Gaming handle versus gaming revenues: NBA doesn’t understand how things work in a casino
By Ken Adams, CDC Gaming Reports
February 1, 2018
Many people confuse handle and win, equating handle with gross income and therefore a suitable target for taxation. However, handle is not the equivalent of revenue in other industries, nor is win when it comes to taxation. In retail, revenue is a straightforward concept; it is the money generated by sales of products or service. So for example, a retail grocery, clothing or electronics store sets its prices and the customer pays; that money is the store’s cash flow. Retail taxes are collected by the outlet directly from customers and that money is then forwarded to the taxing agency. Even punitive taxes, such as those on tobacco and alcohol products, are paid by the consumer, not the retailer. In retail, all of the cash from sales can be used to pay normal operating expenses. Things do not work that way in a casino.
In a casino, the customer is offered a wide range of betting options and prices; the customer chooses the option and the price. The casino and the customer play a game to see who wins. If the casino wins, that money becomes part of its cash flow. If on the other hand, the customer wins there is no cash flow. Casinos are taxed on the gross win and that money comes off the top, if you will. All additional expenses are paid from the cash leftover after that tax. Casinos cannot collect the tax directly from the player and in that sense the gaming industry is unique. That unique status is confusing at times to lawmakers and the media and it creates a very challenging environment for casinos.
Lawmakers in their endless search for revenue look to tax everything. Unfortunately, they sometimes think of gaming revenue in the same way they think about retail revenue. And thus, casino taxation is frequently thought of in the same category as tobacco and alcohol; if anyone wishes to engage in this unhealthy behavior they will have to pay a premium. That thinking leads to the extremely high tax rate in states such as Pennsylvania. One can imagine the impact on retail if stores were taxed on their gross sales. No grocery store could remain in business with even an eight percent tax on gross sales; the lowest gaming tax rate in the country. But imagine a tax of fifty percent of gross sales, like the gaming rate in Pennsylvania – you would not be able to buy even milk and bread, as no retail stores could exist. To further complicate the comparison, consider the impact of a retail license in the millions of dollars. It is obviously an untenable model and yet lawmakers consider it perfectly reasonable as a model for casinos.
There is nothing new in anything I have said, but people are pushing the refresh button due to the current interest in legalizing sports betting. The United States Supreme Court is poised to set the stage for legal sports betting in the country in any state that chooses to legalize it. New Jersey passed a law authorizing sports betting within the state, but federal authorities said the law violated federal law. The federal government and New Jersey have been in a lawsuit ever since and now it is before the Supreme Court. If the court rules in New Jersey’s favor, as many people believe it will, then the door will be open for other states to legalize sports betting. Some states already are passing legislation in anticipation of that decision. To fans of sports betting, it seems like the dawn of a new era; no longer will they have to travel to Nevada or gamble illegally online to bet on their favorite team.
But, a word of caution – no one should get too excited yet. Whether or not sports betting becomes legal and successful depends on the legislation in each state. There are already some warning signs and most of those signs can be related to the faulty comparison of retail sales to casino revenue. As lawmakers examine the issue of sports wager, they are looking for the moral high ground. To protect their reputations they want to insure that only the most upstanding operators will be allowed to offer sports betting. Those found suitable will be expected to pay a high licensing premium. This too comes from the myths surrounding casino gaming; many people believe a casino license is a license to print money. And because those operators are going to be making so much money, the state is entitled to a tax rate that is commensurate with the profits. Illinois thinks 20 percent is appropriate and Pennsylvania wants 36 percent. That is fair, isn’t it?
No, it is not fair. And the reason is simple, sports betting, like all casino games is not the sale of a product. It is a contest between the gambler and the bookie. As everyone knows, over the long-term the house usually wins, but far less than one might expect. Nevada is the only state that can serve as a model. The University of Nevada in Las Vegas publishes the numbers on sports betting since 1984. The win varies from year to year; the largest win percentage was in 2006 when sports books won 7.8 percent; the worst year was 1987 with 1.5 percent. In general for the last ten years or so, the win has averaged between 4 and 5 percent. Clearly if a tax were to be imposed on gross handle, a sports betting industry could not exist. But even if the win were to be taxed, a high tax rate would make it nearly impossible for sports books to operate profitably. Besides the tax, the win has to service the debt incurred in setting up the book, which includes the infrastructure – a modern Las Vegas sports book costs between $20 and $50 million to build and there is the cost of the initial license, wages, utilities and other related expenses such as advertising and marketing. After expenses, sports books in Illinois or Pennsylvania would not be profitable.
