Sports Betting in the U.S. Part 2: Public Policy Issues

Note: Part 1, Legality, was published previously.

The legislative history of the Professional Amateur Sports Protection Act of 1992 (PASPA) shows the law’s three basic goals: (1) to stop the spread of state-sponsored sports gambling, (2) to maintain sports’ integrity, and (3) to reduce the promotion of sports gambling among America’s youth. (Meer, 2012: 288). But PASPA has not achieved these goals.

In 1992, the main proponent of PASPA was New Jersey Senator Bill Bradley, a former basketball player. He said that legalizing sports gambling would send the wrong message to young people – that sport is about gambling rather than achievement and sportsmanship. (Muehle, 2012) PASPA was supported by the National Football League (NFL), the National Basketball Association (NBA), Major League Baseball (MLB), and the National Collegiate Athletic Association (NCAA). (Muehle, 2012)

PASPA was opposed by Iowa Senator Chuck Grassley. Among his arguments was that if Bill Bradley and the sports leagues were truly concerned about the integrity of sports, they would attempt to stop sports betting in Nevada as well. In fact, the NBA expressly permitted wagering on exhibition games held in Nevada during the four years prior to PASPA’s enactment.

PASPA has been successful in restricting legalized sports gambling, but has not prevented a large expansion in illegal gambling. For example, the amount of money wagered in Nevada on the Super Bowl grew from $50.3 million to $81.2 million between 1992 and 2011, almost exactly the rate of inflation. But there is now an estimated $2.5 billion wagered illegally on the NCAA basketball playoffs (“March Madness”). (Muehle, 2012) And online sports betting, something that didn’t exist when PASPA was enacted in 1992, is now a huge industry. It is estimated that gross revenues from online sports wagering will reach $100 billion per year by 2015. (Muehle, 2012)

The extent to which the second goal of PSPA was achieved is unclear. There have been some serious sports betting scandals in the history of U.S. sports, such as the Black Sox of 1919, so maintaining the integrity of sports is a worthy goal. But there have been several point-shaving scandals since the enactment of PASPA, such as the case of Tim Donaghy, an NBA referee. Donaghy, who has spent fifteen months in prison, was caught placing bets on professional basketball games, including ones he officiated. (Muehle, 2012) Ironically, legalized gambling such as Nevada sports books are a source of data to help detect suspicious betting behavior which could indicate point-shaving, but PASPA keeps most sports betting in illegal venues, where data is unavailable to enforcement authorities and those running sports books don’t care about whether games are fair. (Muehle, 2012)

PASPA has failed to reduce the exposure of young people to sports gambling. The spread of the Internet since 1992 has made sports gambling widely available to everyone. In fact, sports gambling has become a serious problem among teenagers in recent years: About one third of high school students gamble on a regular basis. Illegal websites don’t care who their customers are. By contrast, regulated sports betting includes clear age restrictions, which could significantly reduce the teenage gambling problem. (Muehle, 2012)

To summarize, PASPA is of questionable constitutionality (see Part 1), and has been unsuccessful in fulfilling its stated goals. Legalization of sports betting, on the other hand, could bring substantial benefits. These benefits include increased tax revenues, job creation, greater economic activity from sports gambling’s “crossover effects”, and greater control over sports gambling misconduct.

The amount of taxes that could be collected if sports betting was regulated is fairly large. According to a forecast by Las Vegas bookmaker Club CalNeva, the state of New Jersey alone could receive $1.3 billion in gross revenues and $220 million in tax revenues per year. (Muehle, 2012). The National Gambling Impact Study Commission, in 1999, estimated the underground sports betting market as being as much as $380 billion nationwide.

There are two possible ways to conduct sports betting: Betting shops run by the state and privately owned bookmakers. In case of a state-run sportsbooks, government (net) revenue could range from $1 billion to $24 billion annually, depending on the volume of betting and the percentage kept by the government. Privately-run bookmakers, on the other hand, could bring between $184 million and $1.1 billion in tax revenue, assuming a 7.5 percent tax rate. (Schwabish, 2005)

Sports betting could also raise employment. It accounted for about 15,000 jobs nationwide in 2009, most of which were in Nevada. The median annual wage of workers was about $23,500. (Meer, 2012) Sports wagering also has potential “crossover effects”. Crossover effects are the increases in economic activity due to bettors playing other games while at a sportsbook, bringing other people with them, and purchasing food, beverage, or hotel accommodation while gambling. (Meer, 2012)

Legalization of sports betting is also likely to bring greater transparency to sport, making it easier to detect suspicious betting behavior indicating misconduct. (Meer, 2012) For example, Betfair, a UK bookmaker, has helped detect match-fixing scandals by monitoring suspicious betting activity at local games. Las Vegas Sports Consultants Inc. (LVSC) has adopted a similar approach: It monitors betting activity to detect patterns which could indicate misconduct, and passes this information to sporting officials and enforcement agencies. Wider legalization of sports betting would facilitate using this technology in the rest of U.S. (Meer, 2012)

Negative effects of legalization of sports betting could be felt in Nevada, as the state currently has a monopoly on sports betting. Nevada would lose its control of the industry, but that might not have a negative impact on its revenues. Today only about one percent of all sports betting takes place through legal sports books. A substantial increase of legal betting market would allow all states to get plenty of customers, and Nevada might lose little of its market. (Meer, 2012)

If sports betting was indeed legalized and regulated, there are important lessons to be learned from the past. For example, it’s important to set the right tax rate. In 1951, Congress introduced a new excise tax on bookmakers and an additional tax on all sports bets in Nevada. The tax rate on bets was set at ten percent, with an excise tax of fifty dollars per year. These rates were too high for Nevada sports books to stay profitable. Sports betting moved from Nevada casinos to underground “turf clubs”. This deprived the state of Nevada of a substantial amount of tax revenue. In 1974 the tax rate was changed to a more affordable level, at two percent. Currently, Nevada has a 6.5% tax on gross gambling revenue. Local governments take additional one percent. (Meer, 2012)

In summary: PASPA has not been a success. There are substantial reasons why Congres should repeal PASPA and give states the right to regulate and tax sports betting as they see fit.

References

Brennan, J. (2014). NJ Sen. Lesniak to craft sports betting bill for racetracks, casinos Available: http://www.northjersey.com/news/nj-sen-lesniak-to-craft-sports-betting-bill-for-racetracks-casinos-1.1019252. Last accessed 22 May 2014.

Meer, E. (2012). The Professional and Amateur Sports Protection Act (PASPA): A Bad Bet for the States. Available: http://scholars.law.unlv.edu/cgi/viewcontent.cgi?article=1026&context=glj. Last accessed 22 May 2014.

Muehle, M. (2012). Paving the Way for Legalized Sports Gambling.Available: http://www.rutgerslawreview.com/wp-content/uploads/archive/commentaries/2012/Muehle-PavingTheWayForLegalizedSportsGambling.pdf. Last accessed 22 May 2014.

National Gambling Impact Study Commission. (1999). Final Report. Available: http://govinfo.library.unt.edu/ngisc/reports/finrpt.html. Last accessed 22 May 2014.

Oxford Dictionaries – Definition of parlay

Schwabish, J. (2005). Regulating Underground Industry: An Economic Analysis of Sports Betting