Sports Betting Taxes: States Want a Bigger Cut

For the past few years, the sports betting industry has enjoyed a period of rapid expansion and relatively friendly regulations. However, the honeymoon phase appears to be ending. Facing looming budget deficits and drying pandemic-era federal funding, state governments are looking for new revenue streams. The lucrative sports betting market has become their primary target, with Illinois and New Jersey leading a charge to significantly increase tax rates on sportsbook operators.

The Illinois Strategy: A Graduated Tax Hike

Illinois has taken the most aggressive concrete steps toward reshaping how sportsbooks are taxed. Governor JB Pritzker signed a budget for the 2025 fiscal year that fundamentally changes the tax structure for operators like DraftKings and FanDuel.

Previously, Illinois applied a flat 15% tax rate on the adjusted gross revenue of all sports betting operators. Under the new law, effective July 1, 2024, the state has shifted to a progressive, graduated tax system. This structure is similar to federal income tax brackets, meaning the more money a sportsbook makes, the higher the rate they pay on those earnings.

The new tiers are structured as follows:

• 20% tax: For adjusted gross revenue up to $30 million.
• 25% tax: For revenue between $30 million and $50 million.
• 30% tax: For revenue between $50 million and $100 million.
• 35% tax: For revenue between $100 million and $200 million.
• 40% tax: For revenue exceeding $200 million.

This change specifically targets the market leaders. While smaller operators might see a manageable increase, giants like FanDuel and DraftKings—who dominate the Illinois market share—will face the maximum 40% rate on a significant portion of their earnings. The state estimates this shift will generate over $200 million in additional annual revenue to help plug budget gaps.

New Jersey Targets Online Operators

New Jersey, long considered the gold standard for a healthy and competitive sports betting market, is also reconsidering its tax stance. Governor Phil Murphy has proposed increasing the tax on online sports betting specifically to address funding issues within NJ Transit, the state’s public transportation corporation.

Currently, New Jersey sportsbooks pay a roughly 13% tax on online gross gaming revenue (often cited as 14.25% when including the Casino Reinvestment Development Authority obligation). The Governor’s proposal aims to hike this rate to 30%.

While this is lower than the new top tier in Illinois or the rate in New York, it represents more than a doubling of the current tax burden. The logic from the statehouse is straightforward. The industry has matured, profitability is high, and the state needs cash to maintain infrastructure. However, industry trade groups like the Sports Betting Alliance have pushed back heavily, arguing that such a drastic increase could drive customers back to illegal, offshore bookies who pay no taxes at all.

The Domino Effect: Ohio and Massachusetts

Illinois and New Jersey are not operating in a vacuum. They are part of a growing trend where states revisit initial tax rates set when the industry was just launching.

Ohio serves as the most recent precedent. In 2023, Governor Mike DeWine approved a measure doubling the state’s sports betting tax from 10% to 20%. This move signaled to other legislatures that doubling tax rates was politically viable.

Massachusetts is also debating similar moves. Senator John Keenan proposed raising the tax on online sports betting operators from 20% to 51%, matching the rate in neighboring New York. While this extreme hike faces steep opposition, it highlights the changing sentiment in state capitals. Lawmakers no longer view sports betting as a fragile new industry that needs protection, but rather as a mature cash cow ready for harvest.

How Higher Taxes Impact the Bettor

The average sports bettor might assume that these taxes only affect the corporations. However, the costs almost always trickle down to the consumer. When operators like BetMGM, Caesars, or DraftKings face a 40% tax bill instead of 15%, they have to adjust their business model to maintain margins.

Here is how you might see these changes reflected in your app:

1. Worse Odds (Higher Vigorish)

The most subtle way books offset taxes is by increasing the “vig” or “juice.” In a low-tax state, a standard point spread bet usually carries odds of -110 (bet $110 to win $100). In high-tax environments, operators may shift standard lines to -115 or -120. This makes it mathematically harder for a bettor to be profitable over the long term.

2. Fewer Promotions and Bonuses

The “New Customer Era” of generous deposit matches and risk-free bets is already fading, but tax hikes accelerate this decline. In New York, which has a 51% tax rate, promotional offers are noticeably less generous than in states with lower taxes. Operators simply cannot afford to give away free money when the state takes more than half of every dollar they hold.

3. Market Consolidation

Higher taxes make it difficult for smaller sportsbooks to survive. If a state implements a high tax rate or a high licensing fee, niche operators may exit the market entirely. This reduces competition. When there are fewer sportsbooks to choose from, the remaining giants have less incentive to offer competitive odds or user-friendly features.

Frequently Asked Questions

Which state currently has the highest sports betting tax? New York currently holds the highest tax rate on mobile sports betting gross revenue at 51%. This rate has generated massive revenue for the state but has been a constant point of contention for operators like DraftKings and FanDuel.

Will I have to pay more taxes on my winnings because of this? No. These proposals increase the tax rate on the operators (the sportsbooks), not the individual bettor. Your tax obligations to the IRS and your state regarding gambling winnings remain unchanged.

Why are states raising taxes now? Many states legalized sports betting between 2018 and 2021 with low tax rates to encourage operators to launch quickly. Now that the market is established and betting habits are formed, states feel confident raising rates to cover budget deficits without fearing that the industry will collapse.

Could sportsbooks leave states like Illinois or New Jersey? It is possible but unlikely for the major players. Despite threatening to re-evaluate their presence, the volume of betting in states like Illinois and New Jersey is too high for giants like FanDuel or DraftKings to ignore. It is more likely they will reduce marketing spend and worsen odds rather than leave the market entirely.