Illinois isn’t the first state to raise taxes on online sports betting (OSB) purveyors and it won’t be the last. That was the conclusion of an investor report published this morning by Deutsche Bank analyst Carlo Santarelli.

The note comes hard upon the decision by the Illinois State Senate to increase taxes on OSB progressively. Adjusted gross revenues would be taxed at the following rates: $0 to $30 million at 20 percent; up to $50 million at 25 percent; $50 million to $100 million 30 percent; $100 million-plus to $200 million 35 percent; and 40 percent on all revenue exceeding $200 million a year.

The bill now goes to the Illinois House of Representatives for reconciliation, then to Gov. J.B. Pritzker, the original proponent of higher OSB taxes. Santarelli treated the escalated rates as a fait accompli.

He also seemed skeptical of the reaction by the Sports Betting Alliance. Its president, Jeremy Kudon, decried the legislation. “This is an extremely disappointing decision that will cause real harm.”

By contrast, Santarelli wrote that the language of the bill “effectively neutralizes” the industry talking point that tax increases will crush smaller operators. The impact to them, he said, “is negligible. … We believe the graduated tax rate concept in this circumstance was a suggestion from the casino operators, as it serves to leave the smaller players relatively unharmed by the rate increase.”

Santarelli continued, “We don’t see the tax increase as being overly draconian for the operators and of little consequence to the majority of the operators in the state, though we do believe the industry is positioned to endure state-tax pressure for years to come, for a variety of reasons.”

The analyst observed that state-tax windfalls from OSB have been mostly lower than anticipated, “given low tax rates and regulations that were drafted and blessed with seemingly little understanding of promotional deductions.” Therefore, a broad gap has formed between where tax rates are nominally set and how they effectively function, especially since tax deductions on promotions have been exhausted in the states that permit them.

Deutsche Bank predicted forthcoming tax increases on OSB, first in New Jersey, then Michigan, Iowa, Indiana, Massachusetts, Arizona, and Kansas. Noting the well-below-average rate of OSB and igaming taxes in New Jersey and Michigan, Santarelli projected additional levies in those states that would be “the most punitive.”

As for the effect of the new Illinois impost, Santarelli forecast that it would raise $170 million of the additional $200 million sought by the state. The remainder, he believed, would be made up from higher taxes on walk-up wagering and gross gaming revenue (GGR) increases.

The considerable bulk of the levy would fall on leading operators FanDuel and DraftKings, which control 75 percent of revenue and stand to absorb 85 percent of the increase, per Santarelli’s calculations. Only BetRivers (Rush Street Interactive) also exceeds the market average and will have to pay out a 34.7 percent levy, he wrote, up 20 percent.

The increased tax burdens as calculated by Santarelli are as follows: FanDuel ($421.3 million GGR) from $67.9 million to $149.5 million; DraftKings ($350 million) $55.9 million to $121 million; BetRivers ($81.1 million) $13.2 million to $28.1 million; Fanatics ($51.7 million) from $8.3 million to $11.9 million; BetMGM ($44 million) $7.1 million to $9.5 million; ESPN Bet ($42.7 million) $6.8 million to $9.2 million; Caesars Sportsbook ($36.1 million) $5.8 million to $7.5 million; Circa Sports ($900,000) $100,000 to $200,000.

Santarelli expected the primary effect of the new rates to be a cutback in promotions. Given that most OSB growth has been driven by promotional activity, “a significant reduction in promotions could provide a peek into organic demand in Illinois. … We would note, however, paying $0.35 of every dollar for promotional gross revenue is considerably more punitive than $0.15 or $0.20 to $0.23 and, as such, if nothing else, we could see some market-share shifts, along with potentially a slowdown in market growth.”

However, Santarelli debunked the industry contention that higher taxes would mean worse odds for players. He pointed to a lack of difference between the nine percent hold in New York state, where OSB is taxed at 51 percent, and that in Michigan, where the rate is five percent. The tightest hold he found (10.7 percent) was in Maryland, where OSB is taxed at 10 percent.

Regarding potential cutbacks in sales and marketing (S&M), Santarelli indicated that this would be a good idea. “We believe this is, and has been, something operators were going to have to do regardless.”

The analyst pointed out that S&M constituted 23 percent of net revenue last year (as much as $850 million) and will represent 16 percent in 2024. “Accordingly, we believe external S&M needs to come down, regardless of the rationale behind the cuts, though again, the impact to revenue remains to be seen.”

Santarelli ended with a warning. “It has been our contention for some time that tax-rate increases were one of the primary risks for the OSB operators and with the recent decision to raise taxes in Ohio, and now Illinois, we believe others are likely to follow.” He called high taxes like New York’s a “risk factor for the sector” and cited the recent (if abortive) attempt to raise OSB taxes in Massachusetts as an indicator that his prediction was being fulfilled.

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