Lotteries, Casinos, Sports Betting, and Other Types of State-Sanctioned Gambling
State and local governments collect revenue from various forms of state-sanctioned gambling, including lotteries, casinos, pari-mutuel wagering (such as horse racing), sports betting, and video gaming devices (such as video poker).
For lotteries, the state government collects a share of all purchased tickets. The remaining share goes to prizes, retailer commissions, and administrative expenses (including advertising).
For most other forms of gambling, the government typically taxes a gambling operator’s revenue. That is, the state taxes whatever the operators collected after they paid out winning wagers.
Revenues from gambling are often lumped in with other forms of "sin taxes." But unlike taxes on cigarettes, for example, state and local governments do not tax gambling to discourage people from it. In fact, most states promote and encourage state-approved gambling. Like taxes on cigarettes, though, a part of the resulting revenue from gambling is often spent on programs that offset the harmful costs related to it, such as gambling addiction.
- How much revenue do state and local governments raise from various forms of gambling?
- Which states allow lotteries, casinos, and sports betting?
- Further reading
That amount does not include any revenues from tribal casinos, which typically are not regulated or taxed by state and local governments. However, some states collect revenue from tribal casinos through revenue-sharing agreements with the operating tribes.
Nearly two-thirds of gambling revenue came from lotteries ($21.5 billion) in fiscal year 2019. Casino gambling generated another $9.6 billion and video gaming provided about $2 billion. Pari-mutuel wagering accounted for most the remainder.
[Note: These revenue data are from the Urban Institute, which collects them directly from government sources as part of its revenue data subscription project, and not the US Census Bureau. As such, the revenue data reported here may differ from Census lottery totals. Census classifies some revenue from video lottery terminals and video games as lottery revenue. Further, states reporting of prizes distributed and other operating expenses may vary.]
We do not have much revenue data on sports betting because it was not legal outside of Nevada until a 2018 Supreme Court decision ended a federal restriction. In fiscal year 2019, only six states reported sports betting tax revenue: New Jersey ($23 million), Nevada ($20 million), Delaware ($13 million), Pennsylvania ($8 million), Mississippi ($4 million), and Rhode Island ($3 million). As of March 2021, 20 states and the District of Columbia offer legal sports betting, and many others are considering legalization. However, despite the rush of legislation, we know that sports betting tax revenue will always be relatively small (even if all states legalize it) because sports betting is a low-margin gambling product. So while sports betting tax revenue will probably grow considerably in the next few years, it will never rival the money states collect from lotteries or casinos.
Among states with state-sanctioned gambling, total gambling revenue ranged from $1.1 million in Alabama to over $3.7 billion in New York in fiscal year 2019. Alaska, Hawaii, and Utah were the only states that collected no gambling-related revenue that year. As with the national total, the statewide totals are mostly driven by lottery revenue. In fact, 24 states and the District of Columbia collected over 70 percent of their gambling revenue from lotteries. However, 13 states collected a majority of their gambling revenue from casinos and three states (Oregon, Montana, and South Dakota) collected a majority of their gambling revenue from video games.
One limit on gambling revenue is that an abundance of gambling options can cannibalize each other. That is, if a state builds a new casino, it will most likely draw gamblers who are already using existing casinos (in the state or a neighboring state) rather than add new gamblers to the pool. As such, over the past decade, inflation-adjusted gambling revenue only increased 6 percent, and it declined 3 percent when measured per adult ages 18 and older.
Forty-five states and the District of Columbia operate lotteries. Only Alabama, Alaska, Hawaii, Nevada, and Utah do not. The first state lottery was authorized in New Hampshire in 1964, and by the 1990s a majority of states were operating a lottery. Mississippi became the most recent state to authorize a lottery in 2018.
The share of lottery revenue that goes to the state (as opposed to winnings and administration) varies by state, but most governments take between 20 and 30 percent of gross lottery revenues. States typically dedicate that lottery revenue to specific programs such as education, veteran services, environmental protection, and natural resources.
As of 2021, state-sanctioned casino gambling, including commercial casinos and casino betting permitted at racetracks, riverboats, and other facilities, was legal in 25 states. (That total does not include tribal casinos.) Before 1991, no commercial casinos existed outside of Nevada and New Jersey. Despite the recent growth in casino gambling, Nevada is still home to more than 50 percent of all the commercial casinos in the United States.
State tax rates on casino revenues (i.e., what the casino collects after paying out to winners) range from 0.25 percent in Colorado to 62.5 percent in Maryland. Some states levy a flat tax rate on casino revenues; others levy graduated rates that increase as a casino’s adjusted gross revenue increases. Moreover, many states tax table games at lower rates than other types of gaming, such as slot machines. In general, early adopters of commercial casinos—particularly Nevada and New Jersey—have lower gambling tax rates than late-adopter states such as Maryland and Pennsylvania.
As of March 2021, sports betting was legal in 20 states and the District of Columbia (although not all states have begun operations). That total does not include New Mexico and North Carolina, where some tribal casinos allow sports betting. Most states levy a flat rate on a sportsbook’s revenues, with rates ranging from 6.75 percent in Iowa and Nevada to 51 percent in New Hampshire and Rhode Island. In addition, New Jersey levies different tax rates on in-person bets (9.75 percent) and online wagers (14.25 percent). New Jersey collected nearly 90 percent of its first calendar-year sports-betting tax revenue from online gambling.
Are States Betting on Sin? The Murky Future of State Taxation
Lucy Dadayan (2019)
States Learn to Bet on Sports: The Prospects and Limitations of Taxing Legal Sports Gambling
Richard C. Auxier (2019)
Three Tax Lessons from the First Year of Widespread Legal Sports Betting
Richard C. Auxier (2019)
Critical Value Podcast: #46 Sin Taxes Are Sweeping the States!
Richard Auxier and Lucy Dadayan (2020)