JEFFERSON CITY, MO. – Advertisements promoting an electoral measure for legalize sports betting in Missouri tout the potential for millions of new tax dollars dedicated to schools. If voters approve the measure, it’s a safe bet they’ll see even more ads offering special promotions for bettors.

Many of these promotional costs — in which sportsbooks offer cash credits to customers for placing bets — will be exempt from state taxes, limiting new revenue for education.

The Missouri ballot measure highlights a burgeoning debate among policymakers over how to tax this fast-growing sector, which has expanded from one state — Nevada — to 38 states and Washington, DC. the United States Supreme Court opened the door to legalize sports betting in 2018.

“It’s a nascent industry,” said Brent Evans, an assistant professor of finance at Georgia College & State University who has taught courses on gambling. “No one really knows what a reasonable tax is.”

Since the authorization of sports bettingIllinois, Ohio, Tennessee and Washington, D.C., have all already raised or restructured their tax rates. And Colorado and Virginia have reduced the tax deductions they originally allowed.

Tax rates range from a low of 6.75% in states like Iowa to 51% in states like New York. This tax gap is even wider because Iowa allows promotional betting to be deducted from taxable income, while New York does not.

About half of states allow tax deductions for promotional expenses. This is a common way to get people to start – or continue – betting. But in the short term, it can also decrease the tax revenue available to governments and schools.

Missouri’s proposed 10% tax rate on sports betting revenue is lower than the 19% national average that sportsbooks paid to states last year. Because of “free play” deductions, there could be certain months in which sportsbooks owe nothing to the state. Missouri’s proposed constitutional amendment recognizes this possibility, stating that negative balances can be carried over from month to month until revenues increase enough to have to pay taxes.

Unlike some states, Missouri’s amendment caps the amount of promotional credits that can be deducted from taxable income at 25% of all wagers. But it seems unlikely that this cap will come into play. An analysis conducted by consultant Eilers & Krejcik Gaming for the amendment’s supporters projects, promotional betting will make up around 8% of total betting in the first year of sports betting in Missouri, subsequently decreasing.

Missouri’s proposal “is very much in line with what has worked and been effective in other states,” said Jack Cardetti, a spokesman for Winning for Missouri Education, the group that supports the measure.

After voters narrowly approved it, Colorado launched sports betting in 2020 with a 10% tax rate and full deductions for promotional bets. It recorded $2.7 billion in total bets in its first full fiscal year, generating $8.1 million in taxes, slightly below legislative projections. But Colorado changed its law starting in 2023 to cap promotional tax deductions at 2.5% of total wagers, gradually decreasing to 1.75% by July 2026.

Colorado’s sports betting tax revenue has since grown to more than $30 million in its most recent fiscal year. This growth has led lawmakers to submit a proposal during the November ballot seeking permission for the state to retain more than the original $29 million limit on sports betting tax revenue.

Capping tax deductions for promotional betting is a good move, said Richard Auxier, senior policy associate at the nonprofit Tax Policy Center. But he wonders why some states exempt them from taxes.

“We don’t give out free cannabis samples when a state legalizes cannabis,” Auxier said. “Is this something you want to subsidize through your state tax policy – ​​to encourage people to play? »

The Missouri Amendment was registered on the November ballot by initiative petition after legislation to legalize sports betting was repeatedly blocked in the state Senate. The $43 million campaign — a record for a ballot measure in Missouri — was funded entirely by DraftKings and FanDuel, which dominate the national sports betting market. If the measure passes, companies could apply for two statewide licenses to conduct online sports betting. The amendment authorizes additional sports betting licenses for Missouri casinos and professional sports teams.

The $14 million opposition campaign was funded entirely by Caesars Entertainment, which operates three of Missouri’s 13 casinos. Although Caesars generally supports sports betting, it objects to “the way this measure is written,” said Brooke Foster, a spokeswoman for the opposition group Missourians Against the Deceptive Online Gambling Amendment.

In some other states, sports betting is handled by casinos. Although research is limited, a study of seven states released last year, found that casino gaming revenue was declining as online sports betting increased.

“There will definitely be a shift between placing bets in a physical space with an incorporated casino in Missouri versus hopping on an app in your living room,” Foster said.

The effect of different tax rates can be seen in Illinois and New Jersey, which spearheaded the legal challenge leading to the widespread availability of legal sports betting. Residents in each state placed between $11.5 billion and $12 billion on sports bets last year, which generated $1 billion in sports betting revenue after winnings were paid to customers, according to figures from the American Gaming Association.

New Jersey collected $129 million in tax revenue, based on a 14.25% tax rate for online sports betting and a 9.75% tax rate with some deductions promotional products for sports betting in casinos and racetracks. Illinois collected $162 million in tax revenue, a quarter more than New Jersey, with a 15 percent tax rate in most places and no promotional deductions.

But Illinois officials weren’t satisfied with those results. From July, Illinois Imposed a Progressive Tax Schedulestarting with a 20% tax on sports betting revenues below $30 million and increasing to a 40% rate on revenues above $200 million.

Some sports betting representatives had discussed the possibility of leaving Illinois if tax rates increased. But that didn’t happen.

There’s also not much evidence that sports betting makes betting odds worse in states where they pay higher taxes, said Joe Weinert, executive vice president of Spectrum Gaming Group, a consulting firm.

“Sports betting operators compete vigorously for bettors,” he said, “and the way to compete vigorously is to offer attractive odds and good promotions.”