Bad News: NJ Won’t Collect $9 Billion From Legal Sports Betting

Written By Eric Ramsey on April 25, 2018

Over the last few months, sports betting coverage has migrated toward the front page in some states.

It began in sports media, where outlets like ESPN are heavily invested in the process around the country. As a decision in Murphy vs. NCAA approaches, though, the conversation has grabbed the attention of mainstream news outlets.

This week, New York Post journalist Josh Kosman provided an update on the progress in New Jersey. It was The Post’s first piece on NJ sports betting since it covered oral arguments from the Supreme Court case last December. It’s insightful at the surface level, but it has a millstone tied around its neck.

In a passage near the beginning, Kosman writes this:

If legalized by the court, sports gambling could bring in roughly $9 billion in annual revenue to the state, according to one estimate — triple the $3 billion annual take from the state lotteries and thumping the $2.68 billion net 2017 revenue from Atlantic City’s seven casinos.

Say what now?

$9 billion in annual revenue?

It’s not clear if the passage is citing that number as casino revenue or state tax revenue from sports betting. Regardless, there’s no chance it’s anywhere close to plausible. Inaccurate data is a poor foundation for opinion and policy, so let’s get it right before we proceed.

It makes sense to start where we know we’re getting factual numbers: Nevada.

The Silver State has the only single-game sports betting industry in the country right now, and it keeps good records. In 2017, bettors wagered almost $4.9 billion through Nevada sportsbooks. That’s called the “handle,” an important term to remember.

Operators retained 5.1 percent of that, good for $248.8 million in total “revenue” (also called “hold”). The rest of the handle was paid back out to bettors to cover the winning tickets.

Nevada taxes sports betting revenue (repeat: revenue) at a maximum rate of 6.75 percent. At the very most, then, the state collected about $16.8 million from its 100+ sportsbooks. That’s an all-time record, incidentally. It’s also barely a blip on the chart of total gaming taxes in the state.

New Jersey is, of course, about three times as large as Nevada by population. But Nevada is the epicenter for legal sports betting in the US and will likely remain so in the immediate future.

Definitely not $9 billion…

The author has fallen victim to the most common pitfall of sports betting coverage: conflating handle and revenue.

Journalists widely cite a 2016 study from the American Gaming Association, which estimates that US bettors wagered $154 billion on sports that year. The vast majority of that, around 95 percent, was wagered through unregulated (or under-regulated) channels. That’s handle, though, not revenue.

Similar to slots, sportsbooks are only taxed on the money they hold, not the money they pay out to customers. Even if that entire $154 billion handle was brought under regulation, books would only hold a total of $7.9 billion at 5.1 percent. And only a fraction of that would end up on states’ balance sheets.

Let’s pretend every state taxed revenue at the highest rate in the country, the 36 percent for PA sports betting. Even at that untenable extreme, total taxes from the entire nationwide industry would amount to $2.8 billion.

So yes, there are billions of dollars waiting to be wagered in NJ. But casinos aren’t going to make billions from sports betting, and neither is the state.

Forecasting true NJ sports betting revenue

Fortunately, lawmakers are becoming educated enough to stop citing conflated numbers. Nobody really has enough information to nail down a revenue projection for NJ sports betting yet, but we can provide some context, at least.

With nine million residents, about 2.7 percent of Americans live in New Jersey. Extracting that percentage from $154 billion, the total handle for NJ sports betting maths out around $4.2 billion. At a 5.1 percent hold, sportsbooks would report around $215 million in revenue from those wagers.

The state hasn’t finalized a tax rate, but others have proposed rates ranging from zero to that absurd 36 percent in PA. Expect NJ regulators to impose something in the low-to-middle range, maybe 10 percent. Under that rate, the state would be looking at about $21.5 million in annual tax revenue. Even at 36 percent (which won’t happen in NJ), it’s still only $75 million or so annually.

These are educated estimates, and they could change significantly depending on how the industry comes together. Regardless, there’s no set of assumptions that would lead to $9 billion.

There are a few caveats to the projection, too.

It’s quite hard to project…

First of all, the AGA’s number is an estimate of all money wagered, including via offshore sites and bookies. While a regulated market will capture some of the grey/black market, it probably won’t eliminate it altogether. Some bettors will still choose to do so offshore for a variety of reasons. A legal market will also capture some people who are unwilling to bet at illegally operating sites.

Lawmakers and regulators have significant control over how many of those bets remain offshore. Higher tax rates force operators to offer less favorable lines, creating less incentive to bet through regulated channels. Current sports bettors are discerning, and they’ll gravitate toward the operators that provide the best lines, whether or not they’re regulated.

The range of potential revenue is also dependent on external factors, some which aren’t encouraging for NJ.

For starters, Atlantic City isn’t the only place on the East Coast to gamble anymore. Casinos have sprouted throughout the region, and most of the neighboring states are also considering sports betting bills. Pennsylvania and Connecticut have already passed laws, for that matter. Depending on the timing to market, competition from neighboring states could stifle some of NJ’s anticipated sports betting traffic.

As a counterpoint, sports leagues contend that bookmakers outside of Nevada should hold more than five percent, maybe twice that much. And widespread sports betting might attract some new customers, many of whom won’t be concerned that they’re not getting the best line available.

In addition, Atlantic City still maintains a strong tourism industry, s0 much of the wagering will likely be done by visitors.

Framing the benefits of legal sports betting

It won’t be $9 billion, but we’re still talking about some pretty big numbers here. Unfortunately, the dollar signs make it easy to lose sight of the real reasons for legalization.

For the record, here are the primary benefits of regulated sports betting for the parties involved:

  • Bettors: Increased safeguards for funds, resources to combat problem gambling, competitive market
  • Operators: An additional amenity for customers, increased promotional opportunities involving sports
  • Sports leagues: Increased transparency into betting activity, better monitoring of integrity concerns
  • States: Tax revenue allocated to things like education and infrastructure

Notice that revenue isn’t among the perks listed for operators. In the world of land-based casinos, sportsbooks aren’t very efficient moneymakers. They take up a lot of floor space (much of it empty), and they require a full staff. Nevada casinos would likely generate more direct gaming revenue if they just filled their sportsbooks with slot machines.

But they don’t. Quite the opposite, major casinos on the Strip have invested millions of dollars into their sports betting facilities. The value of a sportsbook is more akin to a spa or a pool cabana; it’s a way to get (and keep) customers on the property for other purposes.

Of course, NJ sportsbooks will certainly create some revenue, and casino owners are already drafting blueprints. But neither they nor the state expects the industry to create a windfall of revenue on its own. Fortunately, it doesn’t really need to. There are plenty of rational benefits to legal sports betting, enough that there’s no need to embellish the numbers.

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Eric Ramsey

Eric is a reporter and writer covering the NJ gambling industry, online poker, sports betting regulation, and DFS. He comes from a poker background, formerly on staff at PokerNews and the World Poker Tour.

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