Illinois Could Have Collected Up To $230M In iGaming Tax Revenue

The Illinois Commission on Government Forecasting and Accountability (CGFA) released a report estimating the state could have generated as much as $230 million in tax revenue had online casino gaming been fully implemented for a 16-month period beginning Feb. 28, 2020.

The report was generated in response to Senate Resolution 303, which was adopted by the Illinois General Assembly on June 1. Currently only five states have online casino gaming available, with Michigan the closest geographically to Illinois. Indiana has been weighing the potential of online casino gaming, but the state legislature failed to advance the motion out of committee in February, which means the earliest it could be taken up in the Hoosier State is 2022.

Illinois has online and retail sports wagering available in addition to 10 brick-and-mortar casinos throughout the state. It passed a massive gaming expansion bill in June 2019 that allows for six more casinos to be built — including one in downtown Chicago. The state also has the most extensive network of video game terminals (VGTs) in the nation, with more than 40,000 machines spanning more than 7,600 venues.

Multiple challenges in terms of methodology for figures

Creating the revenue estimates for the state was challenging for the CGFA on multiple fronts. For starters, the estimates are based on a “full implementation” assumption, which means the revenue numbers do not reflect the usual slow progression of implementation from a launch date.

The agency also pointed out that the state has been historically slow to implement gaming — as an example, it noted the law allowing VGTs was passed in 2009, but video gaming revenue was not realized until 2012. In the case of sports wagering, the first bets were not accepted until March 2020, more than eight months after the gaming bill was signed into law by Gov. JB Pritzker, as rules had to be promulgated.

The low number of states currently with online gaming led to a further weeding out process based on state population to create better comparisons. That meant New Jersey, Pennsylvania, and Michigan — all with populations reasonably close to Illinois’ 12.7 million — were given more relevance than Delaware and West Virginia. Those helped formulate lower- and upper-range projections for revenue, with the lower range $1 billion and the upper range $2 billion covering 16 months.

Tax rates were another area scrutinized, though the CGFA was given instructions in SR 303 to forecast tax revenue based on rates of 12%, 15%, and 16%, as well as a graduated tax rate in which Illinois would receive 15% of the first $25 million of adjusted gross revenue and 20% of any AGR above $25 million.

All those factors, though, are merely prelude to determining how online casino gaming would impact VGTs and vice versa given the widespread local support the latter enjoys from bar and tavern owners and truck stop owners across Illinois. Video gaming terminals across the state generated $213.2 million in net terminal income (NTI) in June — more than double the revenue of casinos — and of the $72.5 million in taxes generated from NTI, the state’s tax coffers received more than $61.8 million.

By comparison, the state’s casinos generated $21.2 million in tax revenue in June, with Rivers Casino in Des Plaines accounting for more than half that total. Sports betting has generated just shy of $50 million in state taxes since launch.

The CGFA also had to account for the COVID-19 pandemic when weighing all those numbers, which included in-person gaming being suspended for 164 of the 487 days covered in the time frame considered. It had to account for the fact that as gaming suspensions were lifted, gamblers in Illinois would have had access to VGTs — something unavailable in every other state save a very small scale in Pennsylvania. Thus, it created a “reduction” factor of 50% on VGT revenue for months not impacted by the pandemic.

Lastly, the agency had to include free play and promotional credits. The 2019 gaming expansion bill allows the subtraction of non-cashable vouchers, coupons, and promotions at casinos, but that subtraction cannot exceed 20% of adjusted gross revenue. The CGFA noted that approximately $55 million in such promotional revenue was subtracted in 2020, which was roughly 9% of the $618 million in revenue for that year, and $30 million through the first five months of 2021, totaling roughly 7%. That led to the agency using an 8% subtraction to account for promotions, vouchers, and coupons for online casino gaming revenue.

The revenue numbers, please

The CGFA projected the 16-month revenues to range from $622 million on the lower end to $1.248 billion on the upper end. That creates a midpoint of $935 million. Given the tax rates from the resolution passed, the tax revenues from the state can be seen in the table below:

[table id=168 /]

The agency pointed out that these estimates should not “be considered an estimate of how much tax revenue could be generated going forward,” citing figures from other states that showed higher amounts collected prior to the pandemic as well as the notable differences between a normal implementation process that customarily takes longer and the fully implemented one used in this forecast.

It also pointed out potential cannibalization effects, something that has happened for nearly a decade in the Chicago metropolitan area with the rise of casinos in Indiana. The CFGA noted the 10 casinos in that area have seen combined revenue fall 16.4% from Fiscal Year 2012 through FY 2019 and pointed out that potential revenue from online casino gaming in the period studied would undoubtedly have come at the expense of both brick-and-mortar casinos and VGTs.

The agency did not provide an exact percentage on what that offset would have been but pointed out it “could have been significant.” Its final point was a reminder to further consider tax rate structures — if online casino gaming is taxed at a “significantly lower” rate than video gaming revenues, it would then be possible the total taxes “could be surprisingly low, despite the increase in overall gaming dollars.”

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