Why Congress Should Repeal a Federal Tax on Sports Betting

Abolishing the antiquated tax seems long overdue

Illustration by Cierra Pedro

Illustration by Cierra Pedro

Last year, Nevada’s sportsbooks accepted a little more than $3.9 billion in wagers. After paying out winners, they kept about $227 million for themselves, and paid about $15 million in taxes to the state. But they also sent a $9.8 million check to Uncle Sam, in compliance with a federal tax law on sports-betting handle, a levy that’s been on the books for more than 60 years—and one that U.S. Representative Dina Titus, D-Nev., is fighting to get repealed.

Like so much else in the history of Nevada gaming, the tax is linked to the Kefauver Committee, the early 1950s U.S. Senate body that investigated organized crime throughout America. Chaired by maverick Tennessee Democrat Estes Kefauver, the committee found that organized crime was indeed a national problem—a problem chiefly fueled by income from gambling operations. With state and local authorities unable (or unwilling) to prosecute gambling entrepreneurs to its satisfaction, Congress decided to fix the problem itself.

That included passing the Johnson Act, a law that forbade the interstate transportation of slot machines. (Nevada’s Congressional delegation was able to add a rider to the bill that permitted slots to be transported to states in which they were legal.) A second piece of legislation, the Revenue Act of 1951, targeted sports betting, which Nevada casinos offered but which was not, at the time, a major moneymaker.

The Revenue Act played on the fact that illegal bookmakers were more afraid of the IRS than the FBI. The threat of prison hadn’t deterred bookies; but perhaps, Congress thought, financial sanctions would. Under the Revenue Act, bookmakers were forced to pay $50 for an “occupational stamp” and identify themselves, their place of residence, and the names and addresses of their customers. The law also required bookmakers to pay a 10 percent excise tax on their handle (the total amount of money they received in wagers). A well-run sports-betting operation averages about a 5 percent profit margin—last year, Nevada’s margin was 5.8 percent—so this new 10 percent provision would essentially guarantee bookies net losses, driving them out of business.

Worse yet for bookmakers, if they were to provide the information required by law, they’d open themselves up to prosecution for running an illegal gambling operation. Thus, nobody really expected bookies to readily put their necks in a noose. But failure to register and pay the excise made them subject to penalties of up to $10,000 per violation and five years in prison—in addition to forfeiture of all unpaid taxes, as calculated by the IRS post-arrest. In other words, the Revenue Act was never designed to bring in a steady new federal revenue stream; it was merely one more club to use against organized crime.

Of course, the law didn’t stop illegal bookmakers—there were perhaps 300,000 of them by 1960—but it drove legitimate Nevada casinos out of sports betting. In their absence, independent “turf clubs,” which were maybe a bit less fastidious with their record keeping, sprang up, with a gentleman’s agreement in which turf club owners promised not to offer other forms of gambling and casinos promised to stay out of the bookmaking business.

All this changed in 1974, when U.S. Senator Howard Cannon, D-Nev., succeeded in passing a bill that reduced the 10 percent excise tax to 2 percent, which provided an opening for casinos to get back in the sports-betting game. Legendary oddsmakers Bob Martin at the Union Plaza and Frank Rosenthal at the Stardust wasted little time in opening sportsbooks, and within a decade, turf clubs were out and sports betting was a casino fixture.

Since a 2 percent tax on a 5 percent business was still onerous, Congress in 1982 lowered the tax on legal Nevada sportsbooks to 0.25 percent, but kept intact the 2 percent levy on illegal bookmaking operations (a law that remains on the books to this day).

Which brings us to Titus’ recent letter to House Ways and Means Committee Chairman Paul Ryan and ranking member Sander Levin asking for a full repeal of the bill. Titus argues that, in 2015, the tax does not produce much in the way of funds and places an “undue burden” on law-abiding Nevada businesses.

Without the Revenue Tax, Nevada would have been denied the colorful era of turf clubs. However, applying a 1951 anti-gambling law—one that serves no significant revenue function for the federal government—to 21st-century businesses is the kind of anachronism that sensible legislation removes.

If Titus is successful in convincing Congress to abolish the law, it will do two things: save the state some cash, and push the legitimization of gambling in the United States that much closer to the goal line.

David G. Schwartz is the director of UNLV’s Center for Gaming Research.