Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

The Legalization of Sports Gambling

by Noah Constantine

 (Image via CNN Money)

(Image via CNN Money)

 

Sports gambling has been a very taboo and complicated issue within the United States for well over a century. A combination of factors, including black market activity, the integrity (or lack thereof) of sporting events, and the general dissent toward gambling from the majority of the population led to an environment where sports betting was illegal across the United States (with very limited exceptions). Over the past five to ten years, however, the public perception has shifted towards the acceptance of gambling, and entrepreneurs, sports leagues, and government officials alike have all started to recognize the potentially huge source of revenue that legalized gambling could create within the United States (Maese, Silver). As a result, the past six years been filled with debate, and the first significant court case regarding the legal status of gambling in several decades. In 2012, New Jersey passed state legislation that would eventually lead to the legalization of sports betting in Atlantic City. Since then, there has been an extended legal battle, which made its way to the Supreme Court. On May, 14, 2018 the Supreme Court ruled on the court case “Murphy, Governor of New Jersey vs. National Collegiate Athletic Association”, issuing a landmark decision on the debate, in which they changed the legal status of sports gambling in the United States. Sports betting will now become a state by state issue, and there is no longer a national ban on legal sports betting (Barnes). While this offers great opportunity for the involved parties, there are a multitude of challenges that will ultimately determine the effectiveness of a new, legal model.

            2012 marked the first attempt for a new state to legalize sports gambling since the passage of PASPA in 1992. New Jersey first passed a law to allow wagering at horse tracks, but soon after decided to fight for legalized sports wagering on all sports in Atlantic City. A state ballot measure followed, which passed convincingly, leading to an amendment to the state constitution. Prior to the opening of any gambling institutions, however, the NCAA filed a suit against the state of New Jersey, claiming that the new amendment was in direct violation of the Professional and Amateur Sports Protection Act (Barnes). The NCAA won the initial case, but New Jersey immediately appealed the decision, starting a legal battle that would last over six years. Despite being temporarily halted by the NCAA, this court case marked a monumental shift and represented the evolution of thought throughout the United States regarding sports gambling (Miller). It served as proof that the public perception of gambling was much more positive than it used to be, and that there were state governments willing to address the challenges because of the perceived economic benefits that legalization could have on their communities.

            Following New Jersey’s attempt to achieve legalization of sports gambling, the NBA played a critical role in the lobbying process. In 2014, the NBA unanimously approved Adam Silver to be the new commissioner. On November 13, 2014 (within the his first year as commissioner), Silver wrote an opinion piece (important note, because it did NOT represent the official stance of the NBA) in the New York Times regarding the possibility of legalizing sports betting. Silver adamantly stressed the importance of protecting the integrity of the NBA, but also very candidly addressed the flaws with the current system. Silver acknowledged that despite all of the legal restrictions and resources committed to deterring gambling, that the market had grown immensely over the past 20 years. Silver essentially expressed his position that, regardless of resources dedicated to gambling, it was clear sports betting was very popular, and would persist as a huge market, whether it be online or underground. Finally, and very critically, Silver expressed his desire to control parts of the legislation, should sports gambling be legalized, with a mandate that sports leagues have the opportunity to control some aspects of the gambling legislation on their sports. Concluding his argument, Silver states, “In light of these domestic and global trends, the laws on sports betting should be changed. Congress should adopt a federal framework that allows states to authorize betting on professional sports, subject to strict regulatory requirements and technological safeguards” (Silver).

            After an elongated legal battle, New Jersey’s case against the NCAA finally made it to the Supreme Court in December, 2017. In the case, the Supreme Court was essentially forced to decide on the constitutionality of PASPA, which had been in place since 1992. The court eventually decided that PASPA was not constitutional due to its infringement on state sovereignty, and that the Act does explicitly make sports gambling a federal crime. Had there been federal legislation that made sports wagering explicitly illegal, the Supreme Court would not have altered their position, but the lack of definite, national legislation allowed to the Supreme Court to ultimately return the issue of sports betting back to the states, and for them to decide how they wish to proceed. Justice Alito summarized the ruling, saying “Congress can regulate sports gambling directly, but if it elects not to do so, each state is free to act on its own.” The Supreme Court did NOT legalize gambling across the United States, but instead overruled the Professional and Amateur Sports Protection Act. The case was decided on May 14, 2018, and immediately triggered ballot measures in over a dozen states nationwide (Supreme Court).

