April 10, 2023
- Emma Tompkins, Juris Doctor Candidate, University of Mississippi School of Law
Comparing tax rates and tax takes between New York and New Jersey
One state has a headline tax rate of 50+% whilst in the other it is as low as 8%. Emma Tompkins explores what that means for state revenues and sustainability and asks whether the two states are likely to converge
Legalized gambling has experienced rapid growth across the country in recent decades; as of 2023, forty-eight states allow legal gambling in some capacity. Recently, the gambling activity that has garnered fast-growing, nationwide popularity is sports betting, making an appearance in thirty-one states and the District of Columbia, including the twenty-one states who support online betting. In 2021, the gambling industry’s gross revenue reached an all-time record in the United States, totalling US$53.4 billion. During just the first eleven months of 2022, the industry’s gross gambling revenue reach a new record of US$54.93 billion, smashing the previous year’s record by 13.5% – and the new record does not even account for the month of December 2022. This significant and record-breaking rise in sports betting revenue has been invariably accompanied by increased regulation and varying taxation regimes by the states who sponsor such activities. New York and New Jersey, although neighboring states, illustrate the broad range of state approaches to the taxation of sports gambling activities. This Article explores the stark contrast between the two states’ policies, the effect of New York’s entrance into the sports betting market on New Jersey, and the financial implications and sustainability of the states’ respective policies.
New Jersey’s rapid ascent to become the nation’s #1 sports betting destination
Federal legalization of sports betting: New Jersey h as enjoyed immense financial success since the federal legalization of sports betting, following the state’s groundbreaking judicial challenge to the Professional and Amateur Sports Protection Act of 1992, hereinafter referred to as “PASPA,” in Murphy vs. NCAA.3 Thanks to New Jersey’s advocacy for nationwide legalization, wagerers across the country can now indulge in legalized sports betting, and some can even enjoy the privilege of wagering online bets from the comfort of their own home. Within weeks of the Supreme Court’s decision in Murphy, New Jersey’s Governor signed legislation into effect legalizing sports betting in the state. Within forty-eight hours of passage, licensed operators within the state began accepting wagers. In August 2018, DraftKings became the first legal online sportsbook outside of Nevada, taking the first legal online sports bets in New Jersey. After spearheading the fight for states to allow sports gambling within their borders, New Jersey quickly eclipsed Nevada as the sports betting capital of the country. In fact, New Jersey has already reported larger annual gambling tax revenue collections than Nevada, in part because sports betting tax revenue now overwhelming comes from online betting. To date, New Jersey holds the title of the number one state for all-time sports betting revenue in the country.
New Jersey’s tax regime and total take: New Jersey differentiates itself from the rest of the country as the only state to levy different tax rates for operators depending on whether they collect in-person bets or online wagers. Accordingly, the tax rate for New Jersey operators depends on the source of the gross revenue generated. Gross revenue from brick-and-mortar casino and racetrack sports pool operations, including mobile operations tied to these land-based operations, is subject to an 8.5 percent annual tax. Consequently, even online sportsbook that are merely associated with brick-and-mortar operators are subject to a lower tax rate than operators who accept bets exclusively online. Additionally, an investment alternative tax of 1.25 percent is imposed on such revenue, but is dedicated to different uses. On the other hand, gross revenue from online casino and racetrack sports betting operations is subject to a 13 percent annual tax, as well as the same investment alternative tax of 1.25 percent as brick-and-mortar sports betting operations. The investment alternative tax imposed on gross revenue from casino sports pool operations is dedicated exclusively for tourism and marketing programs for Atlantic City, the state’s self-proclaimed entertainment capital, while tax revenue from racetrack sports pools operations is distributed to the municipality and county in which the sports wagering operation is located.
