Colorado Tax Revenue Set to Increase Thanks to New Sports Betting Bill

Newly imposed limiting on tax deductions from promotional bets expected to double the Centennial State's tax revenue from sports betting almost immediately.

Last Updated: Jan 2, 2023 11:01 AM ET Read Time: 4 min
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Colorado is taking a far larger slice of sportsbooks' legal sports betting revenue as of January 1. This is the result of H.B. 22-1402, a law that reduces tax write-offs for sportsbooks, which went into effect at the beginning of 2023.

The impact of the new legislation will be to roughly double the Colorado sports betting tax collections of $12.4 million for the 2021-22 fiscal year (which ended on June 30) to an estimated record total of $24 million in FY 2022-23.

These findings, released last week by The Governor’s Office of State Planning and Budgeting (OSBP), further estimate that the new bill will generate a minimum of $25 million in sports betting tax revenue for Colorado for FY 2023-24, owing to a full 12-month period in which the tax loophole has been largely eliminated.

The new state sportsbook tax will generate $22.5 million in additional funds that have been specifically earmarked for the Colorado Water Project, while the new bill, which was passed by substantial majorities in the House (50-15) and Senate (25-8) chambers this summer, also calls for an additional $3 million a year in state funding to treat problem gambling.

Unlimited free play tax deduction reduced

Colorado retail and online sports betting sites were previously entitled to deduct an unlimited amount from their taxable revenue, provided that it comes from free bets and sports betting promotionsNow, sportsbooks' tax-free deductions will be subject to a maximum ceiling of 2.5% of their monthly handle — which will likely trigger a decline in the number of these promotional incentives that are used to acquire new bettors.

Currently, the Centennial State imposes a modest 10% tax on both online and retail operators revenue. This rate ranks among the lowest in the U.S., compared to New York (51%), Pennsylvania (36%), New Jersey (14.25% online and 8.5% retail), and Illinois (15%) — four of the six largest U.S. sports betting markets based on monthly handle.

Bryce Cook, chief economist for OSBP, suggested that the new bill will compensate the state for what is a highly favorable tax rate for sportsbooks. He also added that the record betting numbers in 2022 were another part of the rationale for removing the sportsbooks' tax incentive.

Critics of the previous sports betting legislation complained that sportsbooks earned $408 million in the two years since Colorado legalized sports betting... but the state treasury collected just $17 million in tax revenue due to the free bet deduction provision.

Based on the state's 10% tax rate, $408 million should have yielded just over $40 million in tax collections — which means that sportsbooks were able to save $23 million in taxes and that the net tax rate has actually been just above 4%.

Meanwhile, the independent Legislative Council Staff has produced an even more optimistic tax revenue forecast, estimating that Colorado sportsbook tax receipts will rise to $26.2 million in FY 2023-24 (compared to the OSBP's estimate of $25 million) and $28.9 million in the 2024-25 fiscal year.

Colorado enjoyed second-highest sports betting handle ever in October

Colorado's October 2022 sports betting figures produced the second-highest month in total sports betting wagers since the state legalized sports betting in May 2020. State operators handled a total of $526 million in wagers, a 17% increase over the $450 million posted in September and a 7.2% year-over-year rise from the $491 million recorded in October 2021.

That action resulted in $36.2 million in Gross Gaming Revenue... but generated just $2.3 million in tax revenue for the state after promo deductions.

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