Illinois lawmakers have approved another sports betting tax hike

Illinois Legislative Tax Changes and Their Implications for the Sports Betting Industry

In a dramatic late-session move, Illinois lawmakers have imposed an unexpected increase in sports betting taxes, raising concerns among stakeholders in the gambling industry. As the legislative clock wound down, a Democratic faction added this tax to a broader $55.2 billion state budget aimed at addressing a significant fiscal shortfall.

This new tax hike is particularly burdensome for major sportsbooks, coming on the heels of last spring’s progressive tax rate increase on sports wagering revenues. Despite the pushback from industry players, Governor JB Pritzker has committed to signing the revised bill, prompting speculation about whether sportsbooks will shift these costs onto consumers.

In light of the increased financial strain, Wall Street analysts are considering the potential for sportsbooks to adopt prediction markets—derivatives on sports events that would remain tax-free—offering an innovative approach to navigating these regulatory challenges.

Navigating Higher Tax Obligations

The tax increase follows Illinois’s prior implementation of a progressive tax policy, which introduced a baseline tax rate of 20% on adjusted gross revenue (AGR), up from a flat 15%. This structure escalates the tax rate for top performers in the market, culminating at 40% for operators with annual AGR exceeding $200 million.

Initially, DraftKings toyed with the idea of imposing a surcharge on customer wagers as a response—a strategy reminiscent of airlines and gig services that often pass increased costs onto consumers. However, the company abandoned this plan after FanDuel announced it would not proceed with similar measures.

Now, the new tax structure further complicates matters for Illinois sports betting operators, who will incur an added $0.25 fee on all wagers up to $20 million and a $0.50 fee for wagers exceeding that threshold. While mid-tier operators may absorb a modest increase, premier books like DraftKings and FanDuel are expected to feel the financial impact most acutely.

Comparing Illinois and New York Tax Structures

Had this latest tax been calculated based on a trailing twelve-month revenue model, projections suggest that FanDuel could face gross tax implications of $86 million, while DraftKings might see obligations of $79 million. Together, these two companies command over 75% of the Illinois market share.

In comparison, Illinois’s tax structure is inching closer to New York’s, which imposes a staggering 51% tax on sports wagering gross gaming revenues—one of the highest in the nation, alongside New Hampshire.

Exploring Prediction Markets as a Solution

Despite the projected $165 million tax burden on DraftKings and FanDuel, smaller operators may only face a collective levy of about $20 million. For DraftKings, this tax impact could represent roughly 5.4% of projected EBITDA for fiscal year 2026, while smaller operators’ impacts would be negligible, at less than 0.5% each.

Barry Jonas of Truist Securities outlines three potential routes for these industry leaders: establishing a minimum bet floor, re-evaluating surcharge strategies, or venturing into prediction markets, which might present a viable avenue to mitigate the tax implications without directly passing on costs to consumers.

Such markets would allow operators to sidestep traditional tax burdens for the moment. Both companies have acknowledged the potential for this approach in recent earnings calls, with DraftKings CEO Jason Robins emphasizing close monitoring of this evolving landscape. Meanwhile, Flutter, which owns FanDuel, is reportedly enhancing its capabilities in prediction markets by integrating expertise from Betfair.

Criticism from Industry Stakeholders

The last-minute addition of this tax has provoked significant backlash on social media, as advocates for legal sports betting warn that such measures could hinder innovation and push bettors towards unregulated, offshore platforms. Notably, FanDuel has enlisted former NFL tight end Rob Gronkowski to advocate for the repeal of this measure.

This tax marks a pioneering instance since the repeal of PASPA, instituting a flat fee on sportsbook operators per wager, which experts argue stifles the competitive environment fostered in recent years.

Brendan Bussmann of B Global Advisors characterized the tax as a “full frontal assault” on the gaming industry, emphasizing its detrimental implications for technological advancements and service economies. Lawmakers, despite celebrating a balanced budget, have faced criticism for the lack of transparency surrounding the process. Opponents have voiced concerns over the rushed nature of the tax proposal, leading to apprehensions about public scrutiny.

Both DraftKings and FanDuel declined to comment on the tax when approached for insights, directing inquiries to the Sports Betting Alliance. The Alliance has strongly condemned the tax, warning that it threatens to undermine responsible gaming and risks driving bettors towards unregulated platforms devoid of consumer protections.

The stakes are high as Illinois grapples with these tax implications, and the industry’s response will undoubtedly shape the future landscape of sports betting within the state.