Additionally, New Jersey presents sportsbook operators within the state with a favorable tax opportunity. Lobbyists in New Jersey were successful in pushing bills to allow sports betting operators income deductions for promotional credits, otherwise known as free play, offered to bettors. In January 2022, New Jersey’s Governor signed Assembly Bill No. 4002 into effect, allowing both brick-and-mortar and online sportsbooks to deduct the amount of promotional gaming credits issued to bettors during the year from the gross revenue received from accepting bets. This deduction applies to promotional credits regardless of whether the promotions featured stipulations such as a play-through requirement (requiring bettors to match the amount of promotional credit issued with their own money). Essentially, this means that a sportsbook can strike revenue associated with these promotional credits, even if it made a profit from the transaction. Consequently, regardless of whether the sportsbook operator makes money or losses money from issuing promotional credits, earned revenue tied to such promotional offers goes completely untaxed by the state.
Although this deduction prevents a favorable opportunity for operators within the state, New Jersey may pay the price in millions of forfeited tax revenue as a result. The consequences of unlimited promotional credit deductions have been felt in states that allowed uncapped deductions like Colorado, Pennsylvania, Michigan, and Virginia, where taxes make up a significantly lower proportion of revenue when compared to other states with legalized gambling that do not allow such deductions. New Jersey’s bill is not quite as generous as these other states: promotional credits that brick-and-mortar sportsbooks may deduct have to exceed US$8 million per year, and for online sportsbooks, the deduction kicks in after US$12 million in promotional credits are issued. While New Jersey will not miss out on revenue at the same magnitude as states that allow uncapped deductions, the state is nevertheless leaving valuable revenue untaxed.
New Jersey collected more tax revenue than initially projected with the legalization of sports betting, but the sources of that revenue proved to be the most illuminative of where the state’s revenue lies.13 In the first ten months of legalized sports betting, the state collected US$4.2 million from in-person betting and US$13.9 million from online betting, even though online sports betting was not available during the first two months of legal gambling in the state. In February 2020, the state collected US$1.6 million in tax revenue from online sportsbook operators, even as in-person sportsbooks lost revenue, reasons unknown, but presumably as a result of the COVID-19 pandemic. In March 2020, the state managed to rake in six times more revenue from online sportsbook operators than from operators who accepted solely in-person bets. This trend in revenue collections continued into 2021, when internet gambling and sports betting represented 46 percent of New Jersey’s total gaming revenue, putting it nearly on par with all the revenue the casinos brought in from traditional gaming. In 2022, the state’s year-to-date sports wagering handle – or total amount wagered – totalled more than US$10.9 billion, with US$10.1 billion of that coming from online sports betting. According to New Jersey’s Division of Gaming Enforcement, brick-and-mortar sportsbook operators brought in approximately US$763 million in revenue, while online sportsbook operators reported a total of US$1.66 billion in revenue, reflected growth of 21.6 percent compared to US$1.37 billion for the prior year-to-date period.
New York’s delayed – but impressive – entrance onto the sports betting market
New York reclaims bettors with state lines and a land grab among operators: New York joined the sports betting market shortly after New Jersey’s trailblazing success, reclaiming the state’s bridge and tunnel bettors who made their way from New York across the Hudson River by car, train, and foot to place their bets in New Jersey. During the first weekend of legalized mobile sports betting in the state, the four online sportsbook operators in New York gained 650,000 new bettor accounts and took in US$150 million in wagers – more than the neighboring states of New Jersey and Pennsylvania combined during the same period. In the first thirty days of mobile sports betting operations within the state, popular online sportsbook operator DraftKings acquired 300,000 users, which is 2.3 times the average of new users during the first thirty days of DraftKings’ operations in other states with legalized mobile sports betting. However, these numbers are not as surprising as they seem when considering New York’s 20 million residents, twice the population of New Jersey.
Although New York legalized online sports betting in mid-2021, bettors were still unable to place any online wagers within state lines until the state negotiated deals with sports betting operators, which did not come to fruition until January 2022. The legalization of online sports betting in New York created a competitive market among sportsbook operators vying to get a piece of the state’s lucrative market. Many operators believed that New York represented one of the most attractive sports betting states given its population of nearly twenty million, wealth, and sports culture. Pursuant to the legislation that legalized online sports betting in the state, the New York Gaming Commission was required to award licenses to at least two sports betting platform providers and four online sportsbooks to operate in the state. The Commission approved ten-year licenses for two groups of gambling companies consisting of nine operators, leaving out a wide array of other popular sportsbooks who applied for licensure in the state.
