New York operators offer dire warnings over continuation of 51% tax rate

New York’s licensed sportsbook operators DraftKings and FanDuel have asserted the Empire State will prove to be unsustainable if its controversial 51% tax rate is continued.

Testifying at a hearing to review New York’s first year as a sports betting market, DraftKings’ CEO Jason Robins and FanDuel’s president Christian Genetski both affirmed their commitment to the market.

However, the pair made the case that while the market was too good not to miss out on, the 51% tax rate and taxation of bonuses were crippling.

“Although it’s only been one year since the market launched, there are clear signs that the New York market has already peaked, whereas other states remain on a solidly upward trajectory,” Genetski told senators.

“First, despite an inordinate level of investment in the first three months post-launch, the New York market is not growing handle nor customer base like every other state, so there’s a direct causal link from the high tax rate to this lack of growth.

“Also, the experience of more mature markets around the world evidences that high tax rate markets stagnate growth and see markets drift back toward unregulated operators.

“Finally, we believe lowering the tax rate even to one commensurate with the next highest state in the country could recharge growth and set the state on a much healthier path in future years,” he added.

Expanding on this early investment in the market, Genetski alluded to FanDuel’s own experience, asserting that while it has the largest market share, the tax rate precluded any sort of profitability in the state, with that already being seen in the reduction in marketing investments made.

“In New York, operators sprinted out of the gate with generous customer bonusing. But once operators understood how the customer bonuses were being taxed, and it became evident that no tax relief was forthcoming and in 2022, their approaches immediately changed,” he said.

Genetski confirmed FanDuel’s own investment had been reduced by as much as 50% on a like-for-like basis when compared to other states. This trend, he contended, would see dire consequences for the market.

“As legal operators struggle to make the numbers work, they will not only reduce marketing and generosity, they may also be forced to adjust pricing in New York. That is how much it costs to make a bet to ensure a higher hold percentage,” Genetski told senators.

“Operators with lower market share will likely elect to withdraw from the New York market altogether. For consumers, that means fewer options, less competition, and a much worse value proposition, all of which make the illegal offshore options much more attractive,” he added.

Genetski’s remarks were echoed by DraftKings’ CEO Robins, who suggested the market was built on an “unstable foundation”, namely the tax rate, but also used the hearing platform to call for a legalization of igaming in the state, something potentially on the cards in 2023.

“Right now, operators are giving up over 70% of their net revenue. Based on DraftKings’ knowledge and experience in shaping sports wagering markets across the country, in our view, the state’s revenue projections are simply unsustainable with this tax rate,” Robins said.

Indeed, Robins suggested that DraftKings itself would be forced to offer a “significantly worse value proposition” in New York, should the 51% tax rate continue.

“This starts with the betting odds where New York customers would receive worse odds than DraftKings offers in other states, and then you can find the illegal market,” Robins said.

“Many customers are very sensitive to this naturally, and they will either cross the border into one of New York’s many neighboring states to place their bets or, worse yet, return to the illegal market.”

Robins continued: “Secondly, we will need to meaningfully reduce the value of promotional credits that we offer to our New York customers. That’s already started to happen, but we haven’t fully done what we would need to do to be able to be sustainable because we are hopeful the tax will be lowered.

“Because our advertising budget will have to be extremely limited, it will also not be practical for DraftKings to enter into or maintain meaningful marketing partnerships with New York teams, leagues and other jurisdictions,” he added.

Answering these criticisms, attending delegates questioned whether operators would change their marketing tactics should the tax rate be lowered, despite concerns being raised about the proliferation of spending and bonusing during the first three months of operation.

One of those criticizing operators was Senator Joseph P. Addabbo Jr., a prominent advocate for the state’s sports betting market and someone who has recently tabled a bill to expand available licenses, something which will see the reduction of the rate.

However, in testimony, Addabbo Jr. questioned whether there was enough evidence that the market was unsustainable in the long term.

“There’s no foundation to say these numbers are suffering at this point, so we need to change this. It’s a very hard argument to make. Do you have enough credible data that this makes fiscal sense to New York?” he asked.

Addabbo Jr.’s colleague New York Assembly member Carrie Woerner queried if the tax reduction would see a change in, what she perceived as, aggressive customer acquisition tactics used by operators.

“If we lower the tax rate and you don’t do anything different than you’re doing now, that’s not going to fix anything,” Woerner said.