Illinois lawmakers approve another sports betting tax hike. How will big sportsbooks react?
As the shot clock neared expiration on the Illinois legislative session over the weekend, a Democrat-led faction added a last-minute proposed hike on sports betting taxes.
Faced with a massive budget shortfall, Illinois lawmakers passed a $55.2 billion state budget on Saturday with minutes to spare. Along with tax increases on tobacco products and out-of-state income of businesses, the proposal contains a hike that will disproportionately affect the nation’s largest sportsbooks.
For the industry titans, the surprise proposal served as painful déjà vu from last spring when Illinois passed a progressive tax hike on sports wagering revenues. After this year’s bill passed late Saturday, Illinois Governor JB Pritzker vowed to sign it despite strong opposition from sports betting stakeholders across the state. The latest increase raises the question of whether top books will pass the tax burden on to their customers.
One option, according to Wall Street analysts, involves the embrace of prediction markets in which companies are able to offer derivatives on sports event contracts tax free.
Shouldering a higher tax burden
Illinois already drew the ire of leading books last year by enacting a progressive tax policy on sports wagering adjusted gross revenues. Through the policy, Illinois established a tax floor of 20% on AGR, up from the previous level of 15% across the board.
But the state also established a sliding scale that increased the tax rate for operators generating the highest revenue in the market. The structure contained various step-ups with a ceiling of 40% for operators generating annual AGR of at least $200 million. In response, DraftKings initially floated a proposed surcharge on customer wagers, taking a page from Uber, hotel chains and various airlines that have passed higher costs on to the customer. DraftKings abruptly pulled the idea last August, less than two hours after FanDuel informed analysts that it would not follow suit.
Under the newly proposed tax structure, Illinois sports betting operators will additionally pay a tax of $0.25 on each of their fiscal year wagers up to the first $20 million in handle. From there, operators will be taxed $0.50 for every wager above the $20 million threshold. While the new increase figures to have a modest impact on mid-tier operators, DraftKings and FanDuel are once more expected to feel the brunt of the hike.
Drawing comparisons with NY’s sky-high tax
Had the tax been applied to operators on a trailing 12-month basis, FanDuel would have faced a gross tax impact of $86 million, according to estimates from JMP Securities. The impact on DraftKings would have been $79 million. The two companies maintain a combined market share of at least 75% in Illinois.
The additional tax would place Illinois in the proximity of New York when it comes to the tax burden felt by the market’s two leading operators. In the Empire State, all operators pay a 51% tax on sports wagering gross gaming revenues.
New York shares the nation’s highest tax rate with New Hampshire, where DraftKings is the lone operator.
A plunge into prediction markets
While the tax changes would potentially present a combined negative tax impact of $165 million to DraftKings and FanDuel, the impact would be marginal for the state’s other eight operators. By JMP estimates, the remaining eight companies will face a combined levy of around $20 million. For fiscal year 2026, the gross tax impact will represent 5.4% of DraftKings’ projected EBITDA, according to JMP. None of the eight smaller operators would shoulder an impact above 0.5%.
Barry Jonas, an analyst with Truist Securities, outlined three potential scenarios for the two market leaders. One option involves imposing a floor for minimum bets, which Jonas believes would be greeted unfavourably by bettors. The companies, he noted, could also revisit the surcharge. The third option, he added, involves prediction markets.
By launching a Kalshi-style prediction market, the operators could sidestep the tax burden for now, Jonas writes. Both operators addressed the controversy surrounding prediction markets on recent earnings calls. DraftKings CEO Jason Robins indicated that the company will monitor the developments closely. Flutter, the parent company of FanDuel, noted that the company has brought on a team from Betfair’s exchange business to explore the opportunity.
A firestorm of criticism
The last-minute budget addition in Illinois unleashed a firestorm of criticism on social media. Proponents of legal sports betting questioned whether the added tax will stifle innovation and push customers to the illegal, offshore market. FanDuel enlisted former NFL Pro Bowl tight end Rob Gronkowski to urge Illinois lawmakers to abandon the proposal.
The tax represents the first time since the PASPA decision that a state has imposed a flat fee on sportsbook operators on a per wager basis.
“While the first in a nation tax was an assault on the gaming industry, it was a full frontal assault on the innovation, technology and the service economy,” said Brendan Bussmann of B Global Advisors, one of the nation’s foremost advisors on sports betting regulatory matters. “It’s clearly not a business-friendly climate.”
While the Pritzker administration celebrated the state’s seventh consecutive balanced budget, Republican opponents criticised the late additions. Republican Rep John Cabello objected that the process lacked transparency once again, according to a Capitol News Illinois report. State lawmakers first introduced the proposed tax hike on sports wagers on Friday, the day before passing the measure.
Cabello said, “We’re rushing this process like we always do: ‘Let’s hide this stuff. Let’s hide it so that the public doesn’t see it until it’s too late.'”
Neither DraftKings nor FanDuel would comment on the new tax when contacted by iGB on Monday. Both companies referred iGB to comments issued by the Sports Betting Alliance, a group that represents DraftKings, FanDuel, BetMGM and Fanatics Sportsbook.
“Make no mistake, this discriminatory, punitive and constitutionally suspect tax increase on legal sportsbooks who have invested more than a billion dollars in the state will be destabilising for regulated sports betting in Illinois,” the SBA wrote in a statement.
“Customers understand that they will be the ones to bear the cost of this new tax,” the SBA added. “With this change, lawmakers are essentially urging customers – and especially these small dollar bettors – to switch to unsafe and unregulated sportsbooks who defy state consumer protections and generate zero taxes for state priorities.”