The Good and the Bad Sides of a Proposed Sports Betting Integrity Fee
The court case legalizing sports betting around the US is causing a lot of questions for states that are looking for extra revenue generated by a sports betting platform. Questions like should their state legislators approve a sports betting bill and what fees or tax rates are reasonable. What venues are equipped to handle this new state sponsored industry.
But a new issue is going to dominate the statehouses around the country and possibly even Congress. The major issue is called an integrity fee. What are they and how can they impact the sports betting landscape in the US. What are the good and bad sides of this proposal and how will it affect implementing legalized sports betting.
What is a sports betting integrity fee
Integrity fees are the financial idea of the NBA and Major League Baseball as they look to find a way to profit from the proliferation of sports betting in the US. The fee would transfer money from sportsbooks to the leagues themselves. The NBA advanced it as its preferred policy around the country at a hearing in New York. NBA and MLB are also opposing legislation that does not include an integrity fee. It’s not a new idea. Pro leagues in both France and Australia already get a small percentage of wagers made in those jurisdictions.
Whether integrity fees ever get implemented depends on the outcome of the New Jersey sports betting case in the US Supreme Court. The federal ban on single-game wagers (PASPA) would need to be struck down before integrity fees become reality anywhere. Data driven betting sites along with betting consultants are still feeling the growth of clients before any court decision and Vegas sportsbooks are doing better than ever. But any favorable court decision is a winning bet for the sports betting industry regardless of any proposed state legislation or league stipulation like an integrity fee.
How does a good integrity fee work
The proposed integrity fee would tax handle at a rate of one percent, payable to each league on which sports wagering would occur. Some people who are new to the sports betting industry confuse handle for revenue. Handle is the total amount wagered by bettors, so it’s a gauge of how much money is flowing through sportsbooks. Revenue is how much sportsbooks hold from the total amount wagered. Historically, this number comes in at about five percent of handle for sportsbook operators. That is their return on investment minus their operating expenses. Not much room for the books to operate but the casinos will get the cross-over action if sports bettors are winning.
A integrity fee of one percent would send that amount of wagers from the sportsbooks to the leagues, regardless of the revenue picture of the sportsbook. Using a baseline of five percent hold, a one percent integrity fee would equate to roughly 20 percent of revenue going to the leagues. The fees in the proposed legislation have no strings attached to them. It’s just a transfer of money from gaming operators to the leagues.
How much could leagues make from integrity fees
A calculated sports betting market is around $200 billion — if the federal law is struck down in the New Jersey sports betting case — which means about $2 billion in integrity fees would be paid out. That translates to hundreds of millions going to individual leagues like the NFL, NHL and the NCAA. Major leagues stipulate that the integrity must be upheld by adding security layers which will cost the leagues additional expenses and extra administration levels of monitoring. There has been some resistance to the idea of integrity fees in several states and the legal sportsbooks in Nevada who some claim the integrity fee is a form of extortion.
Why integrity fees are a bad idea
There are several reasons to be skeptical of integrity fees. Taxing handle is not a great idea because it is not tied to revenue. Sports betting will be a new industry in a lot of states. It is only legal in Nevada. If margins are even lower than in Nevada to start, that means an even larger portion of revenue is going to leagues. Why do the leagues deserve the money. The leagues are playing no functional role in the industry. The state will be regulating it. The sportsbooks are operating it. The leagues simply exist and have huge television contracts and other streams of revenues in the millions.
It takes away from state revenue. Why would states simply want to give money away to the leagues. They would likely be lowering their own tax rates in order to make this work. Enriching leagues at the cost of money that could go to state coffers is a difficult decision to defend. It hurts consumers and businesses. If the cost of doing business increases for sportsbooks operating legally in the US via integrity fees, they will likely attempt to pass that cost on to consumers. That would make it more difficult for legal books to compete with offshore books that are serving Americans illegally already. If the goal is to move all betting to regulated markets, states should be interested in keeping costs down. Integrity fees don’t do that.
