Sports gambling has existed in North America since 1665 when the first horse-racing track was opened. By the late nineteenth and early twentieth century, gambling became more prevalent as card rooms began to operate and many started gambling on boxing matches and baseball games. However, a series of scandals, such as the 1919 Black Sox baseball scandal and the point-shaving scandal at the City College of New York, and the rise of organized crime’s domination of the gambling market led sports leagues and federal legislators to attempt to prohibit sports gambling.
In 1920, Major League Baseball appointed its first commissioner, Judge Landis, in an attempt to restore the integrity of the game, and he banned from major league baseball for life the eight professional baseball players involved in the Black Sox baseball scandal. The federal government, on the other hand, passed the Federal Wire Act, which made it illegal to place bets or share information about them via wires across state lines. The federal government’s involvement with the sports gambling market culminated with the passage of the Professional and Amateur Sports Protection Act of 1992 (“PASPA”). PASPA banned states from sponsoring or authorizing any betting or gambling on competitive sporting events. Since PASPA’s passage, federal prosecutors have successfully pursued cases against illegal sports betting operators. Nonetheless, an estimated $150 billion were wagered illegally on sports every year prior to 2018, despite PASPA.
In 2011, New Jersey voters voted to create a constitutional amendment that would allow sports gambling, and in the following year the state legislature passed a law legalizing it. However, the several sports leagues sued New Jersey under PASPA to prohibit the New Jersey law. Eventually, this suit reached the Supreme Court. In Murphy v. National Collegiate Athletic Association, the Supreme Court agreed with the State of New Jersey and held that PASPA violated the Tenth Amendment of the Constitution, opening the door for states to legalize sports gambling.
With an estimated $150 billion being wagered on sports every year, it is not surprising that less than three years after Murphy, sports gambling is legal in twenty states. More states are attempting to legalize sports gambling as the revenue through state-permitted sports gambling may help with the lost tax revenue as a result of COVID-19. For example, Governor Cuomo of New York has said that legalizing sports gambling could bring hundreds of millions of dollars of revenue, but he also stated that, in so doing, he wanted New York to have tight control and oversight. Despite the appeal of legalizing sports gambling, how different states and the federal government will navigate the challenges that come with legalizing sports gambling is less clear.
Senators Schumer and Hatch introduced a federal sports gambling bill in 2018, which would have set minimum standards for states to offer sports betting. Although it has not made much progress in the Senate, its aim, like that of the MLB in 1920, is to maintain the integrity of sports games by establishing a national integrity standard. One of the benefits that could result from a uniform federal regulation is that operators may not have to worry about different compliance and reporting requirements in different states. Michelle Minton of Competitive Enterprise Institute, however, argues that the bill, if passed, would further the opposite of the intended aim. She argues that the bill would create more underground sports betting markets, and because these underground markets have less oversight, match-fixing—where competitors, teams, or referees deliberately fix a result—is more likely to occur. Therefore, while the federal bill would raise revenue for the federal government, it seems unlikely that the bill would succeed in promoting sports integrity.
All in all, it is unclear whether federal or state regulation should regulate the sports gambling markets opened as a result of Murphy. Jennifer Roberts and Greg Gemignani highlight the potential benefits and costs of federal government regulation of the sports gambling market. Nonetheless, due to the lack of success of the Schumer-Hatch bill, there are no federal statutes or regulations overseeing the sports gambling industry currently. Consequently, states lack uniformity in how they regulate sports gambling markets. For example, Rhode Island only allows in-person bets in casinos whereas Indiana allows for both retail and mobile sports betting.
The lack of uniformity in regulations among the states that have legalized sports gambling suggests that various states have not found the optimal regulatory framework. In addition, despite the legalization, fifty-two percent of all sports bettors are still wagering illegally and the average spending with illegal bookies decreased only twenty-five percent in states that have legalized sports gambling. Despite legalization, why are consumers still betting on illegal markets? Does this suggest that further regulation will not have much impact?
American Gaming Association President Bill Miller argues that the continued interests and activities of illegal offshore operators may be a result of consumers’ lack of knowledge. He states that more consumers would use legal gambling markets if educated on how to wager legally and on the dangers of the illegal market..
While educating consumers may lead to increased legal gambling, the regulations in and of themselves may drive consumers out of legal markets and into illegal alternatives. For example, in 2019, nine out of every ten bets in New Jersey were made via a mobile device. Consumers may value the convenience of mobile betting markets; therefore, because Rhode Island only allows in-person bets in casinos, consumers may turn to illegal markets over the protections provided in state-sanctioned betting markets.
In addition to the convenience, Andrew Silver of Ifrah Law argues that illegal markets typically offer more attractive odds and allow bets on credit. One of the suggestions Silver makes is to avoid high tax rates on legal gambling operators. He finds that “[w]ith high tax rates, the lines and odds that legal operators can afford to offer to consumers inherently decrease in attractiveness as compared to their illegal counterparts, further exacerbating illegal operators’ competitive advantage.” With the lure of increased tax revenue from legal sports gambling, some states have largely ignored the competitive disadvantages that high tax rates cause for legal gambling operators. For example, Kentucky requires an initial licensing fee of $250,000 and a “hefty tax rate–3 percent of handle,” and Virginia’s recent bill also has a $250,000 fee and a fifteen percent revenue tax. These high rates may have a counterintuitive effect of costing the state as more people continue to bet illegally.
Finally, another reason why illegal sports markets are able to offer more attractive odds to consumers is that some states offer exclusivity for mobile sports wagering to a single operator. For example, New Hampshire approved a contract that makes DraftKings the state’s exclusive operator. As part of the revenue-sharing system in New Hampshire, DraftKings gives the state fifty-one percent of gross revenue to the state. While some argue that giving exclusivity to a single operator and taxing them heavily may give the state more revenue, others aren’t so convinced. Jeremy Kudon, a partner at Orrick Herrington & Sutcliffe LLP, argues that a single operator will be disincentivized to market its product under a monopolistic system. Therefore, illegal markets may continue to offer more attractive odds, and consumers may continue to bet on illegal markets, resulting in decreased state revenue.
Despite legalization of sports gambling, consumers may be betting on illegal markets because of the regulations that states have enacted. These regulations, such as high tax rates and exclusivity deals for a single operator, may be creating a competitive disadvantage and disincentivizing consumers from engaging in the legal market. If the goal of legalizing sports betting is to raise revenue for states and to maintain the integrity of the sports, states should attempt to attract more consumers to engage in the legal market by lowering tax rates on operators and allowing many operators to compete in a state. These changes could create an environment for legal sports operators to better compete with illegal offshore operators. In addition, if more consumers use the legal market, the integrity of sports games will likely be preserved and issues with gambling and addiction may be abated as a result of greater oversight.
About the Author: Justin Park is a J.D. candidate in the class of 2022 at Cornell Law School. He earned a Bachelor of Science in Mathematics from Washington and Lee University in 2019. Justin is interested in issues of litigation and tax law. He is an associate for The Issue Spotter, the online edition of Cornell Law School’s Journal of Law and Public Policy, and a member of the Asian Pacific American Law Student Association.
Suggested Citation: Justin Park, Optimizing Sports Gambling: A Case for Deregulating the Sports Gambling Industry, Cornell J.L. & Pub. Pol’y: The Issue Spotter (May 14, 2021), http://jlpp.org/blogzine/optimizing-sports-gambling-a-case-for-deregulating-the-sports-gambling-industry.