revenue, they risk pushing players towards unregulated offshore platforms, ultimately defeating their purpose. Thoughtful, balanced policies are needed to ensure both state interests and consumer protections are maintained.