Last May, the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA), finding the federal prohibition on sports betting unconstitutional. Accordingly, all states (not just Nevada) may now legalize sports betting. Excited about the potential revenue bump, a few states, including New Jersey and Delaware, have already passed legislation to open their doors to sports betting. Other states including Pennsylvania, New York, Mississippi, and West Virginia have sports betting bills pending in their legislature, and at least fifteen other states have introduced bills in some form. Unlike PASPA, a federal statute that provided a uniform application for nearly all states across the country, each state’s gambling laws will be unique to their state. And those lawmakers who are considering enacting gambling legislation are also trying to determine how to best regulate the industry—a complicated issue that requires balancing a number of difficult considerations, including: how the state should tax sports betting; whether the state should allow for in person bets only or also online betting; whether the state should permit access to bets with a higher risk of corruption, such as one-off prop bets; and whether the state should the state provide fees to leagues to assist them in corruption prevention. (See here for a discussion of these issues in New York).
While there is a debate in the anticorruption community about whether legalization of sports betting is good or bad for corruption, for those states that do decide to legalize betting, it’s important to do it in such a way that the black market for sports betting shrinks. States considering legalization must ensure that legal betting is a sufficiently attractive option as compared to sports betting in the black market. Otherwise, sports bettors will remain in the black market, which not only would pose numerous challenges for regulating corruption but also would lead to low revenues for states. Thus, at least for those states that choose to legalize sports betting in some form, the twin objectives of maximizing state tax revenue and preventing corruption (especially match fixing and spot fixing), often thought to be in tension with one another, are both advanced by maximizing the market share for legalized betting in their state, as opposed to limiting opportunities for betting.
To maximize market share and decrease corruption risk, states should include the following provisions in sports gambling legislation:
- Creative betting options. Creative betting options, such as in-game betting and prop bets that do not directly affect the outcome of a game, raise a rational fear of heightened risks of corruption (such as spot fixing) for lawmakers. Some sports leagues have urged states to ban prop bets because they can easily impacted by a single player without altering the game’s outcome, making them highly susceptible to corruption. Lawmakers might be tempted to heed the advice of the sports leagues and ban those forms of betting that raise the highest corruption risk. Yet these bets are already offered on the unregulated black market. If legal shops don’t offer creative options such as prop betting, bettors will continue to turn to and use the unregulated black market. By taking such betting options out of the black market and into a regulated space, enforcement groups will be better able to track abnormal bets and suspicious behavior when it occurs, which in turn will decrease corruption.
- No “integrity fee” for professional sports leagues. Every state that is considering legalizing gambling is dealing with the issue of whether to provide professional sports leagues with an “integrity fee” on all wagers placed. Integrity fees are essentially taxes on legal sports betting to be paid to professional sports organizations. In theory, the fees will go to the leagues to pay for procedures to assure that the games are corruption-free and that no match or spot fixing occurs. However, rather than focusing on assisting leagues with their own corruption efforts, lawmakers should focus on maximizing market share by encouraging sports bettors to place legal bets and leave the black market. Even small integrity fees for sports league may be too significant to attract bettors currently on the black market. It is conceivable that an integrity fee, if correctly priced and implemented on the league side, could help prevent corruption—but sports leagues already have powerful incentives to regulate this behavior, so an additional integrity fee from states is unlikely to make much difference. Moreover, even before sports betting was legal, sports gambling took place on a massive scale and sports leagues had systems in place to track and detect corrupt behavior.
- Low tax rates. Finally, while states are excited to bring additional tax revenue into the state through sports betting, some states are considering excessively high tax rates, which will serve only to push in-state betters into the black market. For example, Pennsylvania’s initial proposed legislation sets the tax rate at 36% of gross gaming revenues. (For comparison, Nevada, where sports betting is currently legal, has a tax rate of 6.75% on gross gaming revenue.) If Pennsylvania proceeds with the stated tax, few if any legal betting shops will be able to enter Pennsylvania’s betting market, and those that do will not be able to offer rates as competitive as those of their illegal counterparts. States should resist the desire to set a high tax rate, as high rates will encourage gamblers to return to the black market.
For states that pass sports gambling legislation, lawmakers should look to obtain the largest market share possible in order to decrease corruption risk. The focus of the legislation should be to shrink the black market and offer betting opportunities that are attractive to sports betters, which will in turn decrease corruption in the industry.