Gaming This Year?

by Tom Yamachika, President, Tax Foundation Hawaii

The revenue news that has been put out recently has been less than encouraging. Federal support is dropping. Prices of things are rising. Tourism numbers are getting softer. At recent events, our Governor said that he wanted to tap into the Rainy Day Fund to help balance the budget, and that the historic tax cuts enacted a couple of years ago may need to be rolled back for those with incomes above a certain point, say $250,000.

In the upcoming Legislature, which gets under way in less than a month, then, we can expect a lot of discussion about revenue raisers. Those would include not only hikes in taxes and fees, but also something that has been talked about for years: gambling.

If we were to jump in on this trend, we would not be alone.

Take sports betting, for example. According to the Census Bureau, state tax revenue from sports betting nearly quadrupled in the last four years. A 2018 U.S. Supreme Court case, Murphy v. NCAA, struck down the federal statute that was being used to put the brakes on States legalizing sports gambling; since then, many states have legalized and taxed it. New York, as an example, levied a 51% tax on gross gaming revenue and regularly collects over $200 million in revenue per quarter.

Leaving aside the question of whether gambling should be legalized as a matter of morality, ethics, and what is best for society, there are some factors that need to be considered when trying to determine whether the sheer economics would work.

First, there is going to be a big change in how federal taxation of gambling works, as we pointed out earlier this year. Starting in 2026, only 90% of gambling losses are going to be deductible against gambling winnings. Let’s say a person bets $100 a week, every week, in 2026. The person wins a total of $5,000, meaning that the overall performance for the year is a loss of $200. The new law allows a deduction of 90% x $5,200 = $4,680 against the $5,000 winnings, so this person not only has to endure the $200 economic loss but needs to pay federal income tax on $320 “net income” ($5,000 - $4,680). These revised economics certainly will put a financial strain on anyone trying to gamble, and the effects will be felt both by those who run gambling businesses and the states hoping to share profits with them by imposing taxes. It’s simple economics: if the federal government is taking more, then there will be less wealth to go around to the other participants, including states.

Then, there is the reality of start-up costs. Just like there are costs associated with starting a new business, there are costs associated with implementing a new tax system. We have to set up forms and systems. We have to train those whom we are tasking with implementing the systems and enforcing them. And much of this training will necessarily be the blind leading the blind: we don’t have anything like this tax type on our books now and haven’t ever dealt with this type of tax. We can seek help from other states that have implemented similar tax types, but that help will be of limited value if the system we set up is fundamentally different from what those other states have. If this new system is based on our existing general excise tax, for example, most states don’t have anything close to it on their books. Remember the gyrations we went through when we legalized medical marijuana? We can expect something similar.

Easy fix to a state revenue problem? I haven’t heard of such a thing.