Rolling the Dice: Unraveling Proposed Sports Betting Tax Cuts & Legislation

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In a surprising move, an Ohio state senator, Senator Niraj Antani (Miamisburg), recently introduced Senate Bill 190 aimed at slashing the state tax rate on sports betting operators in half, potentially reducing tax revenues by tens of millions annually. Currently, a significant portion of this revenue is earmarked for K-12 education. Per Cleveland.com, the bill proposes a reduction in the gross receipts tax on sportsbooks from the current 20% to 10%. When Ohio's sports betting program kicked off on January 1st of this year, casinos were subject to a 10% tax on gross receipts. However, the rate was later doubled to 20% in the state budget that was passed during the summer – this was, again, primarily directed to support both public and private K-12 education.

Sen. Antani's proposal comes as a response to concerns raised by Ohio Governor Mike DeWine, who advocated for the increased tax rate due to what he perceived as operators crossing ethical lines in their advertising strategies. Incidents involving regulatory fines against major operators like DraftKings and Barstool Sportsbook prompted the Governor's push for a higher tax rate. The impact of such legislative changes has been evident, with Ohioans having placed bets totaling $5.2 billion on sports, resulting in $4.5 billion in winnings, translating to a net loss of $700 million.

The financial implications of Senate Bill 190 remain uncertain, with the Legislative Service Commission yet to provide a revenue estimate. However, Ohio has already collected nearly $102 million in tax revenue from sportsbooks between January and October 2023. It’s worth noting that this excludes potentially lucrative months like November and December, during which the NFL, college football, the NBA, and college basketball are all in season.

In an interview shared in Cleveland.com’s article, Sen. Antani criticized the legislature for increasing the sports betting tax within the state budget, emphasizing the need for a more measured approach to an emerging market like sports betting. He argued that while the increased tax may seem to target sportsbooks, its repercussions trickle down to bettors through less favorable odds and stingier promotional offers. The urgency, according to Antani, lies in reverting the tax rate to 10%, with a willingness to consider an even lower rate.

The national landscape for sports betting taxes has evolved since 2018, with 30 states and the District of Columbia legalizing and imposing taxes on sports betting. As more states contemplate legalization, lessons from jurisdictions with established legal frameworks become crucial, especially in terms of tax base design. New York, for instance, hit online sports betting outlets with a hefty 51% tax rate on gross gaming revenue, serving as a prime example of the varying approaches across states.

Most states adopt ad valorem (value-based) taxes on gross gaming revenue, theoretically aligning with the negative externalities associated with gambling. However, few states allocate significant revenue to address problem gambling, instead diverting the majority to general funds or unrelated programs. The challenge arises in the design of gross receipts taxes, which ostensibly target sports betting operators' gross receipts or gross gaming revenue (GGR). The complexity lies in the fact that GGR doesn't precisely indicate actual gross revenue, often including promotional bets offered by operators.

Promotional bets, such as "free" or "risk-free" bets, constitute a significant portion of GGR, capturing transactions that don't involve monetary exchanges. Ohio's move to reduce the tax rate reflects a broader challenge faced by many states. A Tax Foundation study found that only a handful, including Arizona, Colorado, Connecticut, Michigan, Pennsylvania, and Virginia, allow operators to exclude specific expenses from adjusted gaming revenue. Excluding the genuine cost of promotional plays from the tax base ensures a more accurate representation of money inflows minus outflows.

In a broader context, the nationwide expansion of sports betting has brought about diverse tax structures across states, contributing $3 billion in tax revenue since May 2018. The American Gaming Association's data reveals variations in tax rates, with Nevada, Iowa, and Indiana boasting lower rates due to their early adoption of legalized wagering. States like New York and New Hampshire, with a 51% tax rate on online sports betting revenue, represent a higher-tax approach, particularly in the Northeast.

As states continue to navigate the complexities of sports betting legislation, the Ohio case highlights the importance of thoughtful tax base design and its direct impact on operators and bettors. The outcome of Senate Bill 190 could serve as a pivotal example for other states grappling with similar decisions in their pursuit of a balanced and effective sports betting tax framework.

More on Sports Betting Taxation

It is important to understand that the taxation of gambling winnings is convoluted. Wins and losses are not netted. Winnings are reported directly as income on an individual’s tax return and losses are only deductible by individuals who itemize their deductions on Form 1040 Schedule A. This means that those who take the standard deduction cannot deduct gambling losses and end up paying taxes on all their winnings. That also leads to other tax traps associated with gambling winnings.

We have highlighted some key points below.

Impact on Adjusted Gross Income (AGI):

• The full amount of gambling winnings contributes to a taxpayer's AGI.
• AGI is crucial in determining eligibility for various tax benefits, and higher AGI can limit said benefits.

Tax Traps and Social Security Benefits:

• Gambling winnings, even if an individual had a net loss, can push their AGI over Social Security Administration thresholds.
• This may lead to up to 85% of Social Security benefits becoming taxable, creating unexpected tax consequences.

Health Insurance Subsidy Reduction:

• Gambling income in addition to a family's earned income can result in reduced health insurance subsidies.
• Families may end up paying more for health insurance coverage, and if subsidies were applied in advance, they might have to repay some or all of it during tax filing.

Medicare Premiums Impact:

• For those covered by Medicare, the AGI determines the Medicare B premiums.
• Gambling winnings inclusion in AGI can lead to higher Medicare B & D premiums, causing a significant increase in healthcare costs.

International Accounts and Reporting Obligations:

• Regardless of winning or losing, if an individual's online sports betting account is located outside of the U.S. and exceeds $10,000 at any time during the year, FinCEN Form 114 (FBAR) filing is required.
• Non-willful violations may result in civil penalties of up to $10,000, while willful violations can incur penalties of $100,000 or 50% of the account balance at the time of violation.

FBAR Penalties and Adjustments:

• For non-willful violations, civil penalties can reach up to $10,000. Willful violations may result in penalties of greater than $100,000 or 50% of the account balance at the time of violation.
• As of January 21, 2022, both penalty amounts are subject to adjustment for inflation.

Understanding the tax implications of sports betting winnings is crucial for individuals to make informed financial decisions. Whether a winner or loser in the gambling arena, being aware of these considerations is essential to avoid unexpected tax burdens and compliance issues.