The Perverse Impact of Indiana’s Proposed “Integrity Fee” in Sports Gaming

By: George Calhoun

Anticipating a positive ruling from the Supreme Court in Christie vs. NCAA, legislators in Indiana have introduced a new sports wagering bill.  Unfortunately, the bill includes a previously unseen poison pill in the form of a 1% “integrity fee” payable to the governing sports bodies:

A sports wagering operator shall remit to a sports governing body that has provided notice to the commission under section 2 of this chapter an integrity fee of one percent (1%) of the amount wagered on the sports governing body’s sporting events. The sports wagering operator shall remit integrity fees to the sports governing body at least once per calendar quarter.

In other words, sports gaming operators are expected to give a 1% gross cut to the professional (and presumably amateur) sports leagues.  “Integrity” fees payable to league bodies have never appeared in other legal sports wagering jurisdictions for a good reason; they will dramatically undercut the profitability of legal sports books and will drive sports gambling right back to the shadows.

David Purdum of ESPN reports that the NBA and Major League Baseball are working on the bill with legislators.  The proposed fees clearly are an effort by the leagues to benefit from sports gaming.  The size of the potential fee is staggering (well beyond the fees that independent integrity service providers might actually charge an operator).  According to reports from the Nevada Gaming Control Board, the handle for Nevada sports books in 2017 will be just under $5 billion.  If the Indiana law had applied, that would equate to a $50 million fee to be paid to leagues.  No wonder pro sports leagues would find that appealing. NFL owners might even be able to afford commissioner Goodell’s salary.

But despite the large handle, the profit from sports books is much smaller.   That $50 million integrity fee (if it applied in Nevada) would account for 25% of Nevada sports books’ gross revenue.  Because the proposed integrity fee applies to the handle, and not the sports book’s revenue, the fee ends up being disproportionately large.  Taken together with the proposed 9.25% tax on gaming revenue, the Indiana bill leaves little room for sports books to turn a profit.  Unsurprisingly, gaming groups already have expressed concern with the measure.

This morning, the American Gaming Association issued the following statement:

“While we applaud Representative Morrison’s efforts to bring legal, transparent sports betting to Indiana, handing sports leagues 20 percent of what’s left over after winnings are paid out, undercuts its economic viability. Doing so will ensure the illegal market continues to thrive in the state, and gut the tax revenues available to fund essential public services. We believe Indiana taxpayers deserve better.

“We encourage Indiana to reject this short-sighted, misinformed idea, which simply replaces a failed federal prohibition with bad state policy. Our goal is to eliminate the illegal market, protect consumers and strengthen the integrity of the game. We invite all stakeholders to join us in working together in a thoughtful and transparent fashion.”

By compelling the transfer of such a large portion of revenues to the leagues, the “integrity” fee would severely undercut operator profitability.  Perversely, as the AGA notes, this would prevent operators from offering competitive games and result in the continued dominance of black market sports wagering.  The so-called “integrity fee” would also undercut its seeming purpose by making the leagues directly interested in the amounts wagered on their sports.  The potential for mischief in such a situation is astronomical.

The old southern aphorism rings true in this situation: “Pigs get fat.  Hogs get slaughtered.”  There is money to be had for states and other stakeholders in sports gambling.  But ruinous fees and tax rates will not produce the desired results.