As the legislative session in Illinois drew to a close over the weekend, a Democrat-led faction introduced a last-minute proposal aimed at increasing taxes on sports betting.
In response to a significant budget shortfall, Illinois lawmakers passed a $55.2 billion state budget on Saturday, just ahead of the deadline. This budget introduces tax increases on tobacco, the out-of-state income of businesses, and amplifies taxes that will heavily impact the nation’s prominent sportsbooks.
For leading industry stakeholders, this tax proposal echoed the pain of last year’s legislation, which introduced a progressive tax on sports wagering revenues. Following the late Saturday approval of this year’s bill, Illinois Governor JB Pritzker announced his plans to sign it, despite strong opposition from sports betting entities across the state. This new tax hike raises concerns about whether major sportsbooks will pass on the cost to their customers.
According to insights from Wall Street analysts, one possible way forward for companies could be to explore prediction markets, which would let them offer derivatives on sports event contracts and sidestep tax implications.
### Shouldering a Higher Tax Burden
Illinois has faced criticism from top sportsbooks for last year’s implementation of a progressive tax policy on sports wagering adjusted gross revenues (AGR), which set the tax minimum at 20%, up from a previous flat rate of 15%. Moreover, the state introduced a tiered structure that scaled the tax rate for operators generating the highest revenues, including incremental increases, with a cap rate of 40% for operators with an annual AGR of $200 million or more. Initially, DraftKings contemplated a surcharge on customer wagers, similar to pricing practices used by Uber, hotels, and airlines to offset higher costs. However, DraftKings quickly withdrew this plan last August after FanDuel disclosed via analysts that it would not pursue a similar surcharge.
With the new proposed tax structure, Illinois sports betting operators will be taxed $0.25 on each wager up to the first $20 million in handle, and $0.50 for each wager beyond that threshold. This modification is set to significantly affect major players like DraftKings and FanDuel once more, while having only a modest impact on mid-tier operators.
### Drawing Comparisons with NY’s Sky-High Tax
On a trailing 12-month basis, this tax would have resulted in a gross tax impact of $86 million for FanDuel and $79 million for DraftKings, according to JMP Securities. Combined, these companies command at least a 75% market share in Illinois. This additional levy positions Illinois similarly to New York, where the two leading market operators face a 51% tax rate on sports wagering gross gaming revenues, the highest in the nation alongside New Hampshire.
### A Plunge into Prediction Markets
The tax modifications could cause a combined negative tax impact of $165 million for DraftKings and FanDuel, though it would be less substantial for Illinois’s other eight operators, anticipated to face a combined tax of about $20 million. By fiscal year 2026, this tax would represent about 5.4% of DraftKings’ projected EBITDA, with none of the smaller operators expecting an effect above 0.5%.
Barry Jonas from Truist Securities has outlined three potential responses for market front-runners: setting a minimum bet threshold, revisiting the surcharge notion, or entering prediction markets. Jonas suggests that by setting up a prediction market similar to Kalshi, operators could temporarily evade the increased tax burden. Both DraftKings and FanDuel have addressed the challenges and prospects of prediction markets in recent earnings calls; DraftKings CEO Jason Robins mentioned ongoing attention to developments while Flutter — owner of FanDuel — is investigating opportunities through a team from Betfair’s exchange business.
### A Firestorm of Criticism
The 11th-hour inclusion in the Illinois budget has ignited considerable backlash on social media. Advocates of legal sports betting warn that this new tax could stifle innovation and push customers towards illegal, offshore markets. In its opposition to the proposal, FanDuel enlisted former NFL Pro Bowl tight end Rob Gronkowski to lobby Illinois legislators.
This incident marks the first occasion since the PASPA decision that a state has imposed a flat fee per wager on sportsbook operators.