Delaware Sports Betting Bill Passes House

The Dover Post reports that the sports betting bill, finally passed the House on Friday. Earlier in the week, the bill had actually failed. The rumor has it that the state's casino operators were in opposition to the original bill, due to the higher gaming taxes and unclear path forward for table games. This blog described other issues with the original bill in a previous post.

The modified bill reduces the increase in taxes so that operators now only will have to pay 43.5% of their gaming revenue. That is a problem. The state should have kept the gaming tax rate at the 37% level. What Delaware is doing is not just adding new gaming options, but increasing the taxes on all gaming revenue.

Let's consider a fast food example to clarify the issue. You have a burger joint. You sell hamburgers, fries and soda. For those items, you pay 10% of the gross profit (price of items minus cost of ingredients). Now, the county health department will allow you to sell cheeseburgers and milkshakes. The price for this expansion is that you will have to pay an upfront fee of $10,000 every year to give you the right to sell cheeseburgers and milkshakes. Not only that, but the tax rate for all food items moves up from 10% to 15%. So, you see in this example, it doesn't really seem like that good of a deal for the burger joint. It isn't.

The original bill was worse, but that was defeated earlier this week. The modification is only slightly better. The increase in the gaming tax rate was reduced to 6.5% from 8%, so the casinos will be paying 43.5% on all gaming revenue. The annual sports betting license fee was cut a paltry half a million to $4 million. The best improvement was putting the table game approval path on a 75 day track to hash out details to present before the legislature.

Politicians seem to live in a world of "orthogonal tuning" when it comes to taxes and revenues. For example, if taxing an item at 20% generates 10 million in taxes, then to a politician it is obvious that raising the taxes on that item to 40% would generate 20 million. Easy! Not so. The politicians, although experts at laws, most of them being lawyers, seem to be oblivious to the law of unintended consequences. When tax rates increase, that has impacts on behaviors and responses. What the government might find in this case that the increase in the tax rate actually results in the decrease in tax revenue.

With regard to the sports betting bill, the casinos will have to operate more lean and mean to survive. As stated in the earlier blog post, the parlay game may not be sufficient to generate lots of interest. Initially, sure, as it is new, but if the game isn't really that good, interest will wane.

What if the casinos, in order to survive, even with table games and sports parlays, had to reduce staff? Is that what Delaware wanted? They might get more revenue from the casinos, but what if one of the casinos close? Will all the revenue move to the remaining casinos? Probably not. With the new legislation in Washington looking to regulate online gambling, it may be in a year or two people can play slots and table games from their home. Why go to a Delaware casino when you can play at home? The only thing the Delaware casinos will have to differentiate themselves is the sports parlay game, which may not be enough.