DraftKings ($DKNG) & Flutter ($FLUT) – June 22, 2024
A few weeks ago, we covered the progressive sports gambling tax policy adopted in the new Illinois state budget. This implemented a step-series of effective tax rate hikes as sports gambling vendors crossed certain revenue thresholds. Rising tax levels for sports gambling over time (and also iCasino) are quite likely. Budgets and deficits need to be addressed and this is a very easy way to do that.
Higher tax rates in isolation foster black market momentum and make converting gamblers to legal channels more difficult. And while that headwind may be inevitable, it’s not what was alarming here. DraftKings and Fanduel both do very well in New York despite that state’s up-to-51% tax rate. DraftKings also does very well in New Hampshire with its identical tax ceiling, but it’s a monopoly in that state, which makes winning far easier. Overall, higher tax rates have shown to accelerate the death of smaller, weaker players and expedite the consolidation process. They’ve made the big boys bigger and stronger.
What is alarming about the Illinois law is that it forces DraftKings and Fanduel to pay higher blended tax rates than anyone else. The key here is the relative disadvantage both will have to overcome in Illinois, as the smaller players are gifted with a cost base advantage. The changes in Illinois mean DKNG’s tax rate roughly doubles from 15% to 30% for a $60 million EBITDA hit (6% of next year’s profits). They’ll have promotional and marketing levers to reduce this impact, but the headwind will still be largest for this player and Fanduel.
Massachusetts was considered a state where tax hikes and a progressive tax policy were possible. Encouragingly, last month, a proposal to hike the rate there from 20% to 51% was struck down. New Jersey and Michigan are the two other states considered to be the most vulnerable (mainly just for flat rate hikes, but still progressive policy too). And? There has been nothing in the proposals or developments for either state suggesting a progressive system was imminent. That could always change, but isn’t likely at this point. That’s led to growing confidence in the tax status quo next year. New Jersey does have a proposed bill to hike the tax rate from a flat 13%-15% to a flat 30%. It doesn’t seem to be a priority – at least as of now. And even if it were, the proposal avoids the least compelling progressive tax outcome. Illinois is looking more and more like an anomaly in terms of tax policy. That’s great news for the budding duopoly in this space.
