Will legalized sports betting affect state taxes?

By David Mitchell and Doug Walker

Based on their recent performance, it’s tempting to bet against the Hogs. If voters approve Issue 4 in November, you will be able to place that bet in future seasons. And while the only poll conducted on Issue 4 last month showed it trailing by a few points, don’t bet against this issue passing: the polling is as tight as the heartbreaking loss against Ole Miss. It’s not going to be a blowout like the Auburn game. Because of this, you as a voter have an incentive to be well-informed about the pros and cons of the issue.

Last May’s US Supreme Court ruling allows any state to legalize sports betting. Issue 4, a proposed constitutional amendment that increases casino gambling would allow sports betting. If Arkansans pass this amendment, you could legally bet on the Hogs, major league baseball, or other sports of your choosing.

Remember this doesn’t legalize your office March Madness betting pool. You would still have to go through one of the four casinos.  But you could bet right here in Arkansas. It’s not right, but you could bet against the Hogs. If Arkansas wins you’re happy. If they lose, you still won your bet and that reduces the sting.

There are pros and cons to legalized sports betting in general and this initiative in particular. This issue would allow people who like to gamble on sports a legal way to do it in Arkansas, it will likely increase economic activity and tax revenue at least a little, and will probably not harm other related industries. However, it may increase problem gambling, it creates a legal near monopoly in this business and will create and entrench powerful special interests with the ability and the incentive to prevent future competition.

First, the pros, people who like to bet on sports would be able to legally do so. That’s a benefit to them – the freedom to place bets legally. Legal sports betting would likely create a few jobs at two racetracks, and potentially at two more casinos. Casinos may have small positive impacts on economic growth. The data specifically on sports gambling is sparse. The Isle of Man has successfully become an online sports gambling mecca but it’s unclear if this would also be true of Arkansas casinos.

What about tax revenue? Sports betting would not create a lot of direct tax revenue for Arkansas. Consider that Nevada had about $4.8 billion in wagers on sporting events in 2017. Of that, casinos’ revenues were about $250 million, just over 5% of the amount bet. Using Delaware as an example, if Arkansas bettors would wager $50 million a year, of which the casinos would retain about 5%, or $2.5 million. Even if those revenues were taxed at 20%, then the state’s cut would only be $500,000.

There are different estimates of the total tax revenue. Moreover, only 55% of the casino tax goes to the state’s general fund; the rest of it would go to casino-hosting cities, counties, and to increase awards for live racing at Oaklawn and Southland. There is a logic to putting some of the money back in the locale’s that host the casinos, but 17.5% of the taxes are set aside to go to purse awards for live horse racing and greyhound racing by Oaklawn and Southland Casinos.

How would sports gambling interact with other types of gambling in Arkansas? It’s unclear. Sports bettors are likely different people than lottery players, so sports betting probably wouldn’t affect the lottery. Sports betting would probably modestly help the racing and casino industries. While at the casinos or racetracks, sports betters might be inclined to bet on dogs or horses, or to play some slot machines. This effect isn’t likely to be too large in any case. But, it would probably persuade some Arkansans from gambling in other states.

Compared to the lottery, a tax on sports betting is likely to be less regressive because the average sports bettor is wealthier than the average lottery player.

Those are some pros, what about the cons? Gambling research has shown that around 1-2%of the general population has a gambling problem. Expanding gambling might lead to more “problem gambling” where people are gambling to an extent that it negatively impacts their personal or professional lives, or results in financial problems. However, research suggests that there is an “adaptation effect.” When a new type of gambling is introduced, the problem gambling rate increases, but over time it falls back to its longer-term rate. We have casinos and lotteries so problem gamblers already have an outlet.

Issue 4 also does more than just allow sports gambling. This process gives a near monopoly licenses to new casinos. A competitive market would be more responsive to consumers. This is true for casinos and for sports betting.

States get to choose how gambling is regulated. Obviously, if Arkansas moves forward with casino legalization and sports gambling, the degree to which the taxes benefit county or city governments will depend upon how it is implemented. One study of casinos’ impacts on county-level per capita government expenditures and revenues found a positive impact from commercial casinos, but a negative impact from tribal casinos.

One problem with a constitutional amendment is that it doesn’t allow us to easily modify it if we make a mistake. Traditional legislation allows more room to modify as problems are discovered. There would still be regulation at the state and local level but the regulations could change more easily to fit new circumstances or correct unintended consequences.

As economists we think a free market where any company could go through the process and start a casino is better or a second best option is that the state could auction licenses for casinos and or sports gambling. The second suggestion would even bring in more revenue. Either would remove some of the advantages currently going to existing casinos.

If the legislature decides to legalize sports gambling , they could look for “best practices” from states like Nevada, Mississippi, and New Jersey, which have well-tested regulatory frameworks for gambling. Like other industries, the gambling industry should have transparent regulations that apply to all.

Regardless of how you vote on Initiative 4 there are many ways to expand gambling in the state. This is just one option and it has both good and bad parts from an economic perspective. The legislature could take up this issue in January. The economic growth or tax revenue gains to the state will likely be small but to those who want to gamble and those who want to provide gambling services, it’s also about their freedom to engage in these activities. The largest potential dangers come from entrenching special interests in the state constitution and isolating them from market competition. How voting Arkansans weigh these trade-offs remains to be seen.