Tennessee Gov. Bill Lee recently signed a new bill that created a historic sports betting tax change. Tennessee will no longer tax its sports betting revenue. Instead, it will tax its sports betting handle.
Is there any way the Kentucky sports betting industry would make a similar change?
No other state in the country has such a law. And it just so happens that Tennessee borders Kentucky, leaving some wondering if it may make a similar change eventually.
Tennessee makes history with its new sports betting tax law
Tennessee previously taxed its gross sports betting revenue at 20%. But after Lee signed Senate Bill 475 into law, that tax rate vanished.
Instead, sportsbook operators will now see a 1.85% tax on their handle. Operators can deduct federal excise tax of a quarter of a percent per wager before calculating their state tax, though.
Worth noting: Tennessee has no physical sportsbook operations. All of its sports wagers are online.
The new Tennessee law also eliminates the required 10% hold for sportsbooks, which the operators favored.
Nine of Tennessee’s 11 sportsbook operators failed to meet that 10% mark and requested some change. The sportsbooks that did not meet the 10% hold were fined $25,000.
And in turn, Tennessee fell $26 million below previous tax projections.
Kentucky sports betting tax breakdown
HB 551, which legalized sports betting in the Bluegrass State, also set a 9.75% tax rate on retail sportsbooks’ revenue. Online sportsbooks will be taxed at a rate of 14.25%. Neither of those tax rates is out of the ordinary and fits in line with most states nationwide.
However, Kentucky is just one of a few states that taxes its retail sports betting and online differently.
New Jersey was the first to do so. Kentucky also joins Arizona, Kansas, Louisiana, Massachusetts and New York as other states that fit the mold.
It’s worth noting that no Kentucky lawmaker has gone on record to explain why the state opted to run two different tax rates. But it’s wise to assume overhead costs factored into the decision.
Brick-and-mortar sportsbooks cost more to run than online operations. And online sports betting typically translates to a larger handle for the operators.
Kentucky, unlike Tennessee, will tax its sports betting revenue, not its handle. Kentucky Sen. Damon Thayer projects that sports betting could bring in $23 million in taxes.
Why Tennessee’s new sports betting tax is a big deal
Depending on how much money residents wager, this could be a big boost for Tennessee. When football kicks off, we’ll get a better picture of the rewards this fall.
So far, in fiscal year 2023, Tennessee totaled $65 million in sports betting revenue taxes. If the state instituted this new handle tax instead of revenue back on July 1, 2022, the tax would be less. Tennessee would have tallied $58.1 million with the new 1.85% handle tax.
But remember that Tennessee’s sportsbooks struggled to meet that 10% hold. That resulted in missed taxes for the state. Since November 2020, the state would have seen $126.4 million in taxes with operators failing to meet that minimum hold and getting their revenue taxed at 20%.
Looking at that same timeline but with the 1.85% handle tax, Tennesee would have seen $141.2 million in tax money. That’s nearly $15 million more in taxes under this new structure.
Could Kentucky follow Tennessee’s lead with taxing its sports betting handle?
Right now? No.
Kentucky likely won’t backpedal on its original tax language. And it shouldn’t.
Tennessee will be a prime guinea pig for Kentucky. Kentucky can watch how things play out across its southern border while working with a more traditional tax approach.
Should all go smoothly in Tennessee, maybe there’s a chance Kentucky could make a switch later. But right now, don’t expect any major sports betting tax changes from Kentucky.
Kentucky has more than $25.1 billion in unfunded pension liabilities
Kentucky has a pension crisis, and taxes from sports betting won’t solve that pension crisis.
Kentucky is the first state to dedicate sports betting taxes for pension funding. In total, 97.5% of the sports betting tax revenue will go toward the state’s pension fund. But it won’t cover it all.
Unfunded pensions are a concerning bubble of debt. Should residents want a lower tax rate since the state isn’t getting funds in other areas, they may leave.
As mentioned, Kentucky won’t make any historic change immediately. Tennessee had time to get standing with its sports betting taxes, and it would be wise for Kentucky to do the same.
Maybe this is an avenue for the Bluegrass State to explore down the road. But at this time, Kentucky should be, and will be, in wait-and-see mode.
