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How States Can Win Big from Legal Sports Betting

Every March, millions of Americans join friends, relatives, and coworkers in “March Madness” betting pools, centered on the National Collegiate Athletics Association (NCAA) Men’s Basketball Tournament. Some may wager hundreds of dollars or as little as five bucks. The one thing they all have in common is they will be running afoul of an obscure federal law that for 25 years has prohibited states from legalizing sports gambling.

For 25 years, the Professional and Amateur Sports Protection Act of 1992 (PASPA) has prohibited any state that had not already legalized sports gambling at the time of the law’s enactment from ever authorizing the activity. Sure, that gave Nevada a practical monopoly on legal sports wagering. But PASPA has done little to stop people around the nation from gambling on sports.

According to industry analysts, Americans will spend about $10 billion over the next two weeks betting on the NCAA championship; just 3 percent of those bets—$300 million—will be placed legally. The law has diverted potentially hundreds of millions of dollars in tax revenue, prevented states from instituting consumer protections, and created a profitable market for criminal enterprises.

But, worst of all, the law has been interpreted to allow Congress to dictate how states may regulate commerce within their own borders, potentially threatening state legislatures’ ability to decide how to deal with a host of other controversial issues, including regulation of marijuana, gun and ammo sales, assisted suicide, and more.

The Supreme Court could change all that this year. In December, the Court heard arguments in a case brought by New Jersey against the major sports leagues, in which the state asserted that PASPA—as interpreted—was unconstitutional. Observers at oral arguments seem to believe the odds are good that the Court will strike down the law when it issues its ruling in spring or summer.

Wisely, many states are not waiting on the courts or Congress, but have already begun the process of hashing out state regulation for sports betting legalization. As CEI argues in a new paper out today, “Legalizing Sports Betting in the United States: A Playbook for States Liberalization and Regulation,” if the goal of legalization is to create a vibrant and revenue-generating industry that protects consumers, maintains the integrity of sports, and chips away at the black market, these regulations must be carefully tailored in a way that makes the legal market more attractive than the illegal one.

State regulation must encourage operators to obtain licensure and consumers to seek out legal pathways to sports betting. Such a regulatory regime should focus on:

  • Adequate license availability;
  • Reasonable tax rates;
  • Diverse product offerings;
  • Robust consumer protections; and
  • Regulatory cooperation

Think about it—if the number of operators in a state is severely restricted, their illegal rivals will continue to offer their services on the illicit market. If tax rates on operators are too high, they will not be able to offer odds that are competitive with their illegal counterparts and consumers will continue to place bets with underground bookies. For example, while Nevada’s current legal sports bookies pay under 7 percent of their gross gaming revenue to the state, the Pennsylvania legislature has proposed a whopping 34 percent tax on bookies’ revenue. Such a large chunk of gambling businesses’ revenue on top of the state’s $10 million licensing fee and federal taxes, will certainly limit the number of operators willing to obtain a legal license from Pennsylvania. Even for those that do, it is likely they will pass costs onto consumers in the form of worse odds and lower payouts, making the illegal bookies (who will almost certainly continue operating in the state) a much more attractive option for bettors.

Similarly, state regulations should encourage operators to offer a diverse array of products. For example, most consumers betting in the illegal market enjoy both on and offline betting. So states that decide to limit legal sports betting only to in-person outlets will shut out the online enthusiasts.

Perhaps the clearest signal that legalization is just around the corner is the arrival of the “rent-seekers.” The sports leagues originally pushed for the national sports betting ban years ago, but many have changed their minds in recent years. The NBA was one of the first and most vocal proponents of legalizing sports betting as a means to addressing the enormous black market. However, their cooperation comes with a price tag.

As state legislatures debate what sports betting regulation should look like in their states, lobbyists for the NBA have argued that whatever form legalization takes, the league ought to get a cut of the gambling revenue. The one percent “integrity fee” they want from every bet made on their sport would actually amount to a 20-30 percent fee on the bookies’ gross gaming revenues. That would mean higher fees for consumers, decreasing the attractiveness of legal betting.

The original impetus for PASPA and, ostensibly, the “integrity fee” leagues now demand, is the idea that legal gambling on sports will somehow encourage match-fixing. However, as numerous studies have found, would-be corruptors are far more interested in operating within large illegal betting markets than in legal markets with government oversight. Regulating this form of gambling would allow the authorities, the industry, and sports governing bodies to work together effectively to spot and address the signs of corruption in the betting market.

Unlike betting on the black market, regulating sports gambling offers authorities something they’ve never had before: the ability to monitor sports gambling. In Great Britain, for example, where more than 99 percent of sports betting occurs on their very liberal legal market, law enforcement, regulators, sports governing bodies, and the gambling industry all share information and cooperate in an effort to identify the signs of criminal or corrupt behavior. In fact, sports leagues in Europe rely almost exclusively on the gambling industry as its early warning system for match-fixing because of the industry’s access to gambling data around the world. In the U.S., even if bookies wanted to alert the authorities to potentially illicit behavior, they couldn’t for fear of prosecution.

For 25 years, states have lost out on millions in tax revenue due to the sports gambling ban. If PASPA is on its way out, states now have chance to institute regulations that protect consumers, reduce opportunities for criminals, and generate huge profits for both the gambling and sports industries. However, these benefits are dependent on the states not making the same mistake the federal government made in 1992 when it put the interests of one industry sector—sports leagues—above the interests of everyone else, including consumers. Instead, states should seek to develop regulatory regimes that emphasize compliance, competitiveness, and cooperation among all stakeholders.