Daily Tax Report ®

2019 Outlook: States Eye Legalizing Pot, Sports Betting (Corrected)

Dec. 31, 2018, 3:50 PMUpdated: Jan. 3, 2019, 10:51 PM

More than half of the states are likely to legalize sports betting, and a handful of new states will legalize recreational marijuana in 2019, tax policy professionals predict.

States in 2018 saw a new avenue of potential tax revenue open up as the U.S. Supreme Court reversed a ban on sports betting, and more states have shown an interest in legalizing recreational marijuana. There are similar factors that could determine which states are next to take those steps, according to state and local tax policy professionals. Both issues face the same quandary: finding a tax rate “sweet spot” to maximize revenues without exceeding what the market will bear.

States need to keep marijuana and sports betting tax rates moderately low because of competition with “illegal markets,” said Richard Auxier, a research associate at the Urban-Brookings Tax Policy Center.

“With both marijuana and sports betting, states want people to take part in these activities, it’s not like cigarette taxes, which are meant to dissuade people from smoking,” he said. “States have to make sure they tax these activities at a rate that will boost revenues, not hurt them.”

The Right Rate

Pennsylvania is seen as a state that has been hurt by high tax rates, Auxier said. The state offers legal sports betting with a 34 percent tax on gross revenue and a $10 million licensing fee for any interested sportsbook. As a result, the state has struggled to attract interested parties, Auxier said.

Pennsylvania is one of seven states—along with Delaware, Nevada, New Jersey, Mississippi, Rhode Island, and West Virginia—that offer sports betting. The U.S. Supreme Court cleared the way for states to allow bets on sports with its May ruling in Murphy v. NCAA, which repealed the federal Professional and Amateur Sports Protection Act of 1992. That law had prohibited states from “authorizing” gambling related to professional and amateur sports leagues.

New York has legalized sports betting but isn’t yet taking bets. The D.C. Council approved sports betting legislation Dec. 18, and the mayor was expected to sign the bill.

Ten states have now legalized recreational marijuana. The latest to do so—Maine, Michigan, and Vermont—have yet to begin sales of recreational marijuana. However, Maine and Michigan have established tax rates.

In addition to arguing that a high tax rate will drive consumers to illegal outlets, Jared Walczak, a senior policy analyst at the Tax Foundation told Bloomberg Tax that states should expect marijuana tax revenue to dip as more states legalize the drug.

“We’ll see a drop in tourism revenue as more states legalize pot,” Walczak said. “People will slowly stop crossing state lines to purchase legal marijuana as it becomes more available.”

2019 Expectations

New Jersey will likely become the first state to legalize pot in 2019, Walczak said. Also in the running is New York. During a Dec. 17 press conference, Gov. Andrew M. Cuomo (D) said he wanted to “legalize the adult use of recreational marijuana once and for all.”

Auxier said he expects at least one of the two efforts to succeed.

Projections soar when it comes to legalizing sports betting, with practitioners anticipating that a double-digit number of states will roll out proposals.

“I expect legislation to be introduced in nearly every state, and half of those to actually legalize sports betting,” Walczak said.

Auxier called sports betting revenue “easy money” for states, and said he could see every state except for Utah—which has historically been opposed to sports betting—at least introducing a bill in 2019.

What about Congress?

One big wild card is if Congress will intervene. On Dec. 19, Senators Charles E. Schumer (D-N.Y.) and Orrin G. Hatch (R-Utah) introduced a federal bill seeking to regulate state-run sports betting.

Auxier said he’s uncertain whether Congress actually has an appetite for regulation next year.

“There’s a big sense of uncertainty here for me. I want to hear from governors and state lawmakers on what they think of this proposal,” he said.

Among other details, the Schumer-Hatch plan would:

  • require state operators to use professional league-provided data to determine all wagers through 2024;
  • require sports books to cooperate with any federal law investigation;
  • ban states from allowing individuals to bet on amateur sporting events except the Olympics and college sports;
  • prohibit anyone under the age of 21 from betting; and
  • update the Wire Act—which prohibits the operation of certain types of betting businesses in the U.S.—to permit certain interstate sports wagers, while also providing additional enforcement authorities such as a state cause of action and a new mechanism for the Department of Justice to target unlicensed, offshore sports wagering websites.

The bill language is careful to defer to the states, saying, “nothing in this Act limits or otherwise affects the taxation of sports wagering by a State, an Indian Tribe, or a locality.”

(Corrected to reflect Maine and Michigan's established tax rates )

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

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