The ugly side to any new legislation — greed
Does the added costs for leagues really need the 1% fee to justify their proposal. The proliferation of sports wagering has been growing over the last decade without any integrity fee. Nevada has their gaming board and security monitoring that works well inside their legal industry. They have to increase the amount of time and money that they spend on data monitoring and integrity protocols. Any major industry, especially in cyberspace, have security flaws and is the cost of doing business.
A regulated market gives Nevada sportsbooks insight into sports betting markets with updated technology. Offshore sportsbooks are able to piggy-back from the Nevada market knowing they are getting all the security information worth tens of millions of dollars in handle annually.
Sportsbook operators will not accept the 1% integrity fee
Over a dozen states are ramping up to meet expectations of a possible Supreme Court positive ruling on sports betting. Indiana legislators proposed new sports betting applications to incorporate onto a state run sports betting platform but is a major complication as stated in their latest declaration.
A sports wagering operator shall remit to a sports governing body that has provided notice to the commission under section 2 of this chapter an integrity fee of one percent (1%) of the amount wagered on the sports governing body’s sporting events. The sports wagering operator shall remit integrity fees to the sports governing body at least once per calendar quarter.
This is the first time such an “integrity fee” will have appeared in sports wagering legislation in the US. Legal sportsbook operators in Nevada know this is not acceptable for their established operations and other states will probably oppose the 1% integrity fee as a strain on their operating budget. Las Vegas book operators are the leaders in sportsbook operations and are not subject to any fees since they are already legal but other states would follow a Vegas style of sportsbook platform to get started if legalized. There are slim margins to begin with and states cannot justify paying a 1% integrity fee to any professional league or college association.
The handle and revenue figures from Nevada are proof of operation
The one percent figure would be on handle, or the total amount wagered by sports bettors in the state — not gross revenue. By way of comparison, Nevada handle will account show just under 5 billion dollars for 2017. That would mean around 50 million dollars would go to leagues if the integrity fee were hypothetically applied in Nevada. Revenue will eclipse $200 million in Nevada this year. The bill also wants to impose a 9.25 percent tax on sports betting revenue (not handle) in new states minus the integrity fee — a real deterrent to any sportsbook operation. There is also currently an excise tax of .25 percent on sports betting handle at the federal level.
Initial reaction
The American Gaming Association, which is spearheading efforts to legalize sports wagering on behalf of the gaming industry, issued this statement Tuesday morning:
“While we applaud Representative Morrison’s efforts to bring legal, transparent sports betting to Indiana, handing sports leagues 20 percent of what’s left over after winnings are paid out, undercuts its economic viability. Doing so will ensure the illegal market continues to thrive in the state, and gut the tax revenues available to fund essential public services. We believe Indiana taxpayers deserve better”.
“We encourage Indiana to reject this short-sighted, misinformed idea, which simply replaces a failed federal prohibition with bad state policy. Our goal is to eliminate the illegal market, protect consumers and strengthen the integrity of the game. We invite all stakeholders to join us in working together in a thoughtful and transparent fashion.”
Leagues can ‘limit wagering’
The bill also provides a mechanism for the defined “sports governing bodies” to limit wagering on some events:
Subject to subsection (b), a sports governing body may at its election notify the commission that it desires to restrict or limit wagering on a sporting event conducted by the governing body to ensure the integrity of its contests, by providing notice in the form and manner required by the commission.The restrictions or limits may include restrictions on the sources of data and associated video upon which an operator may rely in offering and paying wagers and the bet types that may be offered.
The description of contests on which wagering can be limited appears only to include minor-league and lower level college contests. That would be the equivalent of leagues having a way to take certain games “off the board” at sportsbooks in the state. This extra consolation should be acceptable to both sides since their is little to no action on lower level sports contests with even smaller levels of public betting interest.
Integrity is a concern for everyone — leagues, players, sportsbooks and governments. It deserves attention and money devoted to it. An integrity fee could help integrity but not at the 1% level. Most likely, negotiations will barter down to .20% or lower to facilitate the passage of the sports betting platform for those states eager to increase state revenue.
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