Since the Supreme Court legalized sports betting in 2018, nearly 40 states have joined the market and $150 billion in legal bets were placed in 2024 alone. But a proposed federal tax hike threatens to undo much of that progress.

A Brief History of the Federal Sports Betting Tax

The federal excise tax on sports betting was originally enacted in 1951 to combat illegal gambling. The initial rate of 10% proved unworkable — projected revenues of $400 million dropped to $9 million within six months. By 1982, Congress had reduced it to 0.25% on legal wagers and 2% on illegal ones, where it remains today.

How Much Has the Legal Market Grown?

With legalization spreading, federal excise tax revenues climbed from an estimated $33 million in 2019 (with 13 states participating) to $373 million in 2024 (with 34 states) — more than 11 times higher. Even so, in the context of a $7 trillion federal budget, that figure is still relatively modest.

The 5% Proposal and Why It’s a Problem

The Bipartisan Policy Center has proposed raising the federal excise tax from 0.25% to 5% — a 1,900% increase. Here’s what that looks like in practice:

  • A sportsbook takes in $2,200 in bets, pays out $2,100 to winners, leaving $100 in gross gaming revenue
  • After adjusting for $45 in promotional wagers, net gaming revenue is $55
  • Under the current 0.25% tax: the sportsbook owes $5.50 — about 10% of NGR
  • Under a 5% tax: the sportsbook would owe $110 — 200% of NGR, a guaranteed loss

The result? Sportsbooks would be forced to offer worse odds, cut promotions, or exit state markets entirely — pushing bettors back to illegal and offshore platforms that legalization was designed to replace.

Tax Stacking Makes It Worse

States already impose taxes on sports betting revenue ranging from 6.75% to 51%. Layering a higher federal tax on top could push combined tax burdens as high as 92.7% in some states — far exceeding the average sportsbook margin of around 7.83%.

Smarter Alternatives

There are better policy paths that balance revenue needs with market health:

  • Repeal the excise tax on legal wagers entirely to level the playing field with other forms of gambling not subject to federal tax
  • Earmark existing revenue for problem gambling treatment programs
  • Increase the tax on illegal bets to discourage black market activity
  • Broaden the tax base across different gambling types rather than targeting sports betting alone

Think Before You Tax

Legal sports betting has brought regulated, safer activity to millions of Americans and generated real revenue for states. A poorly designed federal tax hike could undo that progress. If you have questions about how gambling income affects your taxes, contact us at 708-665-6663 or marketing@4wealthfg.com. Or, visit 4wealthadvisors.com/get-in-touch to fill out our contact form.