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Labor Day is in the rearview mirror and for my family that means it is football and tailgating season. When I feel that fall nip in the air, I feel the urge to light the BBQ smoker and wear blue. However, more and more Americans, especially young men, are feeling the urge to light up their DraftKings or FanDuel sports betting accounts. Let’s look into some data and how sports gambling might affect how we view the economy.
Big Handles and Big Revenue
Mobile sports wagering is quickly becoming a big business. The Census Bureau renamed a line item in its state tax revenue survey. In Q1 2021, “pari-mutuels” generated $65M in revenue nationwide. In Q2 2024, “sports betting (including pari-mutuels)” generated $744M in revenue, more than 10X the run rate back when we didn’t have 30 states full of gamblers with betting apps in their pockets. My quick math based on the tax revenue is that consumers spent about 3% of their typical personal savings rate on sports betting last year alone.
States Vary Widely
Every state has its own plan for taxing this new surge in betting and for allocating those tax dollars. New York is now the top contender in betting revenue. Two years of betting in New York resulted in 9 of the top 10 highest state betting revenue months in history. This brought in an incredible $1.75 billion in tax revenue, which goes towards funding education. That whopping revenue is produced by a 51% tax rate on mobile bets; legislators, so far, have been correct that gamblers won’t drive to New Jersey to bet under the 14.25% tax regime where the betting apps offer sweeter promotions.
Kentucky is a prime example of how states with fewer bettors can use the new revenue stream. Mobile wagering is taxed at a middle-of-the-road 14.25% in Kentucky, with the revenue going to buoy the underfunded state pension. Based on the trailing revenue and the unfunded pension liability, it will be fully funded in 75 short years!
New Measure of the Economy?
Mobile sports wagering has changed the relationship Americans have with their gaming budget. In the past, gambling was considered a “luxury good” in economic terms3, with a high-income elasticity of demand. When you had to travel to Vegas, a riverboat, or a horse track to bet, that spending rose dramatically with a change in income.
With more ubiquitous gambling, researchers1 are measuring much lower, but still positive, elasticity for wagering. Instant access has made sports wagering a “normal good”, where spending more closely mirrors income. But, unlike other normal goods like groceries, mobile wagering may prove to be more sensitive to economic cycles that affect the consumer wallet. Moreover, new studies1 suggest that mobile wagering is replacing positive expected value behaviors like investing in stocks, reducing some of the wiggle room consumers might create to insulate themselves from down cycles. We will watch with interest to see if parlay handles become the newest leading indicator of the health of our economy.
Sources:
Forrest, David, et al. “Income Elasticity of Demand for Horse Wagering — Large-Scale Evidence from Online Betting Accounts.” Economics Letters, vol. 213, 2022, article no. 110356, https://doi.org/10.1016/j.econlet.2022.110356.
R. Baker, Scott and Balthrop, Justin and Johnson, Mark J. and Kotter, Jason D. and Pisciotta, Kevin, Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households (June 30, 2024). Available at SSRN: https://ssrn.com/abstract=4881086 or http://dx.doi.org/10.2139/ssrn.4881086
Suits, Daniel B. “The Elasticity of Demand for Gambling.” The Quarterly Journal of Economics, vol. 93, no. 1, 1979, pp. 155–62. JSTOR, https://doi.org/10.2307/1882605. Accessed 17 Sept. 2024.