But that is not all. The National Basketball Association wants a cut and we have to assume the other sports leagues will also want a piece of the action. The NBA is not being greedy; it just wants what it considers a fair share. The NBA argues that it produces the product upon which the gamblers will wager. In its argument to the New York legislature the NBA asked for a mere 1 percent – reasonable, no? No it is not reasonable because the NBA like many others seeking to profit from casino revenue does not understand the issue. The NBA wants 1 percent of the handle, not the win. Let me quote Richard Wells, a long time industry insider with a very high degree of expertise. Richard says: For ballpark numbers, the sports betting handle in Nevada was over four billion dollars in 2016. A 1% rake to the NBA would be $40 million. The net win to Nevada casinos was only 200 million. Thus a 1% fee to the NBA is the equivalent of 20% of win.
In no year did the sports books in Nevada ever win 20 percent. In fact that is over twice the amount of the win in Nevada sports books. So, where does that leave us? If the Supreme Court rules in New Jersey’s favor, sports betting will proceed. The success of sports wagering will depend on several things including the tax rate, the professional league cut of the action and the population of the state. Experience tells me not to expect lawmakers in every state to suddenly become reasonable; nor is it reasonable to expect the leagues to make a serious effort to understand the economics of sports betting. The billions and billions of dollars said to be wagered nationally sound too much like profit to the leagues at this point. The last point, the size of the potential betting population, is as important as the other two. It does not matter what tax rate South Dakota or Maine chooses, there simply are not enough gamblers to make it profitable in those states. New York, California, Illinois, Florida and Texas are the plums, but only if the leagues and lawmakers take the time needed to understand the fundamental economics of the game. In my mind, that is a very tall order.
By Ken Adams, CDC Gaming Reports
February 1, 2018
Many people confuse handle and win, equating handle with gross income and therefore a suitable target for taxation. However, handle is not the equivalent of revenue in other industries, nor is win when it comes to taxation. In retail, revenue is a straightforward concept; it is the money generated by sales of products or service. So for example, a retail grocery, clothing or electronics store sets its prices and the customer pays; that money is the store’s cash flow. Retail taxes are collected by the outlet directly from customers and that money is then forwarded to the taxing agency. Even punitive taxes, such as those on tobacco and alcohol products, are paid by the consumer, not the retailer. In retail, all of the cash from sales can be used to pay normal operating expenses. Things do not work that way in a casino.
In a casino, the customer is offered a wide range of betting options and prices; the customer chooses the option and the price. The casino and the customer play a game to see who wins. If the casino wins, that money becomes part of its cash flow. If on the other hand, the customer wins there is no cash flow. Casinos are taxed on the gross win and that money comes off the top, if you will. All additional expenses are paid from the cash leftover after that tax. Casinos cannot collect the tax directly from the player and in that sense the gaming industry is unique. That unique status is confusing at times to lawmakers and the media and it creates a very challenging environment for casinos.
Lawmakers in their endless search for revenue look to tax everything. Unfortunately, they sometimes think of gaming revenue in the same way they think about retail revenue. And thus, casino taxation is frequently thought of in the same category as tobacco and alcohol; if anyone wishes to engage in this unhealthy behavior they will have to pay a premium. That thinking leads to the extremely high tax rate in states such as Pennsylvania. One can imagine the impact on retail if stores were taxed on their gross sales. No grocery store could remain in business with even an eight percent tax on gross sales; the lowest gaming tax rate in the country. But imagine a tax of fifty percent of gross sales, like the gaming rate in Pennsylvania – you would not be able to buy even milk and bread, as no retail stores could exist. To further complicate the comparison, consider the impact of a retail license in the millions of dollars. It is obviously an untenable model and yet lawmakers consider it perfectly reasonable as a model for casinos.
