New York State’s highly touted legalization of sports betting is being called “dead on arrival” after a disappointing first weekend. Considering that New York is an estimated $1 billion market, the appraisal by Regulus Partners, a sports and leisure consulting firm, might prove premature.

The main factor putting into doubt the future of Empire State sports wagering is the state’s tax rate on sports betting earnings — an astounding 51 percent. By comparison, New Jersey’s is only 8 percent. Pennsylvania taxes sports betting revenue at 36 percent, “the highest rate of any competitive commercial market in the US,” according to Play Pennsylvania.

New York airwaves and screens have been saturated with commercials announcing that online sports betting has begun. BetRivers, Caesar’s Sportsbook, DraftKings, and FanDuel are the first of nine sportsbooks that will be scrambling for the New York market in coming years. It is questionable whether their big initial investments will pay off for operators in this highly taxed market.

The operators started business in the state last weekend with big promotions, offering between $250 and $3,000 in promotional credit, suggesting operators are willing to pour a lot of money into the market.

The investments were prompted by the outlook for the market for sports gambling. Macquarie Financial Group estimated online sports betting will become a billion-dollar market in New York, with the state thus clearing more than $500 million in tax revenue.

It appears that despite the high taxes, sportsbooks are hoping to