How will the PASPA sports betting repeal affect states and the casino and racing industries?

Hartley examines the reasons that states not named New Jersey or Delaware have lost some of their initial thirst for sports betting in the U.S., as have several gambling companies.

PASPA has been repealed for two weeks but only New Jersey and Delaware, who said they would be offering sports betting immediately after the repeal, have any concrete plans to begin offering sports betting in the near future. Both states indicated they would begin offering sports betting as soon as the lawmakers ensure that the regulations and tax considerations are firm and viable. New Jersey will apparently offer sports betting at Monmouth Park as a pilot, while Delaware will just expand betting at the three racetracks that have already offered NFL parlay cards the last 2 years.  New Jersey is anticipating that sports betting will bring in $13 million in tax revenue in the first fiscal year, but it had lofty expectations with online poker as well, and as we know that turned out to be a dud.

Aside from New Jersey and Delaware there has been little movement to start offering sports betting – even in the states that already passed sports betting bills – New York, Mississippi, West Virginia and Pennsylvania. And from the other states that had bills introduced but were awaiting a PASPA repeal before proceeding any further, there has been little anxiousness on their part to seriously look at sports betting either. It has only been a couple of weeks since the repeal, but the fanfare and excitement that states indicated prior to the SCOTUS decision certainly hasn’t continued after May 14th.  No doubt many of the states were blindsided by the decision and are now facing a reality check.

US sports bettingHaving talked to analysts from a few states it seems the majority of legislators were confident SCOTUS was going to rule for New Jersey and allow them to offer sports betting at casinos and racetracks, but would not grant a full repeal. Had that occurred, the states would have moved slowly and weighed all their options buying them time, but now that they have the right to offer gambling as they see fit, it seems most states are ill equipped. In at least five states with bills on the table there is a disagreement among legislators on how to proceed and states like California and Florida will have to work out an agreement with the Tribes before they can move forward with anything. Aside from tax considerations, states have to take bids from casino companies, racetracks, bars, etc. to operate the sportsbooks and they have to decide how much say they want to give the leagues in the drafting of legislation, as well as whether to allow betting on amateur sports (see NCAA). Some states have indicated they will work with the leagues, while others want nothing to do with them. Plus, states have to decide whether to grant the leagues their proposed ‘integrity fee’.

As well, another consideration is that some believe that Congress will now take up the issue and PASPA will be replaced by a new federal legislation, with Congress setting the rules. MGM and Caesars have gone on record stating they prefer a federal sports betting law to  50 individual state laws and the leagues have gone on record saying they want PASPA replaced by a new federal law as well, no doubt to insure the 1% integrity fee that they have requested is included in the regulations. A few states seem to be waiting to see if that occurs and at least a couple of state legislators have indicated they would be only too happy to see uniform rules across all states. And if that does happen any money and effort put in to creating state regulations would be a waste of time. Neil D. Braslow, a first amendment attorney explained why he doesn’t believe that will take place however.

"The professional sports leagues prefer federal legislation because now they realize that they are too late on the issue. For example, New Jersey is not going offer any kind of “integrity fee” or other proposed regulation by the professional sports leagues after they have spent millions of dollars over the past few years on litigation, in addition to the countless amount of revenue that they have lost because they have not been able to offer sports betting for the past several years. The New Jersey Sports Betting Act was originally signed in 2012, which is when the professional sports leagues sued to stop it. By passing federal legislation, the professional sports leagues would be able to go after 'integrity fees' and other regulations instead of dealing with each state individually. It is anticipated that several if not all states, in addition to New Jersey, will not be interested in any kind of fees to the sports leagues. Nevada has operated without any kind of fees going to the sports leagues for years, so it is unclear why they think they are entitled to them now.

Federal legislation would greatly benefit the professional sports leagues. In addition to being able to get their 'integrity fees' they would also have greater control over the data that is used to determine winning and losing wagers. The benefit of federal legislation is that it would be clear as to the regulations and guidelines of sports betting, instead of having to interpret them separately for each state.”

