Last updated: April 25, 2024
Legalizing betting and marijuana has a significant fiscal impact on state economies. As consumer habits and industries evolve, sin taxes become crucial in generating government revenue, affecting consumption patterns and budget deficits, as Moody’s Investor Service pointed out.
Illegal wagering and other vices are emerging in the structure of government income. For a long time, “sin taxes” on goods such as alcohol, tobacco, wines, and others have been state governments’ primary income source. Just recently, taxable items such as marijuana and sports betting can craft the structure of the revenue from the many states. At present, some 38 states have legalized at least some form of sports betting even though, at the same time, 25 states could legally allow recreational marijuana use among adults. Moody’s Investor Service highlights two areas infusing state and local finances: the age-old, closely guarded sports and recreational marijuana.
According to the research firm, some consuming goods had their, particularly alcohol and tobacco, purchasing habits. This extensively impacted the established government tax income. “Due to the dynamic adaptation of the private sector, new goods and services emerge, redefining the terms of the ‘sin tax’ category. The revenue generated by these taxes varies nationwide, affecting people’s consumption styles differently,” the firm adds, as customers’ behavior in the context of the changing environment must be addressed.
The gaming industry habitually offers the possibility of higher revenue using expanded betting to state officials aspiring for a bounty. On top of this, marijuana’s tax benefits also contribute to this process of legalization in some states, which leads to the legalization of sports betting and recreational marijuana use.
The particularity of betting and marijuana, whose sales taxes are vital for both state deficits in the short run or long term, is noted by Pew. Nonetheless, as we move into 2024, 50% of America’s population lives in states with this kind of deficit in the short or long term. Besides large states, California, New York, and Pennsylvania—the most critical budgetary deficits—on the other hand.
Of these states, California is the only one that has not legalized sports betting. At the same time, New York and Pennsylvania have the two biggest online sports betting markets, and heavy taxes are imposed on these activities.
“However, sports betting operations must also contend with tax burdens from states, and some of the expenses may be allowed deductions which affect the viability of the enterprise,” adds Moody’s.
Some states permit sportsbook operators to deduct promotional expenses from their gross income, but attempts are being made to do away with this deduction, which could lead to a rise in the state’s income. Comparing Betting and Marijuana Taxes to Alcohol and Tobacco, Moody’s emphasizes that the states that charge both sports betting and marijuana besides alcohol and tobacco taxes can generate 2.5% of the revenues on their own, which is in contrast with the mere taxation of alcohol and tobacco of which 0.7% of the state revenues is derived. Furthermore, both sports betting and marijuana are on the upswing in the way they are being socially perceived.
“The advent of internet sports betting does lead casinos to pay more attention to mobile gaming platforms, and rate-related factors is another factor driving this trend,” the rating agency responds.
Such a trend leads states like Illinois (for sports betting) and New Jersey (for iGaming) to raise taxes on online wagers, which can cause a budget deficit in the state economy. Moody also draws attention to the fact that revenues from alcohol taxes are growing in different states; however, income from tobacco taxes remains a trend.
