As the legislative session in Illinois drew to a close last weekend, Democratic leaders made a last-minute proposal to increase taxes on sports betting.
Facing a significant budget deficit, Illinois lawmakers passed a $55.2 billion state budget just ahead of Saturday’s deadline. The budget includes higher taxes on tobacco products, the out-of-state income of businesses, and notably, on sports betting, which significantly impacts the country’s top sportsbooks.
These major players in the industry felt a disheartening sense of déjà vu, reflecting on the previous year’s introduction of a progressive tax on sports wagering revenues. Following the approval of this year’s bill late on Saturday, Illinois Governor JB Pritzker pledged to sign it into law despite considerable opposition from stakeholders within the state’s sports betting sector. This new increase raises questions about whether the leading sportsbooks will transfer the tax burden onto their customers.
Some Wall Street analysts have suggested that one possible strategy could involve embracing prediction markets, allowing companies to offer derivatives on sports event contracts without incurring tax liabilities.
### Shouldering a Higher Tax Burden
Illinois had already upset major sportsbooks last year by enforcing a progressive tax policy on sports wagering adjusted gross revenues (AGR). This policy established a base tax rate of 20% on AGR, up from the previous universal 15%.
Moreover, the state introduced a tiered tax system that escalates rates for operators with the highest revenue. This system features increments peaking at 40% for operators whose annual AGR reaches or exceeds $200 million. Initially, DraftKings considered introducing an additional surcharge on consumer bets, similar to cost-passing practices in sectors like ride-sharing and hospitality. However, this proposal was quickly withdrawn last August after FanDuel informed analysts it would not adopt a similar approach.
Under the newly introduced tax framework, Illinois sports betting operators are now also required to pay a tax of $0.25 on every bet within the first $20 million of their total annual wagers handled. Beyond this threshold, the tax rises to $0.50 per bet. This modification is expected to moderately impact mid-tier operators, but it will likely significantly affect market leaders like DraftKings and FanDuel.
### Drawing Comparisons with New York’s Sky-High Tax
Had this tax been applied retroactively for the last twelve months, FanDuel would have faced a gross tax outcome of approximately $86 million, with DraftKings experiencing a slightly lower impact of $79 million, as estimated by JMP Securities. Collectively, these two companies command at least 75% of the market share in Illinois.
This additional levy places Illinois nearly on par with New York regarding taxation pressure on the two leading operators in the market. In New York, all operators face a 51% tax on sports wagering gross gaming revenues, which ties for the highest rate in the nation along with New Hampshire, where DraftKings operates independently.
### A Plunge into Prediction Markets
Despite facing potential negative tax implications totaling $165 million for DraftKings and FanDuel, this scenario would have a minimal effect on the state’s other eight operators. According to JMP Securities, these operators could face a total tax burden close to $20 million. For the fiscal year 2026, this would represent 5.4% of DraftKings’ projected EBITDA, while none of the smaller operators’ burdens would exceed 0.5%.
Barry Jonas, an analyst with Truist Securities, outlined three potential strategies for the market leaders. Beyond setting a minimum betting floor or revisiting the surcharge strategy, he also highlighted the potential for entering prediction markets.
By launching into a prediction market similar to Kalshi, operators might temporarily evade the increased tax load, Jonas indicated. In recent earnings calls, both major operators addressed the contentious nature of prediction markets. DraftKings’ CEO, Jason Robins, remarked on the company’s cautious monitoring of developments, while Flutter, FanDuel’s parent company, discussed using expertise from Betfair’s exchange business to explore opportunities.
### A Firestorm of Criticism
The last-minute inclusion in the Illinois budget has sparked extensive criticism across social media platforms. Proponents of legal sports betting argue that this additional tax could stifle innovation and push consumers towards illegal, offshore markets. To accentuate their stance, FanDuel enlisted former NFL Pro Bowl tight end Rob Gronkowski to persuade Illinois legislators to reevaluate the proposal.
This tax signifies a significant move since the PASPA decision, marking the first state to impose a flat fee per wager on sportsbook operators.