How Further Legalization Of US Online Casinos Could Exponentially Increase Gambling Tax Revenue

If there’s any accuracy at all to a new study on the potential tax revenue impact of legal US online casinos, states that currently prohibit that form of gambling are essentially turning away money. The question is whether the study’s figures are legitimate and if so, to what extent.

The analysis says that with the widespread legalization of online casinos in the United States, jurisdictions within the country could collect billions of new tax dollars. The devil is in the details of how the study reached its conclusion.

What a recent study says about US online casinos and tax revenue

Light & Wonder, which is a division of Scientific Games, produces content for online casino operators across the globe, including the US. Thus, they are interested in the continual expansion of online casino play in the country.

In that interest, Light & Wonder commissioned VIXIO Gambling Compliance to produce a forecast of how jurisdictions in the US could benefit from legalized online casinos. VIXIO delivered exactly what it was paid for, too.

The study’s conclusion is that if every state that currently allows casino gaming – either commercial or tribal – or sports betting also legalized online casinos, the total tax revenue across all those states and the existing six states that allow at least some online casino play would amount to a whopping $6.35 billion annually. The study also estimated the total worth of the US online casino industry in that context would be $30.37 billion.

How VIXIO reached those figures and what the study doesn’t factor in are both worth discussing to fully understand the value of these figures.

Could online casinos in the US really be worth $6.35 billion a year to states?

The study’s summary introduces the first component to consider when evaluating the findings. It says that it operated on an assumption that new states would levy a 20% tax rate on online casino revenue.

While it was obviously necessary to establish some baseline to do the math, it’s a precarious assumption. Looking at how various states have taxed online sports betting reveals why. There has been little uniformity, with rates varying from 6.75% all the way to 51%.

The study doesn’t treat 20% as a mean or median in a range, though. Rather, it assumes that 36 new states would all assess a 20% rate. A wide variance in that rate seems more likely. Additionally, the study’s figure assumes that states would levy those taxes on gross gaming revenue and not net revenue.

That’s another way in which online sports betting legalization has produced deviance among states. Some states allow online sportsbooks to deduct a certain amount of promotional costs from their gross gaming revenue before taxation.

VIXIO says it used the last 12 months of actual reported gross gaming revenue from Michigan online casinos and New Jersey online casinos plus the same in both Pennsylvania and West Virginia in its math. It produced an average of those totals divided by the adult population in those four states that came to $139.50 per adult.

Then, VIXIO extrapolated that $139.50 over the equivalent adult populations of states that have yet to legalize online casino play. Again, that’s an essential assumption for formulation that has some weaknesses.

So, what’s the value of this study?

As the study itself notes, there is a wide variance between the economic value of the average adult in the states that currently offer legal online casinos. VIXIO says that figure comes to $215 per adult in New Jersey and just $56 per adult in West Virginia.

To formulate the $6.35 billion figure, the study had to assume all adults across 36 prospective states would produce gross gaming revenue in line with that $139.50 number. It’s quite possible that the figure of $139.50 per adult could resemble an average in the new block of 42 states but expecting millions of people to predictably each produce $139.5 in gross gaming revenue just in online casino play every year could be quite a reach.

The study doesn’t hide its weaknesses but rather mentions them explicitly. It would have been difficult for VIXIO to prognosticate deviances in each prospective state’s population. Additionally, each successive hypothesis used as a factor in the equation makes the conclusion even more theoretical than practical.

A final consideration for this analysis is that it does not take into account new costs states will incur due to regulating online casino play. This could include new processes, staff, and expanded programs for people who struggle with compulsive gambling issues.

Light & Wonder paid VIXIO to produce a number that it could tout to state legislators in attempts to sway them to legalize online casinos and VIXIO needed hard numbers to work that math. Forecasting the future is never an exact science, though.