Shares of major sports betting companies, including DraftKings and Flutter, experienced significant declines following the approval of a substantial tax increase on sports bets in Illinois. The state’s fiscal 2025 budget, set to begin on July 1, introduces a new graduated tax structure that will nearly triple the tax on certain sports bets, causing DraftKings’ shares to fall by as much as 14% during Tuesday’s trading while Flutter, the owner of FanDuel, saw an 8% drop.
The new tax plan introduces a tiered system where the tax rate escalates based on the adjusted gross revenue a sports book operator earns within Illinois. The lowest tier imposes a 20% tax on companies with less than $30 million in volume, up from the previous 15% flat rate that has been in place since 2021. For operators with revenue exceeding $200 million, the tax rate will soar to 40%, making Illinois’ sports betting tax rate the second-highest in the nation, just behind New York‘s 51% rate.
Historically, Illinois has taxed retail and mobile betting at different rates. The new budget aligns these rates but applies them separately to each betting arm of the companies. According to the American Gaming Association, adjusted gross revenue is defined as the total sports wagering money collected minus winnings paid out.
Major Operators Impacted the Most
The progressive tax system is expected to have the greatest impact on market leaders DraftKings and Flutter, both of which dominate the state’s betting market. As a result, these companies are likely to face the highest tax rate of 40%. DraftKings’ shares ended the trading day at $36.61, down 10%, while Flutter’s shares closed at $188.33, a decrease of 8%. Shares of Penn Entertainment, which operates ESPNBet, also dropped by 6%. Representatives from the affected companies have not yet commented on the developments.
Bernie McTernan, an equity analyst at Needham & Co., noted in a research note that the new progressive tax plan is somewhat in line with Illinois Governor J.B. Pritzker’s earlier proposal of a 35% flat rate, announced in February. McTernan suggested that the new structure might benefit smaller operators such as Rush Street Interactive and Penn Entertainment, according to Sportico. “In the long term, the prospect of higher tax rates may become a significant concern for investors,” he added.
While major operators faced sharp declines, other companies experienced milder reactions. Rush Street Interactive saw a 1% increase in its share price, benefiting from lower taxes on its casino locations under the new system. Meanwhile, MGM’s shares, influenced by its mobile betting partnership with Entain, fell by 2%.
The betting industry had anticipated higher tax rates, but there was also hope that this would lead to the approval of more iGaming opportunities—mobile casino gaming, which tends to be more profitable for operators than sports betting.
Taxes and customer acquisition costs are two primary factors that Wall Street analysts consider when evaluating the financial health of sports betting businesses. McTernan highlighted that DraftKings might need to pay an additional $44 million in taxes for the remainder of 2024 if the new rates take effect as planned on July 1. The focus will likely shift to how companies like DraftKings will manage these increased costs.
During an earnings call in early May, DraftKings CEO Jason Robins discussed potential strategies to mitigate the impact of higher taxes, such as reducing marketing expenses and customer promotions. “Ultimately, if the government raises taxes, the additional cost has to be absorbed by the consumer,” Robins stated.
The significant tax hike in Illinois represents a major shift for sports betting operators in the state, posing new challenges and prompting strategic adjustments as they navigate the evolving regulatory landscape.
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