Colorado Doubles Down on Sin Taxes with Sports Betting (1)

Colorado may be fashionably late to the sports gambling party, but when it comes to sin taxes it’s a trend setter.

Colorado—the first state to legalize recreational pot—has just become the 14th to legalize sports betting. It joins Oregon and Nevada as the only states to collect revenue from both “sin taxes.”

But even in that small club, Colorado stands out. Oregon misses out on millions by charging no sales tax while Nevada has no income tax. Colorado collects on both, meaning money collected from legal sports bets and a much larger pool of pot taxes—potentially nearly $1 billion total over the next five years—is essentially bonus revenue.

“Much like smoking weed people are going to be betting on sports no matter what,” according to Dustin Gouker, an analyst at Legal Sports Report, a sports betting-centric online news source in Oregon. “The parallels between the marijuana industry and sports betting industry are definitely something to watch.”

Colorado’s 10% tax on profits from casino sport wagers will fund the state’s water management plan—which made the Nov. 5 ballot initiative (Proposition DD) a popular bipartisan lawmaker issue, despite a narrow outcome.

The state brings in $188 million from taxing pot every year. That money goes into investments such as affordable housing, education, and infrastructure. Colorado will collect about $16 million off sports betting over the next five years, per an analysis by the Legislative Council of the Colorado General Assembly.

Levies on recreational marijuana and sports gambling are both considered “sin taxes"—taxes on products or activities considered potentially harmful or undesirable.

States must be mindful to not tax too much as higher overall costs can drive consumers to cheaper unregulated black markets according to Lucy Dadayan, a senior research associate at the Urban-Brookings Tax Policy Center who studies sin taxes .

“The goal of legalization is to eliminate or at least reduce the black market. However, often that’s not the case as consumers do not switch from black to legal market overnight,” Dadayan said. “The high tax rate and overall high cost of legalized product or service could lead to a larger black market.”

Since Colorado legalized recreational marijuana in 2012, 10 other states have followed suit, although only seven collect taxes from sales.

Before a 2018 decision from the Supreme Court striking down a 1992 federal ban on commercial sports betting Americans could only place legal bets in Nevada. More than $10 billion has been legally bet since then, Gouker said.

While tax revenue isn’t overly excessive, “we’re not even close to the maturity of most of these markets,” he said.

“There’s a lot of education and marketing that still needs to be done. It’s still tens of billions if not upwards of $100 billion a year wagered at offshore sites that are not legal, not being taxed by anybody.”

Only 56% of those living in a state with legalized casino sports betting are aware it’s no longer illegal, according to data from the American Gaming Association, a lobbyist group. And just 41% of Americans are aware that using a bookie to place bets is still illegal, the association reported.

Growing Revenue

Colorado’s 10% tax on net proceeds from bets is in the middle of the pack among states. Pennsylvania taxes the most at 36%, while Nevada the least at 6.75%.

“The best part about Nevada is it has a pretty low tax rate,” Gouker said."You’re trying to compete with offshore operators, so the more money that can be put back into product or marketing, that should eventually help grow the legal sports betting market.”

Colorado imposes a 15% additional state sales tax on retail marijuana and retail marijuana-infused products. It’s brought in over $1 billion in revenue since it became legal. Per year revenue is expected to rise to $274.3 million over the next three years, by the Office of State Budget and Planning, about a 46% increase from current levels.

“For a number of consumers the price point is their priority,"said Morgan Fox a spokesperson with the National Cannabis Industry Association which lobbies on behalf of the industry. “The more tax on cannabis is, the more that drives consumers to the illicit market and the more that drives down tax revenue.”

Some states tax by weight while others apply taxes by the product’s price. Washington imposes the highest sales tax at 37%, while Massachusetts charges the lowest rate at 10.75%.

“The idea that we’re trying to push to state regulators is that if you drop taxes on this product it makes it easier for legal businesses to provide and take business away from the illicit market,” Fox said. “In the long run you’ll have more sales taking place in the legal market and increase your tax revenue.”