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Kentucky Lawmakers Set High Taxes in Sports Betting Bill

KentuckyProposals to regulate sports betting in Kentucky have been widely criticized for suggesting a 3 percent tax on revenue – rather than taxing operators´ gross profits. A panel set up to advance sports betting legislation have until January to change the proposals or face opposition to the plans from stakeholders.

Sports betting operators typically set odds in their favor to win about 5 percent of what they take (the “handle”). For example, if you look at the odds for the opening week of the NFL season, you will most often find one of the teams being given a points advantage (i.e. New York Giants +1) and both teams being priced up at -110, which means you have to stake $11 to win $10. Provided the operators take an even amount of money on both teams, they will pay out $21 (including stake) for every $22 they take.

The $1 profit is Gross Gaming Revenue and, in jurisdictions in which gambling has been regulated, it is the profit that is taxed rather than how much the operator has taken. Therefore with a tax on profits of 6.75 percent, the taxman would get $0.0675 and the operator would retain $0.9325 to cover its costs. This is assuming the operator takes an even amount of money on both teams. Sometimes, money can come in for one team faster than the operator can change the odds – in which case it loses.

What is being proposed in Kentucky is a 3 percent tax on how much money is taken. So, if an operator makes a profit of $1 on every $22, the taxman would take $0.66 and leave the operator with just $0.33. The math doesn´t make it worthwhile operating a sportsbook in Kentucky because should the operator lose money on an event, it is still liable for the tax – win or lose.  What´s more, that´s before the cost of licensing fees or integrity fees are taken into account. Basically, it´s a bad idea.

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Objectives of Legislation Won´t be Met

If the tax structure remains the same, the objectives of raising revenue for the state and bringing gambling out of the shadows in Kentucky will more than likely fail. There will be few operators willing to take the risk and provide the state with the projected tax revenues of between $5 million and $60 million per year (depending on whether betting on college sports is allowed) – and those that do will have to offer such mean odds, gamblers will opt to use unregulated operators.

It is a problem members of the advisory panel appear oblivious to. In a recent interview on Louisville´s Wave3 News, State Rep. Jason Nemes was keen to focus on the revenues, giving residents of Kentucky the “liberty” to spend their entertainment dollars they way they want and ensuring “bad components” (problem gambling) are addressed before the law passes. What he missed is that, if Kentucky´s problem gamblers opt to use unregulated operators, it will be impossible to identify the “bad components”.

It´s also amazing how Nemes and his co-interviewees – State Senators Julie Raque Adams and Morgan McGarvey – managed to keep straight faces during the interview. Kentucky has some of the toughest anti-gambling laws in the country and prohibits any non-state sanctioned gambling activity that has an element of chance. However, the state has a thriving horse racing industry with pari-mutuel betting allowed, profits considerably from a multi-state online lottery, and tolerates DFS.

Might Online Poker have a Shout after Sports Betting is Regulated?

Assuming the proposed sports betting bill is amended to revise its tax structure – and subsequently passes both chambers of Kentucky´s legislature – it is difficult to know whether the appetite will be there to further expand gambling in the Bluegrass State. The horseracing industry is well protected in Kentucky and – should the sports betting proposals become law – it is assumed licenses for offering sport betting facilities will only be issued to the state´s six racetracks.

Sports betting is considered complementary to the racetracks´ existing activities, but there is a fear of cannibalization as far as non-related gambling activities are concerned. This is why there are no brick-and-mortar casinos in Kentucky. However, never say never. As various states around the country pass legislation to regulate gambling activities of all formats, Kentucky might see the opportunities that exist from regulating online poker. Let´s just hope they make a better job of drafting their proposals than they have for the regulation of sports betting!

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