Voters will be asked in November to make Colorado the 20th state with legal sports betting — and, policymakers hope, generate a small pot of new tax revenue in the process.
It comes in the wake of a 2018 U.S. Supreme Court decision that struck down a federal prohibition of sports gambling in most of the country, setting off a wave of state legalization. If approved, it would mark the first major expansion of gambling in Colorado since 2008, and only the second authorized by voters since gaming was legalized in 1991.
The stakes for Proposition DD aren’t particularly high, from a revenue standpoint. Although the measure asks voters to approve up to $29 million annually in new taxes, the voter-information guide known as the blue book only projects about $16 million in average annual revenue in the first five years. A separate fiscal analysis by legislative forecasters suggests it could take years to reach even that level, projecting between $6 million and $15 million annually in the first three years.
But the Nov. 5 ballot measure represents a major policy change, nonetheless. It would decriminalize, tax and regulate an activity that’s long been occurring on the black market. The gaming industry estimates that Americans spend as much as $150 billion a year placing illegal sports bets, often through offshore websites.
And if revenues hit the targets, the proceeds would start to fund a critical state priority that has lacked a dedicated revenue stream — the Colorado Water Plan.
Still, state after state has provided a cautionary tale on the limits of gambling revenue — sports-related or otherwise. And even if Prop. DD meets or exceeds the legislature’s conservative revenue expectations, the money it generates won’t go far in tackling a looming state water crisis it’s intended to help address.
Meanwhile, some opponents question aspects of the water plan itself. And they say the costs of addressing the state’s water issues shouldn’t be borne by gamblers, but by the industries that most contribute to water and climate problems.
Here’s what you need to know about Prop. DD and what it would mean for gamblers, casinos and public services in Colorado.
What would Prop. DD do?
In short, the measure proposes decriminalizing sports betting in the state. It would also impose a 10% tax on the casinos’ net sports proceeds (after winner payouts and federal taxes). Right now, casinos pay a graduated tax as high as 20% based on their level of revenue.
Here’s what voters will be asked on the ballot:
Shall state taxes be increased by twenty-nine million dollars annually to fund state water projects and commitments and to pay for the regulation of sports betting through licensed casinos by authorizing a tax on sports betting of ten percent of net sports betting proceeds, and to impose the tax on persons licensed to conduct sports betting operations?
Starting in May 2020, it would legalize betting on professional and college sports, Olympic games, motor sports, and official video game contests and other esports. But there would be no betting on high school sports. And while prop bets — things like gambling on the performance of a specific player, rather than a game’s outcome — would be allowed for pro sports, they’d remain banned for collegiate athletics.
It also would restrict gambling to Colorado’s three licensed casinos, Black Hawk, Central City and Cripple Creek. Bets could be placed either in person or online, through the casinos’ licensed contractors. In practice, the casinos are likely to contract with established sportsbooks like DraftKings or FanDuel that are already taking legal bets in other states.
The referendum also creates some new misdemeanors and felonies related to sports betting, but they primarily apply to those taking bets, not individual gamblers, and criminal enforcement is expected to be rare. Only 22 people were convicted of Colorado Gaming Act offenses in the last three years, and a state fiscal analysis only expects 10 new misdemeanor convictions and no new felonies a year if the referendum passes.
Fantasy sports are unaffected by the referendum. The state legislature legalized fantasy sports betting and began licensing such businesses in 2017, but doesn’t impose special gambling taxes on them. The office overseeing fantasy sports is undergoing its periodic sunset review now, so regulatory changes may be on the horizon.
How would bets be taxed, and how would the money be spent?
Here’s how the math works: Let’s say you make $95 on top of a $100 bet. From the other $5, 25 cents would go to federal taxes and the remaining $4.75 would be considered casino proceeds. From the casino’s portion, the state would collect 47.5 cents in taxes. Of course, how much winners receive and how much casinos keep would depend on casino payouts for a particular sports bet.
The first dollars into state coffers would cover the costs of the Division of Gaming, the state’s regulatory body, which start at $2 million and increase in future years.
The next portion of tax revenue — 6% each year — gets set aside to cover potential decreases from other forms of gambling and horse racing that direct proceeds to local governments in casino communities, community colleges and the state historical fund.
Another portion of the state’s proceeds each year would go toward government-managed gambling and addiction services. The state’s Office of Behavioral Health would receive $100,000 to prevent and treat gambling disorders, and another $30,000 would go toward for a crisis hotline, currently run by the Rocky Mountain Crisis Partners.
