Excise-Tax Reform as a Harm-Reduction Approach to Sports Gambling
TL;DR
Background: The U.S. federal government applies a 0.25% excise tax on total amounts wagered on legalized sports gambling (LSG), as well as a 2% excise tax on illegal sports gambling—although the latter is rarely collected. When combined with state-level taxes and an annual $50 per-employee occupational tax, however, the taxes that legal operators face are significantly more onerous. In practice, these additional operational costs present obstacles to the effective operation of legal gambling markets. These tax burdens also limit legal operators’ ability to invest in responsible gaming programs and safer user experiences.
But… While the federal excise tax aims to generate revenue and discourage excessive gambling, its unintended consequences include making illegal offshore gambling relatively more attractive to consumers. Legal operators report that they struggle to match the pricing and incentives offered by illegal operators, who systematically avoid taxes and regulations. Offshore platforms also lack many responsible gaming measures, exposing consumers to risks without legal recourse.
However… By embracing a harm-reduction approach, governments could encourage consumers to engage with regulated platforms by making legal gambling more competitive.
KEY TAKEAWAYS
LOWERING OR REMOVING THE EXCISE TAX
Reducing or eliminating the federal excise tax on legalized sports gambling would directly alleviate the financial burden on legal operators, enabling them to lower their operational costs. The 0.25% tax on all wagers, coupled with the $50 annual head tax per-employee, inflates the expenses that legitimate businesses must bear.
The excise tax is applied to the total amount wagered, known as the handle, regardless whether the bettor wins or loses. The difference between the sums that a sportsbook pays out to winners and the amount it keeps from losers is known as the hold, and is typically about 5% of the handle. Thus, while a tax of 0.25% of the handle seems small, as a share of the revenues the sports book receives, the tax can be 5% or more.
Research indicates that U.S. gaming consumers are very price sensitive. In a competitive market, a 5% tax can significantly restrict operators from offering competitive odds, promotions, and bonuses, making it harder to attract consumers. Further, most offshore platforms evade these taxes entirely, which allows them to offer superior payouts, better odds, and more generous promotions. This can be thought of as a form of import dumping, in which tax-evading offshore firms can underprice U.S. firms.
Lowering or eliminating the LSG excise tax would restore parity by allowing legal platforms to price their services competitively and attract more consumers to regulated markets.
A BETTER USER EXPERIENCE
Reducing the federal excise tax would also allow legal gambling platforms to reinvest their savings into innovative customer-engagement strategies, such as improved odds and more attractive sign-up bonuses. Additionally, operators could create more appealing loyalty programs, providing incentives for bettors to stay within legal platforms. By offering experiences comparable to or better than offshore alternatives, legal platforms would increase their market share while ensuring that consumers gamble within environments that are subject to responsible gaming regulations
ENCOURAGING RESPONSIBLE GAMING
Offshore platforms often operate outside U.S. regulators’ reach, allowing them to evade consumer-protection standards, responsible gaming measures, and financial transparency. This lack of oversight exposes consumers to such risks as fraud, addiction, and the loss of recourse in disputes.
Lowering or eliminating the LSG excise tax would empower legal operators to devote greater focus to harm-reduction efforts, such as investing in technology to monitor gambling behavior and intervene when problematic patterns arise. These investments could include better customer-support services, self-exclusion programs, and partnerships with mental-health organizations to offer accessible counseling and addiction-prevention resources.
Additionally, operators could develop more transparent communication with users, promoting healthy gambling habits and educating them on the risks involved. This shift would reduce the social costs of problem gambling, which is ostensibly a primary justification for the excise tax.
MAINTAINING THE INTEGRITY OF SPORTS
Legal operators play a crucial role in maintaining sports integrity by sharing real-time betting data with specialized monitoring services that detect potential match-fixing attempts. These aggregators analyze betting patterns across multiple platforms to identify suspicious activity.
Offshore operators typically avoid participating in these monitoring systems, creating blind spots that make it harder to detect and prevent match-fixing schemes, ultimately threatening the integrity of sports competitions. Further, unregulated offshore entities can be vectors for cybersecurity breaches and fraud.
Once a tool to curb excessive gambling, the LSG excise tax now undermines the competitiveness of legal markets and compromises consumer safety. Reforming or eliminating the tax would align with a harm-reduction strategy, promoting safer gambling environments while maintaining market health.