Ads promoting a November ballot measure to legalize sports betting in Missouri offer the potential for millions of new tax dollars for schools. If voters approve the measure, it’s a good bet they’ll see even more ads offering special promotions for punters.

Many of those promotional costs — where sportsbooks offer cash credits for customers to place bets — will be exempt from state taxes, effectively limiting new revenue for education.

The Missouri ballot measure highlights an emerging debate among policymakers over how to tax the fast-growing industry, which has expanded from one state — Nevada — to 38 states and Washington, D.C., since the Supreme Court The US has opened the door to legalize sports betting in 2018. .

“It’s an emerging industry,” said Brent Evans, an assistant professor of finance at Georgia College & State University who has taught courses on gambling. “So nobody really knows what a reasonable fee is.”

Since legalizing sports betting, Illinois, Ohio, Tennessee and Washington, DC have all already raised or restructured their tax rates. And Colorado and Virginia have reduced the tax deductions they originally allowed.

Tax rates range from a low of 6.75% in states like Iowa to 51% in states like New York. This tax gap is even greater because Iowa allows promotional bets to be deducted from taxable income, while New York does not.

About half of the states allow tax deductions for promotional costs. It’s a common way to get people to start – or continue – betting. But in the short term, it can also reduce the tax revenue available to governments and schools.

Missouri’s proposed 10 percent tax rate on sports betting revenue is below the national average of 19 percent that sportsbooks paid states last year. Because of the “free play” deductions, there could be some months when the bookies owe nothing to the state. Missouri’s proposed constitutional amendment recognizes this possibility, stating that negative balances can be carried over from month to month until income grows enough to owe taxes.

Unlike some states, Missouri’s amendment limits the amount of promotional credits that can be deducted from taxable income to 25 percent of all wagers. But it seems unlikely that the cap will come into play. An analysis by consultant Eilers & Krejcik Gaming for amendment supporters projects that promotional bets will comprise about 8 percent of all wagers in Missouri’s first year of sports betting, declining thereafter.

Missouri’s proposal “is very much in line with what has worked and been effective in other states,” said Jack Cardetti, a spokesman for Winning for Missouri Education, the group supporting the measure.

After voters narrowly approved it, Colorado launched sports betting in 2020 with a 10 percent tax rate and full deductions for promotional bets. It posted $2.7 billion in total wagers in its first full fiscal year, generating $8.1 million in taxes, just short of legislative projections. But Colorado changed its law starting in 2023 to cap promotional tax deductions at 2.5 percent of total wagers, gradually falling to 1.75 percent by July 2026.

Colorado’s tax revenue for sports betting has since grown to more than $30 million in the most recent fiscal year. That increase prompted lawmakers to put a proposal on the November ballot to seek permission for the state to keep more than the original $29 million cap on sports betting tax revenue.

Capping the tax deduction for promotional bets is a good step, said Richard Auxier, senior policy associate at the nonprofit Tax Policy Center. But he wonders why some states exempt them from taxes in the first place.

“We don’t offer free cannabis samples when a state legalizes cannabis,” Auxier said. “Is that something you want to subsidize through state tax policy — to encourage people to gamble?”

Missouri’s amendment was placed on the November ballot by initiative petition after legislation to legalize sports betting stalled repeatedly in the state Senate. The $43 million campaign — a record for a Missouri ballot measure — was funded entirely by DraftKings and FanDuel, which dominate the national sports betting market. If the measure passes, the companies could apply for two statewide licenses to conduct online sports betting. The amendment authorizes additional sports betting licenses for Missouri casinos and professional sports teams.

The $14 million opposition campaign was funded entirely by Caesars Entertainment, which operates three of Missouri’s 13 casinos. While Caesars generally supports sports betting, it opposes “the way this measure is written,” said Brooke Foster, spokeswoman for the opposition group Missourians Against the Deceptive Online Gambling Amendment.

In other states, sports betting is conducted through casinos. Although the research is limited, a seven-state study published last year found that casino gambling revenue declined as online sports betting increased.

“There’s definitely going to be a shift from placing bets in a physical space with an incorporated casino in Missouri versus jumping to an app in your living room,” Foster said.

The effect of different tax rates can be seen in Illinois and New Jersey, which led the court challenge that led to widespread legal sports betting. People in each state placed between $11.5 billion and $12 billion in sports bets last year, resulting in $1 billion in revenue for sportsbooks after winnings were paid out to customers, according to figures from the American Gaming Association.

New Jersey collected $129 million in tax revenue based on a 14.25% tax rate for online sports betting and a 9.75% tax rate with some promotional deductions for casino and circuit sports betting racing. Illinois took in $162 million in tax revenue — a quarter more than New Jersey — with a tax rate of 15 percent in most places and no promotional deductions.

But Illinois officials weren’t satisfied with those results. Starting in July, Illinois imposed a progressive tax scale, starting with a 20 percent tax on sports betting revenue of less than $30 million and rising to a 40 percent rate on revenue exceeding $200 million. dollars.

Some bookmakers raised the possibility of leaving Illinois if tax rates were to rise. But that didn’t happen.

There also isn’t much evidence that sportsbooks make the odds worse for bettors in states where they pay higher taxes, said Joe Weinert, executive vice president of Spectrum Gaming Group, a consulting firm.

“Sports bookies compete strongly for punters,” he said, “and the way you compete vigorously is to offer attractive odds and good promotions.”