In a significant legislative move, the Illinois Senate passed a bill late Sunday night that aims to transform the state’s sports betting tax structure into a progressive system based on operator revenue. The changes are set to begin with Fiscal Year 2025 on July 1.
The bill, HB 4951, passed by a margin of 37-22, included a critical amendment from its original Saturday proposal. According to this amendment, mobile and retail sports betting revenue will be taxed at the same progressive rates, but they will be treated as separate entities for taxation purposes.
This modification can be seen as advantageous for major operators like FanDuel and DraftKings, according to SportsHandle. Among the eight mobile operators in the state, these two are most likely to surpass the $200 million adjusted gross revenue threshold that would incur the highest tax rate of 40%.
The new progressive tax structure includes several tiers: the first $30 million in adjusted gross revenue (AGR) will be taxed at 20%; the next $20 million at 25%; revenue between $50 million and $100 million will be taxed at 30%; revenue from $100 million to $200 million at 35%; and any revenue above $200 million will be taxed at 40%.
With the Senate’s approval, the bill now moves to the House of Representatives. If passed there, it will go to Governor JB Pritzker‘s desk for final approval. Pritzker, who signed the original gaming expansion bill in June 2019 that legalized sports betting in Illinois, has been a strong proponent of sports betting. The first bets were placed just before the COVID-19 pandemic hit in March 2020.
Governor Pritzker’s decision to suspend in-person registration for sports betting apps later that year, allowing remote registration, played a crucial role in propelling Illinois to a top-three position nationally for the monthly betting handle.
Should the House approve the bill, Illinois will be the first state to implement a purely progressive tax rate for sports betting. For comparison, Arkansas sportsbooks pay a 13% tax until their total gaming revenue exceeds $150 million, at which point the rate increases to 20%.
Some Operators Might Enjoy Lower Taxes
The separation of mobile and retail revenue streams will likely result in lower taxes for some licensees. For instance, over the past 12 months, Rivers Casino generated $81.1 million in AGR through its BetRivers sports betting app, which falls into the 30% tax bracket. However, the nearly $12 million earned at Rivers Casino’s physical sportsbook would only be taxed at 20%, saving the casino approximately $1.2 million in taxes.
Similarly, DraftKings at Casino Queen would benefit from the amendment. Under the previous system, it would have paid a 40% tax on its $7 million in winnings, but with the new amendment, it would only pay 20%, saving $1.4 million. Additionally, DraftKings recently started operations at its new sportsbook adjacent to Wrigley Field, which is expected to generate significant revenue over the next year.
In February, Governor Pritzker initially proposed increasing the state’s flat 15% sports betting tax rate to 35% in his $52.7 billion budget plan. The progressive tax structure proposed in HB 4951 would have generated an additional $174.5 million in tax revenue over the past 12 months compared to the current 15% rate. This amount closely approaches the $200 million that Pritzker’s budget anticipated from the proposed flat rate increase.
However, the bulk of this additional revenue would come from FanDuel and DraftKings, the two largest operators in Illinois. Together, they would contribute $154.8 million of the additional taxes, with $371.3 million of their combined $771.3 million in winnings being taxed at the highest 40% rate.
Based on their earnings over the past 12 months, FanDuel would face an effective tax rate of 35.5%, while DraftKings would be taxed at 34.6%. Despite these high rates, both companies paid significantly more in taxes in New York, where the tax rate on gross revenue is 51% without deductions for promotional credits and bonuses. In 2023, FanDuel paid $415.7 million on $815.1 million in winnings, and DraftKings paid $291.6 million on $571.8 million in revenue.
The effective tax rates for FanDuel and DraftKings in Illinois, if the bill passes, would still be higher than in Pennsylvania, where the tax rate is 34% with allowances for promotional deductions. Last year, FanDuel had an effective tax rate of 24.5% on $322 million in gross revenue, while DraftKings paid an effective rate of 23.3% on $173.6 million in winnings.
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