February 9, 2023
Proposed Changes to New York Gaming Laws Could Impact New Jersey Gambling Revenue
- New York operators claim that taxes are inhibiting mobile gaming profits.
- NY Legislators consider expanding sports gambling licensing and legalizing online casinos.
- New Jersey eyes the potential impact of neighboring legislation.
New Jersey had another successful gambling revenue year in 2022, when the state matched its all-time high of $5.2 billion. However, there are some recent rumblings of potential tough times down the road.
One of the biggest concerns for the New Jersey gaming market is neighboring New York, where the recent legalization of mobile sports gambling seems to have impacted New Jersey’s bottom line. Sports gamblers in New Jersey placed nearly $11 billion worth of sports bets in 2022. While that seems like a massive number, it is just a bit more than was placed in 2021.
Of that $11 billion in New Jersey sports bets placed at casinos, tracks, and online, the venues took in $726 million in profits—a 7% decrease in sports gaming revenue from the previous year. Meanwhile, From Jan. 8, when the New York expansion to internet sports betting went into effect, to the end of the month, patrons wagered nearly $2 billion at the online sportsbooks, according to the New York State Gaming Commission. This topped New Jersey’s prior single-month record of a $1.3 billion.
These New York sports gambling numbers are likely inflated, but two proposed changes to New York gambling laws could add to issue: 1) legalization of online casino gambling and 2) lowered taxes on mobile sports betting.
The Push to Legalize Online Casinos in New York
iCasinos and iPoker are the next priority for New York gaming operators, and those operators are already making their voices heard. DraftKings CEO Jason Robins recently made his feelings on the matter clear at a hearing on state gambling tax rates:
“States like New Jersey, Connecticut, and Pennsylvania have authorized iGaming,” Robins said in his testimony. “And results have shown that iGaming’s success can come without cannibalizing existing retail gaming operators or the lottery, and certainly without experiencing the hyperbolic, doomsday scenarios that many opponents recklessly predict.”
Robins’ immediate comparison to New Jersey’s online gaming market should not go without notice. New Jersey was one of the first states to offer online casinos, which led to early dominance in the market. This dominance continued through 2006, when gross gambling revenue for New Jersey hit a record $5.2 billion. However, revenue began decreasing after that, largely due to competition from casinos in other states, particularly neighboring Pennsylvania.
The online New Jersey casino industry ended 2022 with double-digit growth. However, if New York enters the online casino market, it stands to reason that New Jersey’s online gaming revenue is likely to take a hit.
As Robins pointed out, and as evidenced by the states with both legal sports betting and online casinos, online casinos are the more significant revenue generator. Spectrum Gaming predicts that the New York online casino market would generate revenue of $2.3 to $3.1 billion in Year 1 and $3.6 to $4.3 billion by Year 5.
Realistically, some of that online casino revenue is likely to come from New Jersey. By comparison, prior to legalized mobile sports gambling in New York there were bettors “who literally had been crossing the George Washington Bridge” from New York City, “placing a bet inside the four walls, maybe at the Meadowlands or in their car online and going back to New York,” according to New Jersey Governor Phil Murphy.
“Presumably a good amount of that traffic will cease,” Gov. Murphy continued during a Feb. 7, 2022, COVID-19 briefing. Similarly, if New York were to pass legislation legalizing online casinos, it would significantly lessen traffic coming from New York to New Jersey to play casino games, either online or on the Atlantic City boardwalk. With online casinos being an even larger revenue generator than sports gambling, combined with the recent success of the New York mobile sports betting market, this is a development New Jersey operators will no doubt have their eyes on.
Online casino legalization in New York is far from guaranteed. First, it is generally considered a more controversial topic in New York than mobile sports betting. Second, it’s unclear if such legislation would require a state constitutional amendment. If so, that would at a minimum slow down the legalization process. Finally, there is concern that tribal casinos will need cut into the online casino action to placate their potential opposition.
These potential hurdles have not prevented some preliminary action on the New York online casino legislation front. Assemblyman Gary Pretlow has already introduced two online gambling bills this year:
- A 1380, a bill to legalize online poker by defining it as a game of skill.
- A 3634, a reintroduced a bill from 2022 that seeks to legalize online casino gambling.
However, it is anticipated legislation by Senate Racing, Gaming and Wagering Chair Joe Addabbo that many industry experts expect to be the key to legalizing online casino gambling.
Sen. Addabbo recently made a case for online casinos yesterday after Light and Wonder official Howard Glaser told lawmakers that iGaming in six states where it is currently legal generated twice the tax revenue of all legal sports betting nationally in 2021. Glaser also claimed that this revenue had no negative impact on brick-and-mortar casinos.
“Sports betting is a good appetizer, but iGaming has proven to be the main course as far as revenue generation is concerned,” Glaser testified to New York lawmakers.
“We’re losing roughly $600 million to an illegal market every year … we’ll say $1 billion to include the out-of-state bettors, then the $3 billion we would have made in revenue,” added Sen. Addabbo. “Every year we don’t do iGaming in New York it’s $4 billion lost – revenue lost and loss to another state and the illegal market.
“This is the argument we made with mobile sports betting. They were going to another state, they were doing it illegally, and every year we lost $1 billion and so forth,” Addabbo said. “I would think New York would do something.”