The remaining $14.9 million, by the blue book estimate, would fund the state’s water plan and other water infrastructure projects. The water plan is a massive undertaking that seeks to address the state’s long-term agricultural and urban water needs at a cost of anywhere from $20 billion to $40 billion. That means the state needs to spend a minimum of $625 million a year if Gov. Jared Polis is going to meet his goal of fully funding the plan by 2050.
Ultimately, whether the revenue looks more like the conservative fiscal analysis, or the maximum allowed by the referendum, the money would be little more than a drop in the bucket relative to the need — and water will only get a portion of it, anyway.
Why are so many states legalizing this now?
Thank New Jersey — and the U.S. Supreme Court. Partly at the insistence of the professional sports leagues, Congress outlawed sports betting nationwide in 1992, with a handful of exceptions carved out in places including Nevada.
New Jersey added legal sports betting to its state constitution in 2011, and its legislature subsequently tried to legalize it in state law, which resulted in lawsuits arguing that it violated federal law. The case eventually reached the U.S. Supreme Court, and in August 2018 it struck down the federal ban.
Since then, at least 16 states have legalized sports betting, and taxes are already being collected in at least seven. The major sports leagues are even warming to the idea, seeing an opportunity to ensure their interests are protected through regulation, and to reap financial benefits from an activity that has long taken place on the black market.
So far, the opposition to Prop. DD is minimal.
Prominent anti-tax groups have stayed out of the fray, and the proposal, House Bill 1327, received widespread bipartisan support from the General Assembly, passing 85 to 14 combined between the two legislative chambers. Democratic and Republican sponsors took a number of steps to tweak the wording to make the ballot question seem more attractive to voters, too.
The only registered campaign opponent to date is Coloradans for Climate Justice, a grassroots environmental group that opposes using gambling revenue to address the state’s water concerns. The group worries that future water infrastructure projects could harm the environment rather than help it, and the referendum is open-ended about what constitutes a water infrastructure project. Instead, the group argues, the fossil fuel industry and other heavy polluters should bear the tax burden of any solutions to the state’s environmental concerns.
Other critics argued that the revenues may not meet expectations and pointed out that gambling also is a public health threat that can lead to addiction. And like many other “sin taxes,” its costs disproportionately fall on the poor.
A caveat: Gambling revenue is notoriously undependable.
Studies have warned against states relying too much on gambling revenue to meet public-service needs.
For one thing, gambling tax revenue nationwide hasn’t grown much since the Great Recession. Instead, the Rockefeller Institute of Government found, it has simply shifted from one state to the next as legalization has opened up new markets to betting.
Most states have come up well short of their revenue targets in the first year of legalizing sports betting, an Associated Press analysis found. And Colorado policymakers have been bitten by overestimating gambling revenue in the past. The Amendment 50 gambling expansion in 2008 promised additional revenue to community colleges and other public services. But the roughly $10 million a year it generated at the start disappointed supporters who were expecting the measure’s higher caps on bets to generate as much as four times more.
Drawing on that experience, Colorado lawmakers have tempered their expectations this time around.
So why does the ballot measure ask voters to approve as much as $29 million in new revenue, when analysts only expect a third of that? To avoid the need for another ballot question, which happened after marijuana was legalized.
Under the Taxpayer’s Bill of Rights, the state can only keep as much revenue as it tells voters it would raise, so when recreational marijuana revenue came in higher than expected, state leaders went back to the ballot to ask voters to retain the excess. By publishing the higher revenue estimate, lawmakers give themselves a sizable cushion in case they undervalue the market.
Expansions of gambling have also been found to cannibalize other sources of tax revenue. Multiple studies have found that adding gambling opportunities to a state reduces lottery revenue. A rise in gambling can also cut into state and local sales taxes, as consumers reduce their spending on other forms of entertainment.
It’s not clear what effect, if any, legal sports betting may have in Colorado. And any impact may be muted by the fact that people are already spending money betting on sports, it just isn’t being taxed.
The measure does include some safeguards, in case sports betting eats into other forms of gambling. The new Hold Harmless Fund could redistribute some of the sports revenue to entities such as cities, counties and community colleges that benefit from gambling revenue today. But they’d have to prove that sports gambling had negatively impacted their tax proceeds.
The referendum doesn’t contain any protections if lottery revenue falls and sends fewer dollars toward the conservation and wildlife entities that benefit.
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