JEFFERSON CITY, Mo. — The advertisements promoting a ballot measure legalize sports betting in Missouri tout the potential for millions of new tax dollars spent on schools. If voters approve the measure, chances are they will see even more ads with special promotions for gamblers.
Many of these promotional costs — in which sportsbooks provide cash-like credits to customers to place bets — will be exempt from state taxes, effectively limiting new revenue for education.
The ballot measure in Missouri highlights an emerging debate among policymakers over how to tax the fast-growing industry, which has since spread from one state — Nevada — to 38 states and Washington, DC. the US Supreme Court opened the door to legalize sports betting in 2018.
“It’s a young industry,” said Brent Evans, an assistant professor of finance at Georgia College & State University that has taught classes on gambling. “So no one really knows what a reasonable tax is.”
Since allowing sports bettingIllinois, Ohio, Tennessee and Washington DC have all already raised or restructured their tax rates. And Colorado and Virginia have scaled back the tax deductions they originally allowed.
Tax rates range from a low of 6.75% in states like Iowa to 51% in states like New York. That tax gap is even wider because Iowa allows promotional betting to be deducted from taxable income, while New York does not.
About half of states allow tax deductions for promotional costs. It is a common way to entice people to start (or continue) betting. But in the short term, it could also reduce available tax revenue for governments and schools.
Missouri’s proposed 10% tax rate on sports betting revenue is below the national average of 19% that sports betting companies paid to states last year. Due to “free play” deductions, there may be months where sportsbooks owe nothing to the state. Missouri’s proposed constitutional amendment recognizes this possibility and states that negative balances can be carried forward from one month to the next until income increases enough to require taxes to be paid.
Unlike some states, Missouri’s amendment limits the amount of promotional credits that can be deducted from taxable income to 25% of all bets. But it seems unlikely that cap will play a role. An analysis carried out by advisor Eilers & Krejcik Gaming for the amendment’s promotional bets will account for approximately 8% of total bets in the first year of sports betting in Missouri, and decline thereafter.
The Missouri proposal “is very similar to what has worked and been effective in other states,” said Jack Cardetti, a spokesman for Winning for Missouri Education, the group backing the measure.
After voters narrowly approved it, Colorado launched sports betting in 2020 with a 10% tax rate and full deduction for promotional bets. It recorded a total of $2.7 billion in wagers during its first full fiscal year, generating $8.1 million in taxes, just shy of regulatory projections. But Colorado changed its law starting in 2023 to limit the promotional tax deduction to 2.5% of total bets, gradually dropping to 1.75% by July 2026.
Tax revenue from sports betting in Colorado has since increased to more than $30 million in the most recent fiscal year. That growth got lawmakers involved submitting a proposal on the November ballot seeking permission from the state to keep more than the original $29 million limit in sports betting tax revenue.
Limiting the tax deduction for promotional betting is a good step, said Richard Auxier, policy fellow at the nonprofit Tax Policy Center. But he wonders why some states exempt them from taxes in the first place.
“We do not give out free samples of cannabis when a state legalizes cannabis,” Auxier said. “Is this something you want to subsidize through your state tax policy – to encourage people to gamble?”
The Missouri Amendment was placed on the November ballot initiated by a petition after legislation to legalize sports betting repeatedly stalled in the Senate. The $43 million campaign — a record for a ballot measure in Missouri — was funded entirely by DraftKings and FanDuel, which dominate the national sports betting market. If the measure passes, the companies could apply for two statewide licenses to conduct online sports betting. The amendment authorizes additional sports betting licenses for casinos and professional sports teams in Missouri.
The $14 million opposition campaign was funded entirely by Caesars Entertainment, which operates three of Missouri’s 13 casinos. While Caesars generally supports sports betting, it opposes “the way this measure was written,” said Brooke Foster, a spokesperson for the opposition group Missourians Against the Deceptive Online Gambling Amendment.
In some other states, sports betting is managed through casinos. Although research is limited, a study of seven states Last year’s publication showed that casino gambling revenues fell as online sports betting increased.
“There will definitely be a shift from placing bets in a physical space with a Missouri incorporated casino to jumping on an app in your living room,” Foster said.
The effect of different tax rates can be seen in Illinois and New Jersey, which spearheaded the lawsuit that led to widespread legal sports betting. People in every state placed between $11.5 billion and $12 billion in sports bets last year, resulting in $1 billion in revenue for sportsbooks after winnings were paid out to customers, according to figures from the American Gaming Association.
New Jersey received $129 million in tax revenue, based on a 14.25% tax rate for online sports betting and a 9.75% tax rate with some promotional deductions for sports betting at casinos and racetracks. Illinois received $162 million in tax revenue – a quarter more than New Jersey – with a 15% tax rate in most places and no promotional deduction.
But Illinois officials weren’t satisfied with those results. Starting from July Illinois imposed a progressive tax scalestarting with a 20% tax on sports betting revenues under $30 million and rising to a 40% rate on revenues over $200 million.
Some sportsbook representatives had raised the possibility of leaving Illinois if tax rates rose. But that didn’t happen.
There also isn’t much evidence that sportsbooks make betting odds worse in states where they pay higher taxes, said Joe Weinert, executive vice president of Spectrum Gaming Group, a consulting firm.
“The sports betting operators compete vigorously for gamblers,” he said, “and the way you compete vigorously is by offering attractive odds and good promotions.”