New Y0rk’s tax regime and total take: Strikingly different from New Jersey, New York taxes its operators’ gross gaming revenue from sports betting at a remarkable rate of 51 percent, which is among the highest rates in the country. Pursuant to the nine online sports betting licenses awarded by the New York Gaming Commission, each sportsbook operator in the state is required to hand over 51 percent tax of gross gaming revenue for a minimum of ten years. To put this in perspective, the three largest mobile operators in New York, FanDuel, DraftKings, and Caesars all paid more than US$3 million in taxes to the state every single month in 2022.
Furthermore, New York’s sports betting tax regime allows for no deduction of promotional credits including those issued by sportsbook operators in the calculation of the operator’s gross income. In effect, New York taxes operators’ “phantom revenue”. For example, if a wagerer receives a free US$100 promotional bet that they consequently lose, that US$100 is nevertheless included in the sportsbook’s gross revenue, even though no real money is being exchanged.
In 2022, bettors wagered a total of US$16.7 billion through mobile sportsbooks during the market’s first year in operation. This translated into a total tax take on gambling revenue of US$1.36 billion, due to the state’s extremely high tax rate and status as the largest state to allow sports betting. In January 2022, the first month of legalized sports betting in the state, New York’s sports betting revenue totalled US$124.1 million, more than double New Jersey’s revenue in the same month.
New York’s impact on New Jersey’s market
New Jersey held the title of the number one sports betting market in the country for nearly three years, that is, until New York’s grand entrance into the market. As New York struggled to negotiate license agreements with prospective sportsbook operators in the state from mid-2018 until January 2022, New Yorkers were left with no other option for online sports betting than to head across the Hudson River by car or make the trek via train into New Jersey. As one journalist noted, “For a few cagey gamblers from New York, the mighty span is the most convenient sports book and casino in the region.”20 Some bettors even saved on the US$16 toll and train fare by taking a fifteen minute trek via bicycle to cross state lines and place their bets. Before sports betting operators finally made their debut in New York, an estimated 20 percent of New Jersey’s sports wagering action came from bridge-and-tunnel bettors traveling from New York. Mobile sports betting in New York exploded at remarkable rates when it was first offered, and the state quickly secured the number one spot for online sports wagers across the board among states for monthly handle, operator revenue, and tax revenue.21 Concerns that the New Jersey sports betting market would suffer significantly after New York joined the market soon faded when it set a record-breaking handle in the same month. In fact, New Jersey’s sports wagering handle has showed no signs of slowing with sports betting handle in both 2021 and 2022 totalled over US$10.9 billion. In other words, there appeared to be enough interest among first-time New York bettors to limit any negative impact on New Jersey’s market. New Jersey’s Casino Control Commission actually maintains that the state is well-positioned to stay competitive with New York, because its tax environment is much more favorable.
Although New Jersey’s sports betting market remains impressive New York has continued to quickly gain ground on its neighbor. In December 2022, New Jersey enjoyed almost 50 percent more revenue than during the same month of the previous year, but the state’s yearly revenue nevertheless dropped from US$815.8 million in 2021 to US$763 million in 2022 with some of that decline likely linked to New York’s success. At the conclusion of 2022, New York claimed number two spot for all-time sports betting revenue, behind New Jersey but closing fast. Importantly, as sports betting revenue continues to fluctuate for the states’ operators, there is one consistent factor: New York boasts substantially greater tax revenues than its neighbor.
How sustainable are the states’ tax regimes?
While New Jersey’s sports betting market has proven it can hold its own even after New York’s impressive debut, New York – as well as other states – are quickly gaining ground to surpass the state in all-time sports betting tax revenue, as New Jersey continues to miss out on valuable revenue. New York is more than pleased with the revenue that has been returned thus far, so New Jersey could learn a few tricks from its neighbor. Not only could the state generate significantly more revenue from taxing both traditional and online sportsbook operators at a higher rate, but it could also benefit by dropping their bifurcated tax rate and applying a higher, standardized tax rate to operators across the board. By imposing a lower tax rate on operators who accept in-person wagers, New Jersey is failing to take full advantage of realizable revenue, albeit nominal amounts compared to revenue received from online sports betting, but lost revenue, nonetheless. Currently, state sports betting tax rates across the country range from 6 percent to more than 50 percent, with the average rate landing at about 15 percent. At just 8.5 percent, New Jersey’s tax rate for brick-and-mortar sportsbooks is much lower than the national average. While the state’s online sports books are taxed at a more competitive 13 percent, raising the rate to the national average of 15 percent would increase revenue by US$ millions. Additionally, with the passage of New Jersey’s Assembly Bill No. 4002, operators can deduct promotional credits from their gross gaming revenue, further diminishing the states’ sports betting revenue collections. Allowing brick-and-mortar and online operators to enjoy deductions above US$8 million and US$12 million respectively risks greatly reducing – and possibly even eliminating – their tax liability. As sports betting operators angle to expand the availability of deductions in other states to increase their tax savings, some scholars are warning states to heed on the side of caution regarding the emerging issue.
Although New York has boasted impressive revenue totals from the state’s 51 percent tax rate, operators are quickly realizing that business may be unsustainable, especially on a long-term basis and when compared to states with more favorable tax environments like New Jersey. Within a year of receiving licenses to operate within the state, New York’s operators are already pleading with the state’s legislatures for a tax break. Operators have begun to exhibit resentfulness towards the state’s high tax rate on their profits, and consumers are feeling the effects of decreasing competition and incentives from the operators within the states. “Everybody wants to be in New York because it’s a trophy market in terms of the size of the state and its importance, but the tax rate is really prohibitive,” noted one New York author and businessman. “It’s very hard to make money in sports betting. Put 51% tax rate on it and it’s maybe a bit more like a fool’s gold rush than a gold rush.”
Furthermore, a Tax Foundation report studied the effect of taxing a sportsbook’s promotions as “phantom revenue” to be included with its gross gaming revenue, estimating that the effective tax rate for the operators in New York totals more than 77 percent, when taking federal taxes into account. The American Gaming Association is currently challenging the 0.25 percent federal excise tax calling it an added operating cost to legal sportsbooks that illegal operators do not pay. Whether or not they are successful will make little difference to operators in New York where the sky-high tax rate and inclusion of “phantom revenue” in operator’s gross revenue means they are taxed to the point of unprofitability. Furthermore, sportsbook operators believe that New York’s tax structure significantly hampers operators’ ability to compete with offshore, online sportsbooks and undercuts one of the core benefits of legalization, which is to bring bettors into the legal, regulated market. Sportsbook operators in New York have felt the detrimental effect of a state tax policy that includes promotional credits issued to bettors included in the operator’s total gross revenue, and so have wagerers who have received fewer promotional credits from online operators – and perhaps even worse odds – as a result. In fact, some New York operators may even be encouraging their bigtime bettors to make the trek across the Hudson to wager their bets in New Jersey.
Shortly after New York’s entrance into the sports betting market, one New York Senator expressed his hesitancy regarding the state’s success: “With a product as we have, I would expect we leapfrog over New Jersey…. But it is about sustainability and the long term.” Interestingly, New Jersey has no professional football team, while New York has two – but both teams play in New Jersey. So, although bettors currently have the ability to place online sports wagers in New York, many New Yorkers may still find themselves next door in New Jersey when sports betting to watch Monday night football – or maybe even to escape New York’s constricting tax environment.
While New York and New Jersey both appear to have benefited from their respective tax policies on sports betting, as the market continues to grow and the initial period of heavy investment among operators is curtailed, the states are feeling the consequences of their decisions. An overreaching tax policy such as New York’s is unlikely to be sustainable as the progressiveness of the industry declines; while a conservative tax policy like New Jersey’s leaves valuable tax revenue on the table. In the long run, sports betting represents a significant opportunity for new revenue for states – especially if they develop an appropriate regulatory and tax framework, one which allows the state to enjoy the revenues while at the same time fostering growth of the lucrative industry by supporting the operators.