Is the Tax Rate for Arizona Sports Betting Too Low?

When sports betting in Arizona went live almost two years ago, it was met with a ton of fanfare. State residents were thrilled, in particular, with the opportunity to bet on the NFL, NBA and MLB.

Equally important, though, Arizona sports betting arrived to steep expectations from key stakeholders.

Professional sports franchises were expecting lucrative partnerships with online operators. Casino sportsbooks were expecting customers to place wagers in droves. All of the top online sportsbooks that entered the market, meanwhile, were expecting to handle even more of The Copper State's gambling business than their brick and mortar counterparts.

And then, of course, Arizona officials were expecting to rake in millions of dollars every year from their agreed upon tax rate.

So far, roughly 19 months into the process, everything has gone according to plan. Arizona has accepted nearly $8.4 billion—yes, that's "billion" with a "b"—in total sports bets since September 2021. From that figure, gambling operators licensed within the state have generated a little over $690 million in combined revenue. And of that money, almost $38 million has gone directly into the state's pocket. For Arizona, that's akin to more than $20 million per year in additional tax revenue—an absolutely massive haul.

And yet, in recent months, the relative success of sports betting in The Grand Canyon State has left officials openly wondering: Is Arizona's current tax rate for in-person and online sportsbooks too low and already due for an increase?

What Is the Current Arizona Sports Betting Tax Rate?

When Arizona first legalized sports betting, lawmakers instituted an 8 percent tax rate for in-person sports betting and a 10 percent tax rate for online and mobile sports betting. Relative to other states, this falls somewhere right around, if not a tick below, the national average.

With that said, if you do the math on Arizona's $38 million in sports betting revenue, you come to see that it amounts to a total tax rate of around 5 percent. That's far lower than the state's proposed rates of 8 percent and 10 percent, respectively.

The reason for this dip? Tax credits. As part of Arizona sports gambling, the state "created deductions for so-called 'free' or promotional wagers," according to AZFamily.com. This explains the lower percentage of revenue, even if the state's share is much lower than initially projected.

Arizona is far from the only one running into this math problem. Most states have implemented some sort of temporary tax credit for sportsbooks offering free-bet and deposit-bonus promotions. Many other states also underestimated the impact these breaks would have on their total revenue over the first couple of years or so. Online sportsbooks, in particular, have aggressively sought out new customers by dangling epic promotional bonuses. And prospective bettors have been quick to capitalize on these terms.

Much like every other state, Arizona plans to phase out this tax-break program. It isn't immediately clear how long it's slated to last, but lawmakers know it won't be around forever. Even so, that hasn't stopped many inside the state from wondering whether it's time to jack up their sports betting tax rate.

The Debate Over Arizona's Sports Betting Tax Rate is Heating Up

With the popularity of sports betting on the rise, Arizona lawmakers have started to hold discussions about potentially increasing the tax rate. Officials and lobbyists most recently debated the merits and pitfalls of a tax hike at 2023 legislative committee hearings. The response to the conversation was mixed.

Some lawmakers are vehemently against the idea—such as Republican Senator Sonny Borrelli. As Morgan Loew relayed for AZFamily.com:

“'Anything above 8%, now we’re starting to make the bookie and the end of the bar, we’re starting to make him a lot of money,' said Sen. Sonny Borrelli, A Republican from Lake Havasu, who was a bill sponsor. Borrelli was inferring that illegal gambling operations would still flourish if the tax rates were high because legitimate gaming businesses would be unable to operate in the state."

This is a very real concern among state lawmakers. A robust illegal gambling market is part of why Arizona offered early access to sports betting when they were still in the beta stages of the rollout.

Still, just because lawmakers are worried about eating into current profit margins that doesn't make them.

The Case for Arizona to Raise Their Sports Betting Tax Rate

Not only is concern for a sports betting tax hike in Arizona overstated, but quite frankly, it's beyond misplaced and, in some cases, thoroughly incorrect.

Consider something else Sen. Borrelli said when Arizona was still debating legal sports betting back in 2021, via AZFamily.com: “People back east, they put the tax up so high, you know they made the mafia billions of dollars because they, nobody’s going to do it legally."

This sentiment turned out to be a load of hogwash. New York implemented a higher sports betting tax than Arizona and is about to become the biggest gambling market in the country less than 18 months into the industry's legalization. And while The Empire State might be an extreme, it's not an exception.

Rhode Island has a smaller population than Arizona. They also don't house any pro sports teams. They installed a higher tax rate than Arizona and are making out like gangbusters. In less than three years since debuting legal sports gambling, Rhode Island has turned in $73.3 million in total state revenue—an average of over $28 million per year.

So, does Arizona need to raise their sports betting tax rate? Technically, no. They will continue making money. And they'll make even more money, without changing their tax rate, once the promotional betting program subsides. But this isn't just a matter of need. It's also an issue of can. As in, can Arizona get away with increasing the tax they charge to sportsbook operators? And the answer, quite frankly, is a resounding, undeniable yes.

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