            Despite the ruling from the Supreme Court, there are still substantial hurtles prior to the legalization of gambling on a wide spread basis. As it stands currently, each state is completely in control of the status of gambling within their state. New Jersey and Delaware are first the two states to have legalized sports gambling in the wake of the recent Supreme Court decision. Thus far, they have allowed sports bets to be placed on-site at several casino locations in state. There is no online gambling yet in either state, but it is expected to be on the horizon. When online gambling is finally offered, gamblers will have to prove they are in physically in state to bet, and it is expected that they will be taxed at a higher rate (roughly 5% higher taxes are expected) (Tuttle). While these two states are the first to have passed laws, there are over a dozen other states that have started the pathway towards legalization, and experts project that between 28 and 32 states will offer legal sports gambling within the next five years (Rodenberg). While this is remarkable progress for such a short period of time, there is significant work to be done regarding the specific details, and the potential for national legislation. One particularly important detail in New Jersey’s case was that they had banned betting on collegiate events of local sporting teams, any collegiate events happening in state, and all high school athletic events. This will be important as gambling expands to other regions of the United States, as betting on collegiate sports is a huge portion of the betting totals reported by different agencies. Additionally, in the wake of the Supreme Court decision, all the major sporting leagues have expressed a desire to earn a certain percentage of the amount bet. Sporting leagues feel entitled to this revenue, but such a system is not likely without some nationwide legislation (“New”). It is very likely that the national conversation regarding sports gambling is just in its infancy, as there are is currently a lack of national standards, which sporting leagues and politicians both agree will be critical to establishing an effective and well-regulated legal market place.

            With legalized sports gambling on the horizon, significant work has been done to project the potential ramifications of the decision. Oxford Economics conducted a comprehensive study, evaluating the potential projections with a legalized gambling marketplace within the United States, while also using data from European nations to help sculpt reasonable expectations. The report attempted to quantify the number of active gamblers in the United States, and gain an understanding of their betting habits (frequency and amount of money bet). Their study suggests that 28% of adult Americans consider themselves semi-frequent or frequent gamblers, on average betting roughly $1,500 annually. Complicating their analysis, however, is the unknown question of how legalization will alter the behavior on previous non-gamblers. Optimistic projections suggest that there are 32 states who might adopt legalized betting, and eight additional territories or jurisdictions. Using comparable European nations, they attempted to model how the population of gamblers will change under the altered legal landscape. With these comparisons in mind, their model projects legalization will lead to a moderate increase in the amount of people who bet, but that the primary change will be that existing gamblers will shift away from illegal forms of gambling, and instead bet via legal avenues (“Economics”).

            In addition to approximating the size of the gambling market, Oxford Economics also sought to project how different forms of legalization will contribute to the market share captured by legal betting operations. For the sake of their analysis, they established three different models of legislation to analyze. The models were categorized as: (1) limited availability, which is exclusively permitted on site at casinos, (2) moderate availability, which offers betting at casinos and commercial locations, and (3) convenient availability, which enables online and live-gaming betting in addition to casinos and commercial locations. These three different modes of legal gambling project to have vastly different levels of popularity. Should gambling be legalized within the 32 states it is expected to be, limited availability projects to handle roughly $80 billion annually, while convenient availability gambling could reasonable handle almost $300 billion on an annual basis (“Economics”).

            The United Kingdom, due to its demographic and economic composition, can serve as an interesting point of comparison for the United States when trying to evaluate different models of legal betting. In the UK, people can place bets at gambling shops, online (or via mobile app), and even at stadiums during live sporting events. This system is extremely accessible, and has effectively created an environment where the vast majority of sports betting is done in a legal fashion (Cartmell). Within the UK, there is data available to breakdown the gambling expenditures via classification (on-site, commercial, online/mobile). Sports wagering in the UK generates gambling operations roughly $55 of revenue per person in the country. This breakdown is heavily skewed toward online gambling, with 76% of the revenue being created through these outlets. In comparison, the on-site and commercial gambling only generated 24% of revenue generated from gambling (“Economics”). These statistics suggest that having gambling options readily available is significantly more popular than physical locations. These legislative details are critically important in shaping the gambling landscape within a country. The legalization of sports betting will undoubtedly have a large impact on the United States, but the details will be incredibly important when trying to accurately quantify the economic ramifications of legalization. Legalized sports betting is often sold as an easy replacement for online gambling, and a potentially huge source of tax revenue. In reality, however, without greater clarity on the specific guidelines for legalization, it is impossible to predict how widely adopted legal avenues will be and the size of the legal market.

            In addition the uncertainty regarding the rules of legal gambling, there are also legitimate questions regarding how legalization will impact the current sports betting model. As it currently stands, sports books have a roughly 4% - 5% advantage, representing their expected return on the total amount wagered. The house advantaged is created by setting the game lines with a built in advantage. The majority of sports bets are placed on the point spread of athletic events. Bookies create game lines, that they think represent a realistic outcome of an event, and bettors are forced to pick a side. If the bookies do a good job, they expect for the money to be equally distributed on both teams. The betting odds on both teams will be -110 in a normal case. The math works out to giving the house a 4.55% advantage on these bets, assuming the money is distributed equally (“Betting”). This model has been very effective for sports books, but considering all of the expenses associated with running the operation, they are actually working on a relatively slim margin (“How”). In many of the proposed pieces of legislation, sports leagues are calling for 1% of the total amount wagered, and taxation will be set a relatively high level. If both of these expenses are calculated into the profits of sports books, they will start earning significantly less (estimates project approximately a 30% decrease), which would likely lead to a shift in their model.

