Study Finds High Sports Betting Tax Rates Harm Local Government Revenue

A recent report, “Local Fiscal Consequences of Sports-Betting Tax Policy” by researchers Cameron M. Ellis and Lars Powell of the Universities of Iowa and Alabama, shows that not only do higher tax rates on sports betting harm consumers, but they also have a negative effect on local consumer spending. The pair point out that while most states have legalized sports betting since 2018, policy debates tend to ignore local governments.

Ellis and Powell argue that local governments shouldn’t be ignored. The researchers used 90,000 municipal bond yields from 2018 to 2024 and Census of Governments data from 2017 to 2022 to examine how the sports betting tax rates established by state legislatures affect local government revenue.

Ranging from a low of 6.75 percent in Iowa to a high of 51 percent in New York and New Hampshire, there is great disparity in the tax rates in the 40 states (plus Washington, D.C.) that have legalized sports betting. The analysis found that states with stronger religious or cultural opposition, or with established lottery programs, tends to set higher tax rates as a form of protectionism. States also tend to set tax rates similar to the rates of neighboring states with sports betting.   

The analysis also found that across all states that legalized sports betting bond yields fall by about 10 basis points as municipal sales tax revenue rose by roughly $44,000 per city. At the median tax rate of 15 percent, bond yields drop by 14 basis points and the sales tax revenue gain is about $36,000. Higher state tax rates erased those benefits, showing a drop of $4,700 in sales tax revenue per percentage point increase in the sports betting tax.

“Legalization improves local fiscal conditions, but higher state tax rates diminish these gains,” Ellis and Powell state. “We find no extensive-margin effect on intergovernmental transfers, suggesting effects flow through consumer spending rather than revenue-sharing.”

The researchers note that states and localities are taxing different, but economically linked, bases. While states tax sports betting revenue, localities tax general sales and consumption. The connection runs through complementary economic activity, with sports bettors using bars and restaurants as they place their bets. Ellis and Powell note that high tax rates can suppress betting volume and the associated complementary spending, while also pushing bettors toward the black markets of unregulated offshore sportsbooks.

Although it is beyond the scope of the study, it should be noted that eight states only allow in-person betting, meaning that local bars and restaurants in those localities would not get the bounce-off benefit of sports bettors wagering on online apps as they enjoy food and drink.

The Taxpayers Protection Alliance recently testified on a sports betting expansion bill in Washington state, arguing that lawmakers should allow existing partners like DraftKings and FanDuel to offer their apps throughout the state rather than only at tribal casinos as proposed. Legislators expressed concern over the prevalence of prediction markets like Kalshi in Washington, while simultaneously offering no solutions to state residents who might want to wager on a game from the comfort of their couch (or from a bar or restaurant).

The Ellis-Powell analysis shows that lower tax rates not only benefit consumers and sports bettors, but also taxpayers of localities and the programs those levies help support.