Why a Federal Sports Wagering Tax Hike Could Hurt the Legal Market
Since the U.S. Supreme Court struck down the federal ban on sports betting in 2018, the industry has flourished. Nearly 40 states have legalized sports wagering, and in 2024 alone, nearly $150 billion in bets were placed legally. This explosion in legal betting has opened up a new revenue stream not only for states but also for the federal government through an often-overlooked tax: the federal excise tax on sports wagers.
But a new proposal to significantly increase this tax is raising eyebrows, and for good reason.
A Brief History of the Federal Sports Betting Tax
The federal excise tax on sports betting isn't new. It was originally enacted in 1951 as a tool to combat illegal gambling and organized crime. Back then, the rate was 10% of all wagers, a figure that quickly proved unrealistic. Revenue projections of $400 million a year were slashed to $9 million within six months. By 1982, Congress had reduced the rate to 0.25% on legal wagers and 2% on illegal ones, where it remains today.
The impact of this tax was negligible for decades, until the Supreme Court ruling brought legal sports betting to the mainstream.
Legal Market Growth
With legalization, legal bets began replacing illegal ones, and tax revenues followed. In 2019, with only 13 states participating, the federal government took in an estimated $33 million from the excise tax. By 2024, with 34 states on board, revenues skyrocketed to $373 million, more than 11 times higher.
Still, in the context of a $7 trillion federal budget, $373 million is barely a blip. Which raises the question: Should the government look to this tax as a new revenue well?
A 5% Tax Proposal
Some policymakers think so. A proposal from the Bipartisan Policy Center recommends raising the federal excise tax from 0.25% to 5%, a staggering 1,900% increase. The logic? Like other excise taxes, a higher rate could both discourage gambling (viewed by some as a harmful behavior) and increase revenue.
But this policy comes with serious downsides. A hypothetical wager illustrates the risk:
A sportsbook takes in $2,200 in bets and pays out $2,100 to winners.
It’s left with $100 gross gaming revenue (GGR), but after adjusting for $45 in promotional wagers, the net gaming revenue (NGR) is only $55.
Under the current 0.25% tax, the sportsbook owes $5.50, 10% of its NGR.
Under a 5% tax, it would owe $110, 200% of its NGR.
In short, the sportsbook loses money, every time.
This level of taxation would likely force sportsbooks to pass costs to consumers through worse odds or fewer promotions, or even exit certain state markets entirely. The ultimate result? A weakened legal market and a potential return to illegal or offshore gambling, precisely what legalization aimed to prevent.
Tax Stacking and State Burdens
It’s not just the federal tax that matters. States already impose taxes on sports betting revenue, ranging from 6.75% to a whopping 51%. Layering a higher federal tax on top of this can lead to a total tax burden as high as 92.7% in some states.
Given that the average “hold”, or sportsbook margin, is around 7.83%, most operators simply can’t afford to stay competitive in a heavily taxed legal market.
Reform, Not Ruin
Fortunately, there are alternative policy paths that could balance revenue needs with market health:
Repeal the Excise Tax Altogether
Bipartisan legislation like H.R. 1440 aims to eliminate the federal tax on legal wagers, leveling the playing field with other forms of gambling like poker or state lotteries, which aren't federally taxed.Earmark Funds for Problem Gambling Programs
The GRIT Act proposes keeping the tax but dedicating 50% of its revenue to fund gambling addiction treatment, directly addressing the social concern that justifies the tax in the first place.Tax Illegal Gambling More Heavily
Increasing the 2% tax on illegal bets could be both a revenue-generator and a deterrent, all while encouraging players to migrate to safer, legal markets.Broaden the Base, Don’t Raise the Rate
If policymakers are set on raising revenue, a more neutral approach would be to apply modest taxes more broadly across different types of gambling, rather than targeting sports betting alone.
Think Before You Tax
The legal sports betting boom has brought millions in new revenue and helped bring a once-black-market activity into a regulated, safer environment. But proposals like a 5% federal excise tax threaten to undo that progress.
Rather than slapping sportsbooks with unsustainable tax burdens, policymakers should aim for thoughtful, balanced reforms that protect consumers, support public health, and sustain the legal market.
Because when the house always loses, it’s only a matter of time before it closes for good.