            If sports books find that the legalized model is less profitable than the current black market is, there are significant concerns that legal operations will have to further adjust the house advantage to maintain their current level of profitability. If this were the case, gamblers would receive significantly worse odds from legal gambling shops than they currently do from online or black market options. While the benefits of legality will undoubtedly encourage some existing gamblers, as well as some new gamblers, to the legal gambling options, it is projected that most serious gamblers (who account for the majority of the money wagered in the United States), will opt for illegal options if they are able to receive superior odds when compared to legal choices. The gambling market is extremely, as almost all casinos and online sites offer identical (or extremely close) gambling lines. Smart bettors frequently shop around to see if they can receive a mathematical edge from a particular site. If legalized gambling is unable to compete with this competitive market place due to the significant cut mandated by sports leagues and the government, it is extremely unlikely that these changes will effectively drive bettors to the legal options.

            In addition to the competitive challenges that legalized sports betting may have, it is also interesting to compare sports gambling to marijuana, which has recently followed a similar legislative pathway. Both marijuana and sports betting have seen their legal status go from illegal, to now shifting to a state issue and both have relatively similar approval rates (61% in favor legal marijuana, 55% in favor of legal sports gambling) (Geiger, Maese). Recreational marijuana gained legal status in eight states since 2012, including Oregon, Washington, Colorado, and California. In the time since, the legal marijuana market place has grown exponentially, and states with legal marijuana have witnessed the development a large, legal operation. There have undoubtedly been significant positives resulting from the legalization of marijuana, notably the reduction in marijuana trafficking from Mexico (border patrol has seen a 50% drop in marijuana seizures since 2011). However, this drop has been accompanied by an increased number of marijuana busts in states that offer legal marijuana (Smith). Additionally, large amounts of marijuana produced in states is not consumed legally. Oregon state police report that only 30% of the marijuana consumed in state is purchased legally. California, where recreational marijuana is legal, grows approximately 13 millions pounds of marijuana annually, but only 2.5 million pounds are purchased legally, suggesting both illegal purchases in state, and drug trafficking to different states (Hughes).

            While there are obviously divergent motivations for the legalizing marijuana (a major one being decriminalization) and legalizing sports gambling, marijuana can serve as a relevant point of comparison when trying to predict the true impact that legalization will have on the gambling markets. First, it appears that legalization has a smaller impact on behavior than generally advertised. While states with legal marijuana have generated tax revenue, the majority of the product (in many states at least) remains on the black market. While decriminalization has been a notable positive, the evidence suggests that illegal consumption is as high as it has ever been. If anything, it appears that legalization has attracted a new group of consumers, and has had a minimal impact on illegal consumption. Additionally, travelling across state lines to purchase or traffic marijuana is an extremely important issue. The same question can be raised when discussing gambling, especially in the short term. Is it okay for New York residents to take the train to New Jersey to place a bet (Hurley)? There has been substantial outflow of marijuana from the states with legalization, and if the patterns is replicated with legalized gambling, there are potential interstate issues that may arise. Lastly, the restrictions on legal purchasing push some people back to the black market to purchase marijuana. If that is replicated in legalized gambling (lower maximum bets allowed, restriction on time or frequency of betting), serious gamblers will be dissuaded from betting in a legal fashion.

            The new legal status of sports gambling is massive shift from the historical standards in the United States. A variety of factors, including an improved public perception, sports leagues expressing interest, and politicians recognizing a source of tax revenue, has led to a situation where legalized gambling is on the horizon across the country. While this decision has been met with significant excitement, the details will prove to be much more complicated than expected. Without national legislation, the sports leagues will be unhappy, and there will be a variety of political issues that arise from interstate differences and debates (Hurley). Additionally, I am doubtful that the legalized sports gambling model will be able to effectively compete with illegal options. Sports books will lose profitability due to a variety of new league fees and taxes, thus forcing legal operations to shift game lines to give themselves a larger house advantage. If gambling is legalized in an extremely accessible way, in may be able to control a substantial portion of the market, but if it is allowed in a limited capacity or with inferior odds for bettors, it will be incredibly difficult to convince serious gamblers to alter their behavior. Finally, it is legitimate to wonder whether legalization will have any impact on serious gamblers. Those with a long history of betting likely have established bookies or use online platforms. Shifting away from those to legal avenues will force them into paying taxes, and alter an extended pattern of behavior. In the marijuana markets, we have observed the continued prominence of the black market. If there are any obstructions whatsoever, it is doubtful that legal betting will gain the traction it expects to. While the recent Supreme Court decision has opened the door for a variety of new opportunities, it will be an extremely challenging process to gain a prominent position in the gambling markets.

 

 

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