Colorado sports betting was supposed to be a modest revenue stream for the state. When Prop DD passed, voters were asked to approve a tax increase that would generate up to $29 million. However, Colorado so far is on track to approach $2 million in tax revenue from sports betting. The low tax bill could be for two reasons. One is Colorado’s sports betting industry is only five months old, and we only have five months of data, but the second takes some explanation.
Sportsbook Business School 101
When bettors place a wager, sportsbooks prepare for winners and losers. Oddsmakers look across their lines to make sure the odds are in the sportsbook’s favor. They tweak the odds, so they award less money than they generate.
So far, Colorado sportsbooks have done that. Across the five months of data we have, Colorado’s sportsbooks make more money than they pay out. The amount of money left over after paying winnings is called their gross gaming revenue (GGR).
But we’re not done subtracting money. Sportsbooks have two major subtractions left to make.
The First Two Costs Colorado Sportsbooks Pay
When sportsbooks offer bonuses, they don’t offer cash like their advertisements may imply. Sportsbooks award money in site credits. Bettors can still use them to wager, and they can be profitable for bettors who understand the fine print. But site credits aren’t real money. So, sportsbooks have to subtract site credits they won back from bettors out of their gross gaming revenue.
Sportsbooks also pay a federal excise tax. It’s a 0.25% tax that sportsbooks pay to the federal government. Although there’s a bill in the House of Representatives to repeal it, Colorado sportsbooks have to pay it for a while longer.
Once sportsbooks subtract these two figures out, they’re left with net sports betting proceeds. That’s a long fancy word for taxable income. That’s the pool of money the State of Colorado taxes sportsbooks. Since we want to know how much money Colorado’s making from sports betting taxes, understanding net sports betting proceeds are critical.
Colorado Sportsbooks’ Awful September
Two trends have been kicking Colorado sportsbooks in the teeth. First, Colorado bettors have been winning a larger percentage of their wagers. That means sportsbooks have had to pay a larger proportion of winnings back to bettors. It’s a large change over a short period of time, too. Here’s the percentage of total bets that sportsbooks kept as gross gaming revenue over the past five months:
|Gross Gaming Revenue as Percentage of Total Betting Handle|
Sportsbooks are keeping less money in their pockets over time because they’re paying so much back to bettors. Colorado bettors could be exceptionally talented–but that’s unlikely. Colorado sportsbooks could be offering higher win percentages to incentivize new bettors to try sports betting. That would help explain the second and far more devastating trend.
In September, Colorado sportsbooks lost money. Net sports betting proceeds were negative for the first time this year. Here are the net sports betting proceeds for the first five months of sportsbook revenue data:
|Net Sports Betting Proceeds|
That’s a big drop. The pool of money Colorado has to tax from has been shrinking. Gross Gaming Revenue has never dropped that low. The likely culprit is the sports betting promotions Colorado sportsbooks have been running to attract new bettors. For example, FanDuel increased its free bet bonus from $500 to $1,000 during the summer. Moves like these from other sportsbooks could shrink their net sports betting proceeds and decrease tax revenue.
Tax Revenue From Colorado Sportsbooks
Colorado’s sports betting industry is still in its adolescence. However, its tax bill isn’t coming close to the $29 million ceiling Prop DD originally prepared for. Here’s how much state tax Colorado sportsbooks paid in its first five months:
At this rate, Colorado’s sports betting industry could generate $1.9 million in its first full year of operations. That’s 29% of the $6.5 million Colorado’s Blue Book predicted for the part of 2020 when sports betting was online. Tax revenues have fallen woefully short of projections.
After looking at the rest of Colorado’s sportsbook revenues, it’s easy to see why. Bettors have been wagering more every month, but sportsbooks have been paying proportionately more money back to them. That’s cut into sportsbooks’ gross gaming revenue. However, sportsbook promotions seem to have been aggressive, too. They’ve made the cut sportsbooks keep for profit and operational payments even smaller. That’s all led to decreased tax revenues from Colorado sportsbooks.
What Could Colorado’s Sportsbook Scene Look Like In The Future?
Although sportsbook promotions are one of the likely driving forces behind Colorado’s depressed tax revenues, there are other possibilities, too. Whichever one is true would have far-reaching effects on Colorado’s sports betting market.
First, we could be seeing how aggressively sportsbooks are pushing promotions as they build their customer bases. This is the most innocuous scenario. If this is the case, we would see bettors win less of their money back over the next few months. Colorado sportsbooks would become profitable again, and we’d see tax revenues increase.
However, this could also be the beginning of a more unfortunate turn for some Colorado sportsbooks. It’s possible that some sportsbooks weren’t ready to play in the big leagues. Perhaps some of them couldn’t compete and remain profitable. If this is true, then we may see the first round of sportsbook closures in the coming months. Although net sports betting proceeds were collectively negative, retail and online sportsbooks both paid taxes. That means that some sportsbooks didn’t lose money in September. The ones that did may not last much longer in Colorado’s competitive market.
We could also see a combination of both approaches. Major sportsbook brands could be driving aggressive promotions to ice smaller competitors out of the market. It’d be an aggressive tactic, but it’s not outside the realm of possibility either. Colorado’s sportsbook market is already crowding up, and it’s reasonable that only a few brands will dominate the industry when it reaching maturity. We may just be seeing the intense competition drain some companies early on.
The Colorado Limited Gaming Commission is by statute prohibited from reporting tax information for individuals or corporations, which means we only have a broad summary, and no way of knowing which Colorado sportsbooks are the weak links. We’ll just have to wait it out to see who contributes to the state and who fizzles out.