Despite these arguments, legalization of online gambling in New York is still in its infancy. Nonetheless, New Jersey operators will have a close eye on which side the tribal casinos and Governor Kathy Hochul fall on pending gambling legislation to predict if an attempted New York constitutional amendment may be on the horizon.
New York’s Mobile Sports Betting Tax Rate
New York ties several other states for highest tax rate on mobile sports gaming at 51%, and operators within New York are not happy about it.
DraftKings Sportsbook and FanDuel Sportsbook made it clear during recent legislative committee hearings that they are eager to lower their tax burden in any number of ways, including:
- A change to the state’s tax rate.
- Increasing the number of mobile operators.
- Allowing promotional deductions.
“The cause of underperformance is not a mystery,” FanDuel President Christian Genetski told the committee. “It’s the pull back of investment by operators in the market.”
DraftKings CEO Jason Robins hinted that if the status quo remains, operators will be forced pass off the burdens to the consumer. New York Assembly Racing and Gaming Chair Gary Pretlow saw the statement as a veiled threat, calling it “collusion,” and countering that if that came to pass, the Attorney General would have to get involved. However, Assemblyman Jeff Gallahan said the budget process will ultimately dictate what happens with the tax rate. When asked by Gallahan what the sportsbooks intend to do if the 51 percent rate doesn’t change, Robins didn’t flinch. Worse odds, worse promos, and pulling back on partnerships with franchises would all be on the table.
Pretlow argued that offering worse odds to increase company profits could backfire, and the types of bets a state permits is also a consideration. Pretlow said he’ll even cross the state border into New Jersey to bet on markets not allowed in New York, such as voted-upon events like MVP.
Bettors, he said, will go where they get the best odds. “If you at DraftKings change the odds on the Giants +15.5 and everyone else is doing 15, everyone is going to go (elsewhere),” said Pretlow.
Robins also claimed the effective tax rate in New York is above 70%, as operators aren’t allowed to deduct promotional credits from their tax obligations. He and Genetski said that high tax rate also translates into a lack of growth. FanDuel specifically anticipates a 10 to 20 percent drop in revenue in New York year to year as it struggles for a higher hold percentage, according to Genetski. Speaking for DraftKings, Robins said, “we would need some allowance for promotions and some change in the rate” to achieve projections.
By comparison, New Jersey taxes online sports betting revenue at a far lower 14.25%. For operators with in-state casinos, promotional bets may also be deducted in determining gross gaming revenue, creating an even greater disparity in the effective rate between New York and New Jersey.
The results of sports book operator hesitancy in New York are starting to show. Data shared by Spectrum Gaming shows that New York mobile sports betting handle per capita fell by 21 percent after the first quarter – something Spectrum official David Isaacson called an anomaly. And mobile sports betting wagering volume in New York fell in the fourth quarter of year one, he added – something that doesn’t usually happen in competitive states, like New Jersey and Pennsylvania.
So far, New York lawmakers seemed unconvinced. Several lawmakers asked why operators, who knew the state had imposed a 51% sports gambling tax rate, applied for licenses. Robins’ answer was it was better to be in New York under any circumstances than to be on the sidelines.
Another strike against a lower tax rate was Gov. Kathy Hochul’s budget, which included $900 million in sports betting tax revenue. It is highly unlikely that New York can reach that number with a reduced tax burden. In fact, many believe that Hochul’s $900 million mark would likely require a tax increase. The state’s 2022 tax benefit was $693 million, and revenue has declined as operators pull back the reins.
On the surface, this sounds good for New Jersey operators. If New York continues to insist on a 51% tax rate with no deduction for promotional bets, then New Jersey holds a competitive advantage for operating within the state. However, there is another path to lower New York tax rates that could pose a bigger threat.
FanDuel and DraftKings both support S 1962, legislation introduced by Sen. Joseph Addabbo, that would increase the number of mobile sports betting licenses available to 14 in 2024 and 16 in 2025. Based on the tax rate matrix the state created for sports betting, the increase in operators lowers the tax rate to 35% and 25%, respectively.
Those tax rates are comparable to the 36 percent tax rate on mobile sports betting in Pennsylvania, where revenue has grown steadily since mobile launched there in 2019. This is particularly concerning considering that the advent of casino gambling in neighboring Pennsylvania sent New Jersey’s gambling industry into a downturn that eventually led to the closures of five of the 12 Atlantic City casinos that were operating at the time.
Sen Addabbo’s proposed bill would simultaneously place more competition in neighboring New York while lessening the competitive tax advantage New Jersey currently holds. How the governor and other legislators will view this proposal is unclear. However, it does appear New York always envisioned more sports betting operators, as evidenced by the tax rate matrix.
Where Does this Leave New Jersey?
New Jersey operators will be keeping a close eye on the debates surrounding lowering mobile gaming taxes and legalizing online casinos in New York—or the potential perfect storm of both.
It is important to remember that these are not either/or options. Rather, New, New York operators and others claim that online casinos would promote more growth by allowing more local investment and better odds and bonuses, which in turn could allow the legislature to cut the tax rate on mobile sports betting.
With PlayUSA’s annual online gambling expansion report suggesting that New Jersey’s gambling market may be approaching a ceiling, it’s even more important for in-state operators to stay adaptive locally while keeping an ever-vigilant eye on what happens in the Empire State.