States Like Michigan Have Lowest Sports Betting Tax Rate in the United States

If the DraftKings surcharge had come to fruition, it would not have affected states like Michigan.

Thanks to one of the lowest tax rates in the country, the Great Lakes State would have easily avoided the surcharge plan.

Michigan’s effective tax rate is 5.1% lifetime and 6.8% for the calendar year, thanks to operators being allowed to deduct promo spend from gross revenue before taxes are applied.

The state collects an 8.4% tax, distributed across three funds:

• The Internet Sports Betting Fund (65%)
• The City of Detroit (30%)
• The Michigan Agriculture Equine Industry Development Fund (5%)

Which States Have Lowest Sports Betting Tax Rates?

Percentages range start at 6.75% (Nevada) and Ohio sits right at 20%, so it, too will avoid the surcharge. But any state that goes over that mark will see their bettors affected.

Tennessee has one of the lowest tax rates at 1.85%, but it’s because it takes a unique approach to taxation. Tennessee taxes an operator’s total sports betting handle rather than the traditional model where taxes are based on gross or net revenue. Tennessee also requires a $50,000 annual license fee.

Why Did DraftKings Abandoned Surcharge Plan?

DraftKings quickly abandoned its plan to add a surcharge on winning bets in four high-tax states after customer feedback. CEO Jason Robins proposed the surcharge on August 1 to shareholders, targeting states with tax rates above 20% (New York, Illinois, Pennsylvania, and Vermont).

The surcharge, set to start on January 1, 2025, would have charged bettors 3-5% of their winnings. However, the proposal seemed like a trial balloon, possibly hoping competitors would follow or states would lower taxes. DraftKings retracted the idea shortly after FanDuel, its main competitor, rejected a similar surcharge. Within two hours, DraftKings announced it was scrapping the plan and reaffirmed its commitment to providing the best value to its customers.

States That Generated The Most Tax Revenue in 2023

The success of sports betting in multiple states is driving lawmakers (and sports operators) to go after a bigger piece of the pie. Even before the tax increases operators are now facing, sports betting revenue generates millions for state coffers.

Just look at the numbers from last year. According to figures from LendingTree, The Empire State brought in $876.0 million in state tax revenue in 2023. That’s more than a third of the nation’s total for the year and a 24% jump from the $706 million New York generated in 2022.

The five states with the most tax revenue from sports betting in 2023 include:

1. New York ($875,996,000)
2. Pennsylvania ($176,655,000)
3. Indiana ($175,387,000)
4. Illinois ($161,437,000)
5. Ohio ($136,296,000)

New Jersey ($111,092,000) came in 6th and rounds out the list of states that generated more than $100 million in tax revenue in 2023. Its tax rate on sports wagering is 14%.

So, the DraftKings story is a great lesson for sports betting operators who are already raking in millions on wagers. Your customers should always come first.