As the Illinois legislative session neared its close over the weekend, a Democrat-led faction introduced a last-minute proposed increase in sports betting taxes.
Illinois lawmakers, facing a significant budget deficit, passed a $55.2 billion state budget on Saturday with only minutes left in the session. The budget includes tax hikes on tobacco products and the out-of-state income of businesses, as well as a tax increase that will particularly impact the nation’s largest sportsbooks.
For major industry players, this unexpected proposal was a painful reminder of last spring, when Illinois implemented a progressive tax increase on sports wagering revenues. Following the passage of this year’s bill late on Saturday, Illinois Governor JB Pritzker committed to signing it, despite considerable resistance from sports betting stakeholders across the state. This latest hike raises concerns about whether top betting firms will transfer the tax burden onto their customers.
According to Wall Street analysts, one potential strategy involves embracing prediction markets where companies can offer tax-free derivatives on sports event contracts.
**Shouldering a higher tax burden**
Last year, Illinois already upset major sportsbooks by introducing a progressive tax policy on sports wagering adjusted gross revenues. This policy set a tax floor of 20% on AGR, an increase from the previous uniform rate of 15%.
The state also introduced a sliding scale that raised the tax rate for operators generating the highest revenue. This structure included various increases, capping at 40% for operators with an annual AGR of at least $200 million. Initially, DraftKings considered imposing a surcharge on customer wagers, similar to approaches taken by Uber, hotels, and airlines to pass higher costs onto customers. However, DraftKings withdrew this idea last August, shortly after FanDuel announced to analysts that it would not implement such a surcharge.
Under the newly proposed tax framework, Illinois sports betting operators will now also pay a tax of $0.25 on each wager within the first $20 million in handle during their fiscal year. Beyond this threshold, operators will be taxed $0.50 for every additional wager. While this increase is likely to have a modest impact on mid-tier operators, DraftKings and FanDuel are expected to bear the brunt of the hike.
**Drawing comparisons with NY’s sky-high tax**
If this tax were applied retrospectively over the past 12 months, FanDuel would have faced a gross tax impact of $86 million, according to estimates from JMP Securities. DraftKings would have seen a $79 million impact. Together, these two companies hold at least a 75% market share in Illinois.
This additional tax would place Illinois close to New York in terms of the tax burden imposed on the market’s two leading operators. In New York, all operators pay a 51% tax on sports wagering gross gaming revenues.
New York shares this distinction of having the nation’s highest tax rate with New Hampshire, where DraftKings is the sole operator.
**A plunge into prediction markets**
With the potential for a combined negative tax impact of $165 million on DraftKings and FanDuel, the smaller eight operators in the state would face a combined levy of around $20 million. By JMP’s projections, the gross tax impact would represent 5.4% of DraftKings’s expected EBITDA for fiscal year 2026. None of the smaller operators would experience an impact over 0.5%.
Barry Jonas, an analyst with Truist Securities, outlined three possible strategies for the two market leaders. One involves setting a minimum bet threshold, which Jonas believes would be unpopular among bettors. The companies might also reconsider implementing a surcharge. Another option is exploring prediction markets.
By launching a prediction market similar to Kalshi, the operators could, for the time being, circumvent the tax burden, Jonas suggests. Both companies have addressed the controversies surrounding prediction markets in recent earnings calls. DraftKings CEO Jason Robins stated that the company will closely monitor developments, while Flutter, the parent company of FanDuel, mentioned that it has assembled a team to explore this opportunity.
**A firestorm of criticism**
The last-minute addition to the budget provoked a storm of criticism on social media. Supporters of legal sports betting voiced concerns that the additional tax might inhibit innovation and drive customers to illegal, offshore markets. FanDuel recruited former NFL Pro Bowl tight end Rob Gronkowski to persuade Illinois lawmakers to drop the proposal.
The tax marks the first instance since the PASPA decision that a state has imposed a flat fee per wager on sportsbook operators. This approach represents a significant challenge to the gaming industry, positioning itself against the industry’s interests.