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 gambling addiction.

How much revenue do state and local governments raise from various forms of gambling?

State and local governments collected $30 billion from various forms of gambling in fiscal year 2017. That was about 1 percent of state and local general revenue that year.

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 ($19 billion) came from lotteries in fiscal year 2017. Casino gambling generated $9 billion, video gaming provided $1.5 billion, and pari-mutuel wagering accounted for the remainder.

Sports betting was not allowed outside of Nevada until a 2018 Supreme Court decision ended a federal restriction. However, because sports betting is a low-margin product, we know the resulting revenue will be relatively small even if all states legalize it. For example, in calendar year 2019, Nevada collected $22 million from taxes on sports betting, New Jersey collected $36 million, and Pennsylvania collected $30 million. Other states with legal sports betting only collected a few million dollars from taxes on it in their first year.

In 2017, total gambling revenue ranged from $1.2 million in Alabama to over $3.3 billion in New York. As with the national total, the statewide totals are mostly driven by lottery revenue: 25 states collect over 70 percent of their gambling revenue from lotteries. Still, 13 states collected a majority of their gambling revenue from casinos.

One reason gambling revenue is not larger 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.  

Which states allow lotteries, casinos, and sports betting?

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 in 2018 became the most recent state to authorize a lottery.

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 2019, 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 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 April 2020, sports betting was legal in 18 states and the District of Columbia (although not all have begun operations). That total does not include New Mexico and Oregon, 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 Nevada to 51 percent in 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. 

Further reading

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)