When Colorado lawmakers decided to allow sportsbooks to allow promotional wagers — free bets, deposit bonuses, and the like — they may have inadvertently made it so regulators couldn’t easily project how many tax dollars from sports betting would be collected.
According to a study released July 8 by the Tax Foundation, states that exempt promotional wagers from taxes may end up collecting less than 50% of expected tax dollars. The study looked at tax rates set forth by statute in 18 states and described how in those that exempt promotions — Colorado, Michigan, Pennsylvania, and Virginia — the effective tax rate was well below the actual tax rate.
“Despite the attention always given to tax rates, it is a universal truth in tax policy that tax bases matter as much, and sometimes more, than tax rates,” the Tax Foundation’s Ulrik Boesen wrote.
Colorado is also among three states that allow sports betting operators to deduct the 0.25% federal excise tax, furthering reducing the amount of revenue on which they pay taxes.
Pandemic played role in lower collections
For Colorado, the exemptions translate into fewer dollars for the state’s water plan, which is to receive the bulk of sports wagering tax dollars. As yet, no money has been sent to the water plan. The Department of Revenue says the Colorado Limited Gaming Commission will approve distributions at its September meeting. The state’s annual tax deadline for operators is July 15.
— Colorado Water Conservation Board (@CWCB_DNR) April 5, 2021
Voters legalized statewide mobile sports betting with a 10% tax rate on gross gaming revenue in November 2019, with a mandate that the state launch operators by May 1, 2020. The Colorado Division of Gaming met that deadline, launching BetMGM, BetRivers, DraftKings, and FanDuel in a barren sports landscape during the height of COVID-19 restrictions and lockdowns. There are now more than 20 mobile sites available throughout the state.
It was estimated that Colorado would take in about $16 million in tax revenue annually from sports betting. But in the first year, from May 1, 2020-April 30, 2021, it took in $6.6 million. Some of the $10 million gap between projected and actual tax revenue can be explained by the dearth of events to bet on, but the effective tax rate is also to blame — and while sports are, for the most part, back up and running, the promotional deduction continues.
As early as last November, it was clear that the state would not collect the amount of sports betting tax revenue projected.
“In September, operators offered free bets to new players who were coming into the sports betting market specifically for football, and they used free bets as a customer acquisition tool during a football push,” Department of Revenue spokesperson Suzi Karrer said at that time. “We anticipate seeing the same push by operators during other large events; for example, the Final Four or the playoffs could see the same marketing push to gain market share by operators.”
The expectation is that the promotion offers will diminish as the market matures.
Actual tax revenue half of projected
According to the study, Colorado has an effective tax rate of 4.47%, the second lowest among the four states that allow deductions, and less than half of what was projected. Michigan, which taxes sports betting operators at 8.4%, has an effective rate of 3.28%. Pennsylvania’s 36% tax rate is among the highest in the nation, but the state collects only 25.4% in actual taxes, while Virginia has a tax rate of 15% and an effective rate of 5.4%.
— Brian Jackson (@BeeeJack) May 25, 2021
States that don’t have legal sports betting yet can learn from those that do, wrote Boesen, a Tax Foundation senior policy analyst, who advocates for a lower statutory tax rate to encourage more wagering. Boesen recommends that states considering sports betting put a cap on promotional deductions, particularly if tax revenue is earmarked for a specific state project, as in Colorado.