Illinois tax hike plans divide opinion as analysts claim reaction is "overdone"

The proposed 40% top rate tax in Illinois has sparked plenty of impassioned reactions since the proposal was approved by the Senate on May 26, via a 37 to 22 vote.

The House of Representatives followed suit this morning, May 29, which now mean that if Governor JB Pritzker also approves the bill, New York at 51% will become the only state in the US with a higher tax rate on GGR than Illinois, though New Hampshire does also enforce a 51% tax on DraftKings, its online monopoly operator.

It was Pritzker who first floated the idea of raising Illinois’ existing tax rate of 15% to 35%. The new proposed rate only reaches 40% once a sports betting operator surpasses the $200m mark in terms of annual revenue derived from the Prairie State, though brackets for rates of 20%, 25%, 30%, and 35% have also been outlined in the proposal.

Consequently, the only two operators in Illinois that would actually be subject to the 40% tax rate would be DraftKings and FanDuel, with the former having posted revenue of $421m for 2023, and the latter $350m for the same period.

The proposed tax hike does not have everyone united in agreement, with some arguing that certain responses have been overblown.

David Katz and James Wheatcroft, analysts for investment banking firm Jefferies, have claimed the reaction to the proposed tax bump is “overdone” from certain quarters.

As per Covers, the pair wrote: “At this point, we view the Illinois proposal as relatively state-specific and see scope for material mitigation over time. Our math and checks suggest the reaction is overdone.”

Meanwhile, during a recent interview with CNBC this week, former representative for Maryland, Donna Edwards, was pressed for comment on her thoughts surrounding the proposed tax hike.

“I think governors and states are always looking for increased revenue when they’re trying to meet state priorities,” Edwards remarked. “And so, it’s not a surprise to me – this is a huge industry. 

“It’s a $1bn industry in Illinois; $11bn nationwide. America has an appetite for gaming. Because they’ve had so many increases in revenue over the last several years, I think the states are understandably looking to get a piece of that.”

Former Governor of Ohio, John Kasich, also speaking to CNN, poured cold water what impact the Illinois government hopes will come from this tax rise.

Kasich said: “[It’s] probably not going to bring in the numbers – the way projections are; ‘we’re going to get all this manna from heaven, everything’s going to be great,’ but I don’t worry too much about those tax increases on gaming. Who’s going to cry crocodile tears on that.

“But what you wonder about is what are they going to do with the revenue, and I know the Governor has some priorities, some of which I can’t argue against.”

An analyst note from Citizens JMP Securities predicted that Illinois’ tax hike could prompt many other states to make the same move.

The note read: “The last year has brought on a tax rate increase from Ohio, and now Illinois, with states including New Jersey and Massachusetts, flirting with the idea of increasing their respective rates.

“We find it interesting states are now turning back to tax rate adjustments for online gaming when tax changes have been non-existent in states with brick-and-mortar casino gaming.

“The floodgate is now open, in our view, whereby state legislators have found a way to increase tax revenue with little to no effort. The current wave of increasing the tax rate will create an overhang on the industry.”

In response to news of the bill being approved by the Senate, DraftKings stock fell 10.3% yesterday, May 28, to $36.61 from its previous Friday close of $40.75.

At the time of writing, the Boston-based operator has seen its share price fall further to $36.28, a decline of around 1% from close of play Tuesday.