Chris Gash
Ever since a 2018 US Supreme Court ruling struck down a federal ban on sports gambling, betting on sports has become big business, generating revenue for parties including online bookmakers, media outlets where they advertise, and sports leagues. State governments are likewise cashing in. More than three dozen states have legalized this gambling, and last year, they collectively raised more than $3 billion by taxing sportsbooks. New York, which levies 51 percent on sports-betting operators—the highest such tax rate in the country—brought in more revenue from that than it did from alcohol and tobacco combined.
There’s some debate about how much legal sports betting is actually adding to state coffers since it cannibalizes spending on state lotteries. But University of Chicago’s Matthew Brown and Chicago Booth PhD candidate Jeffrey Ohl ask a different question: When a state has legalized sports betting and intends to tax it, how should the levy be designed? Their research suggests that the tax most states already use is, in many ways, a win for policymakers.
This tax, as it’s often structured, tends to raise revenues without much affecting the price that individuals pay to make a bet, the study finds. It argues that most of the tax burden falls on sportsbook profits rather than on bettors, which makes these taxes a relatively efficient way to tax sports betting—although policymakers have to weigh the increased state revenue against the social harm gambling can cause.
Sports betting has experienced explosive growth since 2018. With more than $165 billion wagered annually, the business is now larger than state-run lotteries, even excluding prediction markets such as Kalshi and Polymarket, which began listing sports contracts last year under a claimed exemption from state betting taxes.
Sportsbooks set the odds so that the average bettor loses about 9.5 cents of every dollar wagered. (Legendary investor Warren Buffett recently described sports betting as “a tax on stupidity.”) Gamblers habitually underestimate those losses: Research by Brown with Nick Grasley and Mariana Guido of consulting firm National Economic Research Associates finds that bettors act as if the cost of a wager is less than half its true price. Other studies find that household finances deteriorate in states that legalize sports betting.
One way states restrain behaviors that are considered harmful is through a sin tax. Most sin taxes are levied per unit, whether that’s a pack of cigarettes or a gallon of alcohol. But in sports betting, the predominant method is an ad valorem tax on the revenue the industry takes in. If the rate is set at 20 percent, for example, a sportsbook that generates $10 in revenue will owe $2 in taxes. For policymakers, this would seem to solve a quandary: The tax restrains gambling and its ills while filling public coffers.
But how effective is it at either? The researchers collected data on ad valorem tax rates for each state from the Tax Foundation, a nonpartisan nonprofit. For aggregate dollars wagered, tax revenue, and sportsbook revenue by state, they sourced data from Legal Sports Report, a publication focused on sports betting and fantasy sports.
The response to a higher tax
After Illinois raised its tax rate on sportsbook revenue, the industry spent less on local TV advertising in Chicago than it likely would have without the tax increase.
Because bets are placed overwhelmingly online, the researchers focused on the states where online sports betting is legal, measuring prices with regulatory filings and gathering moneyline odds from the Odds API, a provider of data for professional sports bettors. (A moneyline bet is a bet placed on the outcome of a game.) The data contain the odds offered by each major sportsbook every game-day morning during the 2021–22 season of the National Basketball Association.
Ad valorem taxes didn’t drive up the prices gamblers paid to bet on sports, the study finds. In the face of taxes, sportsbooks set the same odds for a given event in every state, regardless of tax rate. Even when the enactment of New York’s lofty tax in 2022 raised the dollar-weighted national tax rate for bookmakers DraftKings and FanDuel by nearly 9 percentage points, neither company hiked prices enough to maintain their previous margin.
Instead, sportsbooks responded by cutting marketing. When Illinois raised its tax rate by 14 percentage points in 2024, local TV advertising in Chicago fell by roughly 32 percent relative to comparable markets, and across states, every 1 percentage point of additional tax was associated with roughly 2 percent less sportsbook advertising. Sportsbooks also offered less generous sign-up bonuses in high-tax states—consistent with the broader finding that these taxes squeeze marketing rather than raise prices.
Does less advertising mean less betting? To find out, the researchers observed deposits into sportsbook accounts from more than 93 million debit and credit cards. Comparing neighboring areas that fell on opposite sides of TV-market boundaries (and therefore saw different local ads), they find that fewer ads indeed led to less betting.
A causal estimate they produced implies that sports-betting advertising works, and it does so mainly by recruiting new bettors rather than by getting existing bettors to wager more. The estimate speaks directly to a live policy debate: The SAFE Bet Act, introduced in Congress in 2025 to address the public-health effects of sports gambling, would prohibit sports-betting TV ads during most daytime and evening hours and during live game broadcasts.
Brown and Ohl conclude, based on their assumptions, that ad valorem taxes on sports betting are relatively efficient and a net positive for society, raising government revenue while still deterring some new gambling.
The researchers offer a caveat: If the social harms are much larger than assumed, a tax on wagers themselves would serve as a more efficient corrective. The study looks at Illinois, which has both an ad valorem tax and a per-wager tax. When Illinois introduced the latter in 2025, the researchers write, sportsbooks passed along the cost, often via an add-on fee. Thus it functioned much like a sin tax meant to discourage wagering.
- Matthew Brown, Nick Grasley, and Mariana Guido, “Do Sports Bettors Need Consumer Protection? Evidence from a Field Experiment,” Working paper, September 2025.
- Matthew Brown and Jeffrey Ohl, “Tax Design, Efficiency, and Incidence in Sports Betting,” Working paper, May 2026.
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