HomeArizona Sports Betting NewsArizona’s Disappointing Sports Betting Tax Revenue Returns – Here’s Why

Arizona’s Disappointing Sports Betting Tax Revenue Returns – Here’s Why

A big month of October for sports betting in Arizona - presumably spurred in part because of the surprise of Major League Baseball's Diamondbacks franchise winning the National League pennant and reaching the World Series - meant a robust $648 million in wagers for that period.

Image: IMAGO / Pond5 Images

That’s the second-highest figure in state history – topped only by the $691 million that was bet in March 2022.

Arizona sportsbooks collectively “held” $56.9 million of that amount in gross revenue. And with a 10% mobile sports betting tax rate (and 8% on the small number of bets that take place in casinos), that on the surface would produce almost $5.6 million in tax revenue for the state in October.

Instead, that figure was only $3.3 million, because sportsbook operators are able to write off promotional discounts and signup bonus costs.

That’s all part of the law worked out in 2021 by a collaboration of former Gov. Doug Ducey, the Indian tribes that play a central role in the state’s gambling industry, and a number of key legislators. For the first five full years of legal Arizona sports betting, that deduction – though declining somewhat each year – will remain in place.

The exemption has meant that just $28.5 million went into the state General Fund from sports betting in the first full year of wagering that featured $6 billion in wagers – far short of the $100 million tax collection figure speculated by some prominent state lawmakers just a few years ago. The fund mainly is utilized by the state Department of Education.

Many states – including Nevada, New Jersey, Illinois, and West Virginia – charge their tax directly from gross betting revenue, with no promotional deductions permitted.

The existence of promotional deductions is the subject of mixed reviews in the gaming industry. For a disciplined gambler, it’s an opportunity to collect “free money” while signing up for sportsbooks that were on their radar anyway.

But for relative novices, the lure of promotional matching dollars to their initial deposit can lead some in the direction of what ultimately becomes compulsive gambling and its serious negative consequences. That “pro and con” pair of issues is why states vary so widely in whether to subsidize such advertising – and if so, to what extent they do so.

The end of Arizona’s marketing and promotions exemption in 2028 will boost state tax revenue, but another issue will remain – the tax rate. Ohio just legalized sports betting on Jan. 1, 2023 at the same tax rate of 10%, then doubled that figure just six months later.

That’s still far behind the tax rate of 51% collected by New York and New Hampshire. That high-end figure would not be realistic for Arizona, however.

New Hampshire is able to charge that much because it granted a unique sports betting monopoly to DraftKings, which is based in neighboring Massachusetts. That means DraftKings does not have to spend forcefully on advertising and marketing thanks to a total lack of competition.

New York, by far the largest state by population that offers legal sports betting, “gambled and won” on major sportsbooks begrudgingly entering the fray because the volume of wagers – and thus the gross revenue – helps counteract the aggressive tax rate.

Arizona’s annual sportsbook licensing fee of just $150,000 also could be revisited.

Sports Betting Proving Very Popular In Arizona

The good news – for the state’s sportsbooks, at least – is that Arizona residents have shown a clear fondness for betting on sports. The $11.7 billion wagered in the first 24 months of bets – September 2021 through August 2023 – ranks second only to Illinois ($12.3 billion) in that time frame in the U.S.

The betting handle of $6.3 billion also was up more than 15% in the second 12 months compared to the first year of sports betting.

Taking a look at October sports betting figures – the November results won’t come in until near the end of January, as Arizona state regulators lag well behind their colleagues in timeliness of reporting the numbers – shows that DraftKings took in $220.6 million in bets while FanDuel posted a virtually identical figure of $220.3 million.

DraftKings Arizona had a slightly more significant edge in the “hold rate,” keeping $22.5 million of gamblers’ wagers compared to $20.2 million held by FanDuel.

The marketplace domination by the two companies originally known for their daily fantasy sports products – they combined for about two-thirds of the amount wagered on sports betting in Arizona in October – is typical of results nationwide.

So, too, was a “second tier” in Arizona for the month of BetMGM ($90.5 million in wagers) and Caesars ($59 million).

What can Arizona do to boost its tax dollar amount collected? Aside from the pending sunsetting of the promotional deductions, it would be worthwhile for state lawmakers to study the impact in Ohio from the doubling of the tax rate from 10% to 20%.

The shift understandably was met with dismay by sportsbook operators who entered the state with a different understanding of what their cost of doing business would be. But if – as seems likely – there are no significant adverse effects on the amount wagered in Ohio, that would be a sign that such a tax boost can be justified.

Ohio and Arizona each rank in the top 10 in U.S. population of states that have legalized sports betting, so operators have plenty of reasons to stay around – even if the tax rate rises to a more typical level nationally of 20%.

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