On May 14 of this year, the Supreme Court issued a decision that has changed the landscape of gambling in the United States. In Murphy v. NCAA, 138 S. Ct. 1461, the Court invalidated the federal law that had limited sports betting to Nevada. Since that decision, several states have passed, or are in the final stages of passing, laws authorizing wagering on sports. While the Court’s decision has unleashed pent-up enthusiasm in states for regulated sports betting, the road forward is likely to be contentious.
The Law and Its Detractors
Congress passed the Professional and Amateur Sports Protection Act (PASPA) in 1992 to address concerns that legalized sports betting would expand from Nevada to other states. Senator Bill Bradley was the driving force for proposals to ban sports betting in the U.S. Bradley claimed that government-sanctioned sports betting undermined the more noble aspirations of sporting competitions in favor of the pursuit of gambling winnings.
But Bradley and other proponents were unable to gather the votes needed to pass a law that would prohibit sports betting. To achieve what they thought would be the same result, they enacted a law that forbade states from passing laws that authorized or licensed sports betting. Nevada was allowed to continue to offer sports betting and New Jersey was given one year from the law’s effective date to adopt sports wagering. As it turned out, supporters of PASPA could not have been more wrong about the law being the equivalent of a federal law prohibiting sports betting.
While New Jersey failed to act within the one-year grace period, they later had a case of non-buyer’s remorse. In 2011, voters passed a constitutional amendment to allow sports betting and in 2012 the regulatory structure for sports betting was in place. But it took New Jersey six years of court battles before their attack on PASPA finally paid off.
The Supreme Court’s Ruling
Justice Alito’s opinion for the Court left little doubt that PASPA violated the Constitution. The law’s fatal flaw was in its mandate to the states that they could not authorize or license sports betting. According to the Court, Congress lacks the constitutional authority to dictate how a state chooses to legislate. The Court ruled that Congress had unconstitutionally “commandeered” the legislative processes of states by barring them from adopting sports betting. PASPA thus violated fundamental tenets of federalism and constituted a “direct affront to state sovereignty.”
The Court also rejected the argument that the portion of PASPA directed at the states could be severed from a provision that barred private persons from operating sports books. Once the provision directed at the states was invalidated, the Court decided, the entire statutory framework of the law collapsed.
While the result itself might not have been a surprise, the emphatic repudiation of the core provision of PASPA by seven justices was remarkable. Constitutional law scholars have already begun to ponder the implications of the Court’s aggressive application of the “commandeering” principle.
States Jump In
Flush with success, New Jersey wasted little time in parlaying its court victory. On June 14, New Jersey Governor Phil Murray placed the first legal sports bet in the state. But New Jersey was beaten to the punch by Delaware which began taking sports bets on June 5. Other states have joined the rush as well. For example, the Mississippi Gaming Commission quickly adopted regulations for sports betting based on a 2017 law permitting daily fantasy sports. Sports betting could be live there by the end of July. The West Virginia Lottery approved regulations that will likely lead to sports wagering by September 1. Rhode Island and Pennsylvania have also already legalized sports betting.
The Devil is in the Details
While other states are likely to jump on the sports betting bandwagon, the bandwagon may move forward with fits and starts. For example, New York state legislators considered sports betting proposals but adjourned June 20 without acting. New York’s experience suggests that as states undertake consideration of sports betting they will face several challenging and controversial issues.
Fees
First, the major sports leagues will continue to press the argument that they deserve to be compensated from the money that sports books collect. This argument was initially framed as an “integrity” fee. The leagues use this term because they assert they will be put to considerable expense in monitoring betting patterns to determine if there is unusual betting activity that would suggest corruption of a game.
Alternatively, the leagues have asserted that sports books should be required to use, and pay for, official league data as the basis for determining the results of sports bets. Adam Silver, the NBA Commissioner, has put the case for compensation in even sharper relief, claiming that the leagues were entitled to royalty fees because they were “content creators.”
While the leagues have pressed the monetization issue aggressively, none of the states which have enacted sports betting provisions included fees for the leagues. A proposal in New York specified the leagues would receive one-fifth of a percent of wagers placed but, as noted, New York’s legislative bodies took no action on sports betting before adjourning. Had New York acted and included the fee, the leagues would have been emboldened to promote the fee to other states.
Taxing Sports Betting
Second, legislators will have to determine the proper tax rate for sports betting. High tax rates could severely undermine the objectives for legal, regulated sports betting. For example, Rhode Island’s staggering 51% tax of the revenues collected from sports betting, and Pennsylvania’s rate of 36%, may well backfire. Taxing at those levels will challenge even the best sports book operator to make a profit, and states with high tax rates may have difficulty attracting operators.
Sports book operators who do venture into high tax jurisdictions may have to charge more for their product by offering less favorable odds or significantly limiting bet maximums. The high taxation discourages the migration of bettors from the unregulated (illegal) sports betting options to the regulated state platforms. The former pay no taxes, have no regulatory compliance costs, and no expensive infrastructure to maintain. This allows them to offer more attractive betting options. If one of the purposes of regulated sports betting is to drive the criminal element out of the industry, high tax rates will have exactly the opposite effect.
In setting tax rates, many legislators will be surprised when they learn that sports betting is unlikely to be a budget game-changer for states. Legislators understandably get excited when they hear claims that sports betting is a $200 billion industry in the U.S. But even if that figure is accurate, it means only that $200 billion is wagered. Sports books are low margin operations; historically, sports books in Nevada pay back approximately 95% of the money wagered to those placing winning bets. In last year’s Super Bowl, Nevada sports books won a paltry 0.7% of the money bet. While every little bit helps, the revenue generated from taxes on the $10 billion retained by the sports books is far from transformative.
Mobile Sports Betting
Third, states will need to address how sports wagers can be made. Limiting sports betting to bricks and mortar casinos will stunt revenues from regulated sports betting. Much of the rise in Nevada’s sports wagering revenues is attributable to the availability of mobile apps that allow sports bets to be made from anywhere in the state. Whatever else can be said about the gambling preferences of millennials, requiring them to go to casinos to place sports bets, or even betting kiosks in convenience stores, will not be popular. Mississippi’s recently enacted law allows mobile betting, but requires the bettor to be present on the licensed premises. Such limitations on mobile wagering may be revisited when it becomes apparent revenues are being lost.
Indian Tribes
Fourth, legislators in states such as California, Connecticut, and Florida will have to manage issues relating to the compacts those states have with Indian tribes. These compacts often provide for the tribes to share revenues with the state in exchange for granting the tribes exclusivity in offering gambling. Renegotiation of the compacts to allow for sports betting to be offered by others will not be seamless. Tribes themselves may want in on sports wagering.
The Future
New Jersey’s ultimately successful effort to overturn PASPA was an epic struggle, and the story of how sports betting will actually be regulated in the U.S. promises to be no less riveting. The uncertainties and inefficiencies of a state-by-state model could prompt Congress to consider enacting a law with a uniform federal template that states would be required to use for sports betting. States would stoutly resist such legislation, and Congress would need to show an unusual level of resolve to overcome that opposition. In any event, the next year will present a dynamic and fluid environment for regulated sports wagering in the U.S. to exhibit its nascent presence in the gambling world.