There is nothing new in anything I have said, but people are pushing the refresh button due to the current interest in legalizing sports betting. The United States Supreme Court is poised to set the stage for legal sports betting in the country in any state that chooses to legalize it. New Jersey passed a law authorizing sports betting within the state, but federal authorities said the law violated federal law. The federal government and New Jersey have been in a lawsuit ever since and now it is before the Supreme Court. If the court rules in New Jersey’s favor, as many people believe it will, then the door will be open for other states to legalize sports betting. Some states already are passing legislation in anticipation of that decision. To fans of sports betting, it seems like the dawn of a new era; no longer will they have to travel to Nevada or gamble illegally online to bet on their favorite team.
But, a word of caution – no one should get too excited yet. Whether or not sports betting becomes legal and successful depends on the legislation in each state. There are already some warning signs and most of those signs can be related to the faulty comparison of retail sales to casino revenue. As lawmakers examine the issue of sports wager, they are looking for the moral high ground. To protect their reputations they want to insure that only the most upstanding operators will be allowed to offer sports betting. Those found suitable will be expected to pay a high licensing premium. This too comes from the myths surrounding casino gaming; many people believe a casino license is a license to print money. And because those operators are going to be making so much money, the state is entitled to a tax rate that is commensurate with the profits. Illinois thinks 20 percent is appropriate and Pennsylvania wants 36 percent. That is fair, isn’t it?
No, it is not fair. And the reason is simple, sports betting, like all casino games is not the sale of a product. It is a contest between the gambler and the bookie. As everyone knows, over the long-term the house usually wins, but far less than one might expect. Nevada is the only state that can serve as a model. The University of Nevada in Las Vegas publishes the numbers on sports betting since 1984. The win varies from year to year; the largest win percentage was in 2006 when sports books won 7.8 percent; the worst year was 1987 with 1.5 percent. In general for the last ten years or so, the win has averaged between 4 and 5 percent. Clearly if a tax were to be imposed on gross handle, a sports betting industry could not exist. But even if the win were to be taxed, a high tax rate would make it nearly impossible for sports books to operate profitably. Besides the tax, the win has to service the debt incurred in setting up the book, which includes the infrastructure – a modern Las Vegas sports book costs between $20 and $50 million to build and there is the cost of the initial license, wages, utilities and other related expenses such as advertising and marketing. After expenses, sports books in Illinois or Pennsylvania would not be profitable.
But that is not all. The National Basketball Association wants a cut and we have to assume the other sports leagues will also want a piece of the action. The NBA is not being greedy; it just wants what it considers a fair share. The NBA argues that it produces the product upon which the gamblers will wager. In its argument to the New York legislature the NBA asked for a mere 1 percent – reasonable, no? No it is not reasonable because the NBA like many others seeking to profit from casino revenue does not understand the issue. The NBA wants 1 percent of the handle, not the win. Let me quote Richard Wells, a long time industry insider with a very high degree of expertise. Richard says: For ballpark numbers, the sports betting handle in Nevada was over four billion dollars in 2016. A 1% rake to the NBA would be $40 million. The net win to Nevada casinos was only 200 million. Thus a 1% fee to the NBA is the equivalent of 20% of win.
In no year did the sports books in Nevada ever win 20 percent. In fact that is over twice the amount of the win in Nevada sports books. So, where does that leave us? If the Supreme Court rules in New Jersey’s favor, sports betting will proceed. The success of sports wagering will depend on several things including the tax rate, the professional league cut of the action and the population of the state. Experience tells me not to expect lawmakers in every state to suddenly become reasonable; nor is it reasonable to expect the leagues to make a serious effort to understand the economics of sports betting. The billions and billions of dollars said to be wagered nationally sound too much like profit to the leagues at this point. The last point, the size of the potential betting population, is as important as the other two. It does not matter what tax rate South Dakota or Maine chooses, there simply are not enough gamblers to make it profitable in those states. New York, California, Illinois, Florida and Texas are the plums, but only if the leagues and lawmakers take the time needed to understand the fundamental economics of the game. In my mind, that is a very tall order.
