Michigan Sports Betting Solution Could Be Its Downfall: The Tax Debate Continues

As Michigan legislators negotiate on gambling expansion with Gov. Gretchen Whitmer, the main area of contention seems to involve a few percentage points in tax rates. While the difference in those sports betting tax rate numbers may be small, they could translate to a big difference in revenue for Detroit’s three commercial casinos.

The current bills espouse lower rates than Whitmer wants. Legislators are faced with the unenviable task of satisfying her demands while not losing the support of the casinos at the same time.

The differences in the proposed Michigan sports betting tax rate

A bill passed by the Michigan House calls for a 12% tax on sports betting handle at commercial casinos. Whitmer has made it clear her number of choice is 18.25%.

Whitmer has voiced concern that legal sports betting could cannibalize the state’s lottery. She fears that would lead to a reduction of the state’s School Aid Fund.

While negotiations are ongoing between the governor and Legislature on more than just that tax rate, the difference of 6.25% isn’t inconsequential. For the businesses involved like the MGM Grand Detroit, 6.25% could be quite large.

A look at revenue figures and some hypothetical math shows how significant that number could be. Over the course of months, it approaches a difference of millions of dollars.

Projecting the different Michigan tax structures forward

Using the MGM Grand’s revenue in September as a starting point, it’s possible to present some projections. In September the casino reported adjusted revenues of more than $49.48 million.

What’s difficult to project is how much revenue the casino will accumulate from a sportsbook in a given month. The number of variables, like the month of the year and whether the sportsbook would offer online betting, can swing handle greatly.

In order to come up with as concrete of a projection as possible, a geographically close comparison is ideal. Indiana has two casinos close to the Michigan border that offer both mobile and retail sports betting.

Those are the Ameristar Casino in East Chicago and the Blue Chip in Michigan City. The Ameristar took in $46.16 million in sports bets in October, while the Blue Chip accepted $6.92 million in wagers.

Averaging those two numbers together comes out to $26.54 million. That’s what this example will use for a figure to project possible sports betting handle for the MGM Grand Detroit in a random month.

Sportsbooks are taxed on their revenue, however, not their handle. Using the same method of averaging together the October win percentages from the Ameristar and the Blue Chip, the hypothetical MGM Grand win percentage would be 11.9%.

Now that a number has been identified, it’s possible to see what the casino would pay in taxes under both structures. That extra 6.25% proves a difference-maker.

A difference of $196,875 between the two plans

In the bill’s current framework, the MGM Grand Detroit would pay $378,000 in taxes to the state assuming one month’s revenue of $3.15 million. That’s 12% of the projected revenue.

Whitmer’s plan would increase that to $574,875 in taxes paid. Using the $3.15 million in revenue as a benchmark, each additional percentage point the tax rate goes up means an additional $31,500 in monthly taxes to be paid.

The difference in this scenario adds up to $196,875. That would be a real damper on revenue for casino sportsbooks, especially over time.

There may be a way to “split the difference,” however, without actually raising the tax rate. The bill could ensure that most of the sports betting tax is earmarked for the School Aid Fund.

That compromise could calm Whitmer’s fears without having to raise the tax rate. Whether Whitmer would agree to that is uncertain, but what’s clear is that percentage points mean millions in revenue per year for Michigan casinos.