Even if there was no concern over federal legislation and if the regulations were drafted, there is a question as to whether existing casinos or racetracks will be interested if the cost is too high. Despite a sports betting law having been passed in Pennsylvania it seems almost all casino operators are hesitant to pay the $10 million licensing fee demanded by the state along with the insane 34% tax on gross profits. States should note that sports betting has not proven to be a huge money maker in Nevada and several casinos have removed sportsbooks to add more slot machines. Aside from the slim margins that sports betting brings in, it involves risk unlike slots and most table games which have a fixed payback rate. And Nevada sportsbooks along with those in the UK have lost money when major longshots or extremely popular favorites have won. Also, in Nevada sports betting is just built into the overall casino operating costs and sports winnings are amalgamated with casino profits when remitting money to the Nevada government at a rate of 6.75%. At the crazy rate Pennsylvania is proposing to charge it is unlikely any sports betting operator will be able to make money. Even at a 12% tax that some states are proposing it is uncertain if there is money to be made for the operator. After the announcement of the repeal by SCOTUS, MGM announced in a press release that it was pleased to be able to offer sports betting as an add-on product. But, other than in New Jersey with Borgata, MGM certainly has given no indication they are ready to jump in at their casinos in Michigan, Mississippi, Illinois, Massachusetts and Maryland if the taxes don’t make sense. And the same holds true for racetracks. The racing industry is hoping that adding sports betting will bring in more patrons to the tracks to wager on racing, but if a tax on sports betting eats away at those profits, or if sports betting cannibalizes racing revenue, they will almost certainly bow out.

William Hill sports bettingThe two companies that seem the most excited about legal sports betting are William Hill and Paddy Power-Betfair. The two UK based companies made large investments in the U.S. in anticipation of legal sports betting as they both believe they have a formula to ensure it is profitable. By purchasing Leroy’s, Lucky’s and Club Cal Neva in 2012 William Hill obtained 55% of the sportsbook locations and 11% of the revenue in Nevada. That share has increased substantially to almost 30% of revenue thanks to in-play wagering, which is popular and has a better return for the sportsbook, along with high profit prop bets aimed at casual bettors. Plus, their mobile app, available to bettors while in Las Vegas, has proven to be very popular. William Hill hopes to further expand their presence after winning the bid to host the sportsbook at Monmouth Park racetrack and more recently partnering with Ocean Resort Casino in Atlantic City. Paddy Power-Betfair made huge investments by purchasing the TVG network and creating a partnership with Caesars in Atlantic City. The company is hoping that a traditional sportsbook, in addition to the very popular betting exchange that became the top gambling site in the UK, will help bring in large profits for the company. Managers acknowledge they will have to get Americans accustomed to exchange wagering and they will have to Americanize it by displaying fixed odds rather than decimal odds, but exchange wagering guarantees a profit, since bets are player-to-player with Betfair taking a commission on winning bets. Thus, the company assumes no risk. Traditional sportsbooks operate the old-fashioned way with odds closing at the start of games and bets offered at fixed odds and changing with action which could explain why their profits are lower than their UK counterparts. Even still, there are salaries and overhead to pay, so it’s hard to see even William Hill or Betfair agreeing to a $10 million license fee and a 34% tax on revenues proposed in Pennsylvania, unless the state has more sports bettors than meets the eye.

So, the die is cast and sports betting is now legal for all states that want to offer it. It has the potential to help struggling casinos, racetracks and any other establishments the government wants to license, but the rules and regulations, including tax concerns, have to be reasonable. The margins on sports betting are small and all gambling operators know this. So, if the states are going to demand ridiculous fees or taxes on profit most companies will take a pass as they know it would be a losing proposition. New Jersey and Delaware understand that.  They have put in a tax scheme that aims to increase traffic at casinos and racetracks rather than looking for an initial windfall, as they understand that as those entities do well, so to will the state. But a 34% tax on profits is a non-starter. And if states are waiting on the sideline to see if the Feds are going to introduce legislation to replace PASPA they are playing a fools game, since the chances of the Feds taking another run at legislation are very slim, especially given the comments by SCOTUS indicating this is solely a state’s concern.

But if the states do act reasonably, offer a full array of betting options and do not kowtow to the leagues’ unreasonable request of a 1% integrity fee, there is a good chance that they can put a halt to the spread of illegal sports betting and help state coffers in the process as well. The next year should tell how many states heed that call and how many price themselves out of the market.

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