Amid sports betting debate, experts caution Texas could see $250 million in tax revenue

AUSTIN — A powerful pro-gambling group, and former Gov. Rick Perry, project Texas could earn $250 million annually from tax revenue, but some caution lawmakers to note patterns that have played out in state after state.
The revenue projection may not bear out as the bill would give Texas among the lowest tax rates on gambling revenue in the country, according to an analysis by The Dallas Morning News.
Sports betting companies and lobbyists show lawmakers projections of a booming economy should a legislature legalize sports gambling. But once states did legalize it, the projections failed to bear out, often leaving lawmakers disappointed.
“I would caution that the gambling promoters and their lobbyists will, I believe, overstate the revenues that will actually end up in the state treasury,” said Rep. John Carmichael, a Kansas Democrat who voted to legalize sports betting in his state last year. “You’ve always got to take these things with a grain of salt.”
Texas’ potential windfall of $250 million annually comes from research firm Eilers & Krejcik, which estimates that the state could see $2.7 billion in gross gaming revenue — the amount that would be taxed. That means Texans would have to lose almost $3 billion dollars for the state to match the projected tax revenue.
That projection hinges on Texas doubling the record for the highest amount any state has ever seen in gaming revenue. New York holds that record at $1.36 billion.
Rep. Jeff Leach, R-Plano, and Sen. Lois Kolkhorst, R-Brenham, authored sports betting bills this session, signaling that the effort is gaining momentum among the Republican-led Legislature. House Speaker Dade Phelan, R-Beaumont, and Gov. Greg Abbott have also expressed interest in expanding gambling.
The legislation is backed by the Texas Sports Betting Alliance, a collective that includes prominent sportsbook operators and all of Texas’ major professional athletic teams and their powerhouse owners, including the Dallas Cowboys owner Jerry Jones and Dallas Mavericks owner Mark Cuban. Perry is the group’s spokesman.
But the bills set a tax rate at 10% on the amount of money a gambling operator gets from people’s losses. States such as New York, Rhode Island and Pennsylvania have tax rates as high as 51%, allowing them to bring in hundreds of millions of dollars in tax revenue.
A 10% tax rate is favorable for gambling operators because it allows them to reap more money in profits. However, the more operators can bring in with profits, the less Texas will see in tax revenue with a lower rate. The bills earmark money raised through sports betting for public education funding and to the Texas Education Agency for property tax relief.
“The higher the tax rates, the more difficult it is for a sports book to be profitable, so you will lose some of the smaller sports books,” said Becky Harris, a professor at the University of Nevada, Las Vegas International Gaming Institute. She formerly served as chair of the Nevada Gaming Control Board and was a Nevada lawmaker. “The other interesting thing in Texas is that the current bill allows for a full deduction of free bets and promos.”
Under both bills, companies would not pay tax on the promotional bets they offer new users. Such bets are important for operators because they draw in users who might not be inclined to place a bet, Harris said.
Leach said he’s comfortable with a 10% tax rate because his priority with the bill is to regulate gambling and ensure Texans stop betting illegally. The Dallas-area lawmaker also pointed out that a portion of the revenue the state gets — 2% — would be used for a fund to address gambling addiction.
“The goal of this bill, the purpose of this bill, is not to create a bunch of tax revenue for the state,” he said. “It’s to protect the freedom and liberty of Texas’ people.”
Rob Kohler, a consultant for the Christian Life Commission who has lobbied against sports gambling in Texas, said Leach seems to care more about companies than Texans.
“If you’re going to carry a piece of legislation for an industry, I guess you don’t mind how much they’re going to make off it,” Kohler said.
Perry, like Leach, also said he’s more focused on creating a legal sports betting market in Texas. He said he would leave it up to the Legislature when asked if he thought the tax rate ought to be higher.
“That’s the beauty of our system,” Perry said. “We’ll have a public discussion.”
Kolkhorst did not respond to questions about the bill. On Wednesday, the senator said on the Chad Hasty radio show that Texans are already gambling illegally in the state and that the bill would regulate the matter.
“The regulation of something that’s already going on, I think, is important,” she said.
She did not mention tax revenue in the interview.
Sen. Juan Hinojosa, D-McAllen, a co-author on the bill, did not respond to requests for comment. Sen. Drew Springer, R-Muenster, who signed on as a co-author on the constitutional amendment, declined to comment.
‘At what cost?’
Mobile sports betting and the biggest companies in the industry, such as DraftKings and FanDuel, have long struggled with profitability, even as the industry has grown across the country.
Currently, 33 states and the District of Columbia allow for legal sports betting, and 24 of those allow online betting. But even with astronomical growth of the industry, it’s not as profitable for those operators as traditional casino gambling.
One reason for that is because of the hold percentage, or the percentage that sports books keep for every dollar that is bet. Companies’ average take is between 8% and 10% on a bet, said Joe Weinert, executive vice president at Spectrum Gaming Group.
A sportsbook only gets higher profits the more Texans lose, not just bet. Those companies need Texans to lose to increase the amount of money they generate — the same money that would be taxed at 10%.
In New York, for example, people bet $16 billion in the first calendar year of mobile sports wagering. New Yorkers lost $1.36 billion in bets, which was taxed. Because that state has among the highest tax rates in the country — more than five times what Texas’ would be — it saw close to $700 million in tax revenue.
If Texas averages an 8% hold percentage for a year, then Texans would need to bet more than $30 billion in a year — more than three times what is spent in the state’s lottery — to meet the projected tax revenue.
“Fine, you bring in [$250 million dollars], but at what cost?” asked Dr. Timothy Fong, co-director of the University of California, Los Angeles Gambling Studies program. “Does it cost you people’s lives and bankruptcy and damage? That’s the part that is difficult to measure.”
Added Kohler, “These dollars are coming out of the economy and will put people in possible situations of spending money they don’t have.”
‘Substantially below projections’
In 2019, after six states legalized sports betting, The Associated Press reported that four of those fell short of their tax revenue projections.
Kansas, for example, set its tax rate at 10% when it launched mobile sports betting that year. To date, Kansas has seen more than $924 million in bets placed; $26 million in gaming revenue; and a total of $2.6 million in state revenue.
Carmichael, the state representative who voted for the bill, said he is disappointed.
“Those numbers are coming in substantially below projections,” Carmichael said. “The state share percentage was negotiated down in the legislative process to a number that barely makes it worthwhile for the state to be involved in the game.”
As the Kansas bill was debated, gambling promoters told Carmichael that if the state set a high tax rate, they would go elsewhere. He didn’t believe that argument, he recounted.
West Virginia also has a 10% tax rate, and it had projected getting about $5.5 million annually in tax revenue. In its latest fiscal year returns, the state saw $3.3 million in tax revenue.