The Tax Revenue and Problem-Gambling Balancing Act

The legalization of online sports betting has dramatically changed the gambling landscape across the United States. Since the Supreme Court's 2018 decision to overturn a federal ban on sports betting, 26 states have embraced online gambling, fueling an industry that has seen billions of dollars in wagers. As legal betting becomes more accessible, a pressing question emerges: how is this affecting consumers, particularly in terms of financial well-being?

Research co-authored by associate professor Dan McCarthy examines the consequences of sports betting legalization, shedding light on both the financial and social implications of this expanding market. Using a large-scale dataset covering over 700,000 gamblers, the study investigates changes in gambling behavior, tax revenue, and the prevalence of irresponsible betting.

One of the most notable findings is the significant increase in irresponsible gambling. The study introduced the concept of “Rates of Irresponsible Gambling” (RIGx), tracking the proportion of gamblers who spend beyond certain income thresholds. The results indicate that after legalization, gambling activity surged, particularly among lower-income individuals, who were more likely to spend dangerously high portions of their earnings on betting.

McCarthy emphasizes the financial risks at play. “There are a lot more people who gamble a very large amount relative to their income,” he says. “Some of those people might win, but typically for sports betting, most of them lose.”

Beyond individual financial risks, there is also the growing influence of sports betting companies, which have invested heavily in advertising. From Super Bowl commercials to highway billboards, major players like FanDuel and DraftKings are spending billions to attract new users, further accelerating participation. While states benefit from increased tax revenue, this financial gain must be weighed against the societal costs of widespread betting accessibility.

With many states currently considering new gambling legislation, McCarthy suggests that while sports betting can generate substantial state revenue, responsible gambling measures, such as tax-funded support programs or regulations to slow down excessive betting, should be considered to mitigate harm.

“You want to make sure that you’re properly accounting for that in your cost-benefit analysis of legalization,” he explains. “Maybe you allow it but attach some strings to it. For example, requiring that companies dedicate a portion of revenue to slowing the rate of irresponsible gambling.”

The study, “The Effects of Sports Betting Legalization on Irresponsible Gambling,” is published at SSRN.