With Prop 26 and Prop 27 failing in the 2022 election, California will miss out on up to $500 million in new tax revenue.
Both California sports betting initiatives had been polling poorly leading up to the midterm elections. Neither were expected to pass. The main arguments in favor of sports betting legalization were that it would generate new revenue. (The implicit part was that it could generate revenue without raising taxes on Californians.)
Both propositions offered estimates of how much tax revenue they’d generate. The California Legislative Analyst’s Office estimated new revenue under Prop 27 “likely would not be more than $500 million annually.” For Prop 26, that estimate “could reach tens of millions of dollars annually.”
Prop 26’s lower expected revenue increase was because Prop 27 would legalize online sports betting and Prop 26 wouldn’t. Online sports betting is more accessible, so it generates more revenue than retail sports betting alone.
No matter how you slice it, this much is clear: California just lost a lot of money by not legalizing sports betting in 2022.
However, estimating the true cost of lost revenue is tricky.
“I think from an opportunity perspective, there are some losses associated with needing to wait another couple of years,” John Holden, assistant professor at Oklahoma State’s Spears School of Business, wrote in an email to California Casinos. “But on the Prop 26 side, this effectively maintains the status quo for the California-based tribes. The California-based tribes will have additional time to determine the best course of action for themselves.
“From a commercial standpoint, I think this is probably a more painful blow. The biggest commercial operators would have loved to (have) added the revenue of Prop 27 to their balance sheets immediately (or close thereto), but for now, they are going to have to continue to fight for profitability without the benefit of California’s adult population as potential customers.”
What $500 Million Buys in California
Given Prop 27’s revenue estimate of $500 million at most, it’s worth seeing what that money could’ve bought.
In 2022, $500 million funded California’s Golden State Pathways Program, which is a grant program aiming to prepare students for both secondary education and careers out of high school. On Nov. 30, 2020, California Gov. Gavin Newsom signed a $500 million grant program into law that would provide COVID relief for small businesses.
While $500 million can pay for important programs, it’s also an expendable amount of money compared to the large line items in the state’s budget. California’s 2022-23 budget calls for over $235 billion in spending. Its reserve balance will be over $37 billion.
While California will be missing out on a few hundred million dollars, Prop 26 and Prop 27 were unnecessary for California’s budget. Legal sports betting is good at pulling gambling dollars out of illegal betting markets. The industry could even fund transformative programs. But sports betting isn’t transformative to California’s budget.
So, Californians won’t face a budget shortfall over Prop 26 and Prop 27 failing to pass.
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California Sports Betting Projections Compared to Other States
Prop 27’s estimate of up to $500 million in sports betting tax revenue was high compared to other state projections.
Before mobile sports betting launched in New York, Gov. Chris Cuomo’s office estimated that online sports betting could generate $500 million per year, too. New York has a smaller population than California, but New York’s online sports betting tax rate is 51%. California’s proposed sports betting tax rate was only 10%. (New York surpassed $500 million in tax revenue in October.)
These figures show how great online sports betting’s revenue potential is in California compared to other sports betting markets.
Early estimates of Massachusetts sports betting pegged revenue potential above $35 million. Maryland’s tax estimate is only about $20 million. Ohio’s tax projection is more ambitious, estimating $90 million in annual tax revenue at maturity. None of these major markets’ estimates are even 1/5 of California’s.
And if California is like New York, its sports betting tax revenue potential is underestimated.
What Happens After Prop 26 and Prop 27 Fail
Commercial sportsbooks are hurting worse than tribal casinos and gambling interests.
Tribal casinos generate most of California’s gambling revenue. The California Legislative Analyst’s Office reported that tribal casinos generate about $8 billion in annual revenue. The California State Lottery only makes about $2.5 billion each year, and the card rooms and horse racetracks don’t crack the $1 billion mark.
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So, California’s largest gambling interest remains without the competitors it could face from online sportsbooks.
In New York, which has about half the population as California, online sportsbooks have made just under $1 billion in revenue after winnings from January 2022 through October 2022. If online sportsbooks come to California, they’re likely to be casinos’ largest competitors.
The business interest California casinos have in controlling sports betting is clear. What’s less clear is whether California legislators can oversee a compromise for the next legalization attempt, or what the next iteration of the fight over sports betting will look like.