Missouri lawmakers eye betting tax hike after modest early returns

COLUMBIA, Mo. (KMIZ)

After spending its first two months in the red, Missouri saw its first taxable sportsbook revenue in the third month of legalized sports betting.

Missouri sportsbooks handled $277 million in February, after taking in just more than $385 million in wagers in January. However, with operators unable to deduct as many promotional credits as they did during the first two months, the state reported $10.3 million in gross taxable revenue, leaving about $1 million for schools. 

After writing off a combined $158.1 million in free-play wagers in December and January, sportsbooks were only able to write off $11 million in February, a $20 million drop from the previous month. FanDuel wrote off $4.6 million while DraftKings wrote off $3.5 million. 

This comes after the Missouri Senate began advancing the state’s budget, approving a key education spending bill last week. Of the $4.28 billion allocated from the foundation formula, just $6.8 million was expected from the Sports Wagering for Education Fund.

However, Ryan Butler, a senior news analyst at Covers.com, believes that number could end up being higher, but admitted it won’t make or break Missouri schools. 

“The promo dollars are drying up. That's good for the state's bottom line," Butler said. “March Madness usually gets a little bump with it. It’ll level out a little bit in April, May and June, and then it’ll be really low in July and August. But that goal is September, October, November, December, the football months, a little bit of January, you see the really strong numbers.” 

Despite strong betting volume, the early returns have prompted Missouri lawmakers to consider increasing the state’s sports betting tax rate.

Any change, however, may be difficult to make because regulations adopted by the Missouri Gaming Commission were required to align with the ballot language approved by voters when sports betting was legalized.

Under the amendment, a 10% tax is applied to sports betting revenue and directed toward education. However, operators are allowed to deduct certain expenses and must also contribute to the compulsive gambling prevention fund before any tax revenue is calculated. The ballot language also allows for the possibility that no money would go to schools if taxable revenue is too low.

House Bill 3533, sponsored by state Rep. Jeff Knight (R- Camden County) proposed raising the current sports betting tax rate from 10% -- which is currently one of the lowest in the country -- to 34%, which would mark one of the highest. Knight’s bill would also cap how much promotional spending operators could deduct from the end-of-the-month totals. 

“It was done through a ballot measure that was funded mostly by two big sportsbooks. They want lower taxes,” Butler said. “You see this in almost every state. These different laws are proposed tax increases. Sin industries (such as) gambling, tobacco, alcohol, all of those things are politically a little bit easier. Missouri, it's also kind of interesting that alcohol and tobacco might be less politically palatable. These are states that are very strong in those two areas. So you go after gambling, and it makes sense.” 

A public hearing was held on the bill on Tuesday. While the bill is still in committee, it could resurface even if it does not pass this session, especially if voters approve Republican Gov. Mike Kehoe’s proposal to eliminate the state income tax. Income tax currently accounts for about two-thirds of Missouri’s general revenue, meaning the state would need to pursue other sources, such as higher sales taxes, to offset the loss.

“The ballot measure would give the legislature broad leeway to tax anything. So sportsbooks would be the very first thing I'd tax, if I’m a politician. You're not going to tax groceries more," Butler said. "You're not going to tax baby formula. How do you get away with that? But you could tax sportsbooks, and you could tax casinos.” 

However, a 34% increase could draw the ire of sportsbooks and prevent new markets from wanting to enter the state. 

“Sportsbooks lobby against tax increases. That's why they have lobbyists for it make sense of it. And yeah, their argument has always been if you do have these crazy big tax increases, that reduces our ability to function. The reality is, is that there are still hundreds of offshore legal sportsbooks that are paying no taxes,” Butler said. “So when you raise taxes on it, it makes it hard.  The sportsbooks are OK, they don't like it, but they're OK with a 20 [percent tax rate]. That's really where they could tolerate it. Once you get past 20, they send people in, and they fight that pretty tooth and nail.” 

Circa Sports, one of the first two companies in Missouri to receive an online betting license, told ABC 17 News in December the state's tax structure was attractive for its low-hold model.

Derek Stevens, Circa’s owner and chief operating officer, said in December that Circa won’t invest in states with a high tax rate because a low-hold model would not be able to make a return. 

“As an example, we really don't want to get into the state of New York, I know the volume is huge, but we want to be able to overcome those taxes,” Stevens told ABC 17 News in December. “When we saw the regulatory framework that was going to come out in the state of Missouri, we felt that Missouri set themselves up to be really a leader in the sports betting industry for a long time. We thought they did a real good job from a tax perspective as well as the regulatory perspective, so we determined we wanted to get into Missouri.”

Missouri’s current 10% tax rate ranks 20th among the 40 states that have legalized sports betting. If Missouri lawmakers were to approve a 34% tax rate, the only states that would rank higher would be Oregon (51%), New Hampshire (51%), Rhode Island (51%), New York (51%), Delaware (50%), Illinois (50%) and Pennsylvania (36%).  

Because of this, Butler believes lawmakers will get pushback from the sportsbooks. 

“If they ban legalized online casinos with a 34% tax increase, they [sportsbooks] would take that deal in a heartbeat. But that's much harder to do,” Butler said. “For Missouri [34%] would be objectively unsustainable. That's too high a number for a state like Missouri.” 

ABC 17 News reached out to Knight for comment on the bill.