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Event wagering may not pay off as expected for Arizona tax coffers

How businesses can take in a half-billion dollars and pay just 0.3% of that in taxes directly results from how sports gambling is taxed.
Updated: Mar. 24, 2022 at 9:45 PM MST
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PHOENIX (3TV/CBS 5) - During December, event wagering companies took in $499 million from gamblers in Arizona. Those companies paid the state just $1.7 million in privilege fees, which is the technical term for “gambling taxes.” If those figures repeat themselves in the coming months, it will place event wagering on the lowest end of estimates made to state leaders when the bill that legalized sports betting made its way through the legislature.

How businesses can take in a half-billion dollars and pay just 0.3% of that in taxes directly results from how sports gambling is taxed -- unlike retail and most entertainment transactions, which are taxed on the front end when a purchase is made. Gambling businesses are only taxed on what they take in, minus what they pay out, and there are no taxes on the initial bet.

“Certainly, there is some possibility that sports gambling will bring in an additional bit of revenue into the state of Arizona,” said Victor Matheson, Ph.D. He teaches economics at the College of the Holy Cross. “But it’s not likely to be nearly as much as people believed in the first place,” he said.

Matheson said there are several reasons the reality of sports gambling may be different from the perception. In some other states, tribal casinos and state lotteries have seen a decrease in revenue after the introduction of legal sports gambling. Those forms of gambling generally benefit state tax coffers more than sports betting.

Matheson also refers to the “substitution effect” as playing a role in the equation. In general, the substitution effect means that people substitute one avenue of spending for another. In other words, the money they spend on sports gambling is money they would have spent on something else. And that “something else” would likely also be taxed. So the sports betting money is not new money coming into the state.

“The more you spend on one thing, gives you less discretionary money to spend on something else,” said Matheson.

The Arizona Department of Gaming announced Thursday that tribal casinos added $27 million in taxes and fees to the state during the third quarter of 2021. Sports gambling became legal two months into that quarter, so any effect on casinos likely won’t become clear until fourth-quarter results are released.