Supreme Court Ends Sports Betting Prohibition—Now What?

It’s hard to believe it was just last Monday the U.S. Supreme Court ended the federal law that, for 25 years, prevented the states (except Nevada) from legalizing sports gambling. The question at issue for the Court in Murphy v. NCAA, et al. was whether the law could prevent states like New Jersey from decriminalizing the activity, as well. In the end, six of the Justices deemed the law unconstitutional (with another, Breyer, partially agreeing and partially dissenting).

Now the big question on many minds is: what happens next?

Already, in the days that followed the ruling, we’ve seen a frenzy of activity among both state and federal stakeholders. Notably, retiring Sen. Orrin Hatch (R-UT)—one of the originators of the now invalid federal ban—promised to spend his last year in Congress pushing for the creation of federal standards for state regulation and interstate sports gambling. What exactly that might look like is not yet clear.

The good news is that, unless Congress enacts federal sports betting legislation again, the states are free to proceed as they see fit.

Since it was New Jersey that has been fighting for legal sports betting since 2012, it’s not surprising that they were the first out of the gate, so to speak. In the days after the ruling, license holders promised to have sports betting up and running as soon as May 28. Regulators, however, are asking folks to hold their horses until they can write up regulations, while lawmakers have targeted June 7 as the more reasonable launch date.

Other states like Delaware, Mississippi, and Rhode Island have also moved quickly to enact legislation to make legal sports wagering available to consumers in their state by summer or early autumn. Others are close behind, with Pennsylvania, West Virginia, Connecticut (which might hold a special session on the issue) and New York trying to hammer out laws to make the activity legal in their states.

In the meantime, the sports leagues that spent millions to keep sports betting illegal have been making the rounds among state legislatures asking for any legalizing bill to include an “integrity fee.” The fee, which they claim is needed to recoup the costs of dealing with the new issues of corruption legalized sports betting would supposedly create, would divert one percent of the handle (every dollar wagered on sports) to the leagues, amounting to around 20 percent of sports books profits.

That’s a terrible idea and a difficult one for the leagues to defend. First, the leagues have already cost states like New Jersey millions in court fees, not to mention the revenue they were heretofore unable to collect thanks to the prohibition. Second, sports betting has been legal in Nevada for decades, and the leagues seemed content not to ask for an integrity fee there. In fact, none of the other five states that enacted sports gambling legislation in anticipation of the Court’s ruling (NJ, PA, WV, DE, and MS) agreed to pay the leagues this fee. What reason do other states have to pay out money that would almost certainly reduce the size of their legal gambling market?

Failing at the state level, the leagues plan to push for the fee in federal legislation. Of course, heading into an election cycle and with Congress as gridlocked as it already is, any kind of sports betting proposal is unlikely to get much traction.

Still, the states should be very wary of this type of rent-seeking and any other proposals that, while seeming to generate immediate profits for the state, would harm the sports betting market in the long run. A major concern for legislators should be guaranteeing that whatever regulations they enact work to attract bettors out of the black market and onto the legal market. Integrity fees will certainly be paid by giving out less money as winnings. If punters find they can get better odds and bigger payouts by sticking with their unlicensed bookies, they will continue to do so.

The same goes for licensing fees and tax rates. While Nevada has a reasonable licensing fee of one percent fee on gross gambling revenue (the money bookies keep after paying out winnings) and a low tax rate of 6.75 percent GGR, other states’ proposals are greedy to a degree that they could end up shooting themselves in the foot. As gaming industry research firm Eilers & Krecjcik found, the ideal tax rate is between 10 and 15 percent. Anything above that actually has a negative impact on the tax revenue states could collect from the newly legalized market. So, a state like Pennsylvania, for example, which set its tax rate at a whopping 36 percent of GGR probably won’t make as much money as Nevada in the long run. The high tax rate, combined with PA’s licensing fee of $10 million, makes it unlikely that many casinos in the state will even pursue sports betting licenses since the cost is so high and the return quite low. Even for those that do, they won’t be able to offer customers as good a deal as the black market bookies already established in the state.

But, this is just the beginning. As the states launch sports betting, tinker with legislation, and observe the failures and successes of their neighbors, the regulations will change. It is a process that will seem to both move at lightning speed in terms of launching sports gambling but also at a turtle’s pace when it comes to getting it right. If the industry can keep up and lawmakers can reject greedy taxes and rent-seekers, there will be few losers in this new legal sports betting world. But, we already know who the biggest winner is: consumers and state voters. By granting states the freedom to experiment, consumers now have a chance to be treated like adults and will be able to bet on sports legally. More importantly, by rebuffing Congress’s attempt to commandeer state legislators and state law, the Supreme Court has restored a key constitutional principle that allows state voters to dictate the rules under which they are governed and hold lawmakers accountable when they fail to comply with voters’ will.