On Friday, October 22nd the New York State Gaming Commission announced what the tax rates will be for anyone unfortunate to win the right to operate online sports betting.  Most of the bids were probably already in, but the Gaming Commission graciously gave the companies involved til Monday to amend their complex, multi-million-dollar proposals.

There are so many things wrong with this attempt by New York to catch up with New Jersey and the rest of the country that it is hard to know where to begin.

The minor question is how an administrative agency like the Gaming Commission has the right to set the tax rate.  Everywhere else, only legislatures can pass tax laws.  But maybe New York is different. 

Of greater concern is the tax rates the Gaming Commission chose.  News reports headlined that the highest tax rate was set at 65%.  I think it would be more accurate to say New York decided sports books could keep 35%.  

But the biggest problem is that book-making is expressly prohibited by the New York State Constitution:

“ . . . except as hereinafter provided, no lottery or the sale of lottery tickets, pool-selling, book-making, or any other kind of gambling, except lotteries operated by the state and the sale of lottery tickets in connection therewith as may be authorized and prescribed by the legislature . . . and the legislature shall pass appropriate laws to prevent offenses against any of the provisions of this section.”

There is an exception for “pari-mutuel betting on horse races,” but nobody is going to argue that betting heads-up on whether a football team will beat the spread is pari-mutuel betting, let alone betting on a horse race.  Another exception in the Constitution allows bingo.  But the Legislature would never claim that sports wagering is bingo.

A last exception is “casino gambling at no more than seven facilities as authorized and prescribed by the Legislature.”  As a sign of how desperate State Legislators are, they actually are arguing that book-making is casino gambling.

A few years ago, ignoring the express prohibition on book-making, the state allowed the seven casinos to have sports books.  Maybe there is some justification because bettors do have to be physically present in the sports books, which are inside the casinos, just like in Las Vegas.  (There were non-casino sports books on the Strip, but they were all wiped out once the federal excise tax rate came down, making books profitable for giant casinos).  

But I think the real reason New York casinos offer bookmaking is that no one filed a suit against it. 

I don’t think online sports books will be as lucky.

Here’s what they say in the new internet sport betting law:  “It is the sense of the Legislature that this provision is not contravened by a statute that authorizes the acceptance of a wager by an individual who is betting by virtual or electronic means and the wager is accepted through equipment located within a licensed gaming facility.”  In other words, the State Legislature can ignore the express Constitutional prohibition on book-making by simply declaring that so long as a computer server is in a casino, a sports bet placed by mobile phone 100 miles away is “casino gambling.”

This game-playing with the law is also going to make those operators who win licenses losers.  Just to get a license will require payment of an initial fee of $25 million. And, since all sports bets have to go through a casino, the sports books also have to pay another $5 million annually to their casino partner.  It is not yet known whether the seven lucky casinos might demand even more.

And then there is the ridiculous 65% tax rate.  In 2008 I was hired by the State of Delaware to recommend the tax rate they should impose on the sports books they planned to reopen in their racinos.  Delaware had been grandfathered in under the federal Professional and Amateur Protection Act as one of the very few states which could have legal sports betting.

I did a lot of research on gambling tax rates around the world and discovered a few truisms:

1) Every state which legalized a new form of gambling looked around to see what every other jurisdiction was doing, and then decided on a tax rate higher than everyone else.

2) When legal gambling is successful, government always tries to raise taxes and fees as soon as it is able.

3) Certainty and stability of tax rates are almost as import as the rates themselves.  No one wants to invest a billion dollars building a casino only to find the rates unexpectedly go up.  When the Governor of Illinois announced that he was raising the top tax rate to 70%, a casino executive told me he would never put another penny into the state.

4) Any tax rate more than 50% is toxic.  Gaming operators feel, quite rightly, that the government is the senior partner.  

All these factors are coming together in New York.  The tax rate might be less than 50%, depending upon the number of successful bidders.  But a top rate of 65% shows government is greedy and will try to get more if the sports betting is successful.  Sports betting is one of the least profitable forms of gambling, whether in a casino or not.  The hold is less than 4.2%.  There is a federal excise tax of 0.25%.  This may not sound like a lot, but it is on every bet, win or lose, not on gross gaming revenue.  That amounts to about another 6%, so a 65% rate becomes 71%, leaving the sports books with 29%.  And that is before the $25 million initial fee and $5 million annual fee, and all other expenses and regular business taxes.

Perhaps the license winners might be able to convince New York to lower its taxes once they start going broke.  

But I wouldn’t bet on it.

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