Illinois’ invasive new tax plan will test sportsbooks’ ability to withstand the temptation to offer the equivalent of an eye for an eye.
Kew Takeaways
- DraftKings’ surcharge was proposed to combat high-tax states
- Public pressure forced the company to abandon its ideas
- A $.32 surcharge per wager would mean $10 bettors need to win 56 percent of bets to stay profitable
The state’s per-bet tax is reminiscent of DraftKings' scrapped plans for a betting surcharge which would force customers to pay extra to submit wagers.
Illinois this week refitted its sports betting industry with a first-of-its-kind per-bet tax. The new standard will charge sports betting operators 25 cents per wager for their first 20 million bets and 50 cents per wager beyond that.
Illinois legal online sportsbooks should expect to pay heavy penalties in the near future. The state accepted 370 million bets last year - at least 300 million of those coming from FanDuel and DraftKings - meaning it would’ve been entitled to an additional $159 million in annual gaming taxes from just those two companies, 57.6 percent of the $276 million it generated as a whole.
That’s only one-half of the changes that were recently made to the sports betting tax system. Operators will be charged anywhere from 20 to 40 percent of their operating revenue, another noticeable increase from the previous 15 percent flat rate.
The tiered system includes a 20 percent tax on the first $30 million of adjusted gross revenue, 25 percent on the next $20 million (up to $50 million), 30 percent on the next $50 million (up to $100 million), 35 percent on the next $100 million (up to $200 million), and 40 percent on anything above that.
Will the surcharge return?
Illinois’ sweeping changes were met with strong criticism from industry members and sportsbook representatives.
Despite that, it is the everyday bettors who could be hit the hardest.
DraftKings last August announced its plans to implement a surcharge on wagers placed in “high-tax” states, or those with rates exceeding 20 percent, which included Illinois, New York, Pennsylvania, and Vermont.
The company’s CEO, Jason Robins, said that a winning $10 wager would return $9.68 after a 32-cent surcharge was deducted to account for Illinois’ steep tax penalty. He also said that the rate would be even higher in New York, which imposed a 51 percent tax rate.
Although one quarter, one nickel, and two pennies might not sound like much, the surcharge would further decrease the margins within which winning bettors have to operate.
Diving into the numbers
Robins’ example posits a $10 wager was made at +100 odds to win $10. If that bet only netted a $9.68 profit after the surcharge, the odds were effectively reduced to about -103, or 0.74 percent lower implied probability.
That’s on top of the vig that is baked into every odds value posted on major sportsbooks. An industry standard vig is about 4.5 percent implied probability.
All in all, bettors would lose about eight points of odds value and 5.2 percent probability.
Considering bettors already need to win 52.4 percent of bets at the standard -110 odds value, usually the baseline for two-outcome markets such as the spread, that means that $10-$100 bettors would need to win 52.7-55.6 percent of their bets to turn a profit with a surcharge.
Still not feeling the effects? Pretend that a bettor wagers $100 on -110 odds every week.
Without the surcharge, winning exactly 50 percent of these bets would result in $236.34 in losses, and winning 52.4 percent of these bets would turn a $1.24 profit.
With the surcharge, winning 50 percent of bets would create $252.98 in losses, and winning 52.4 percent of wagers would result in $15.40 in losses.
The gambling industry fights back
DraftKings has not alluded to bringing back its highly-opposed approach. However, sportsbooks have previously threatened to tank their odds if states got too greedy with their tax rates.
Many prominent voices in the gambling industry have already lashed out at Illinois’ change to try to dissuade other state governments from adopting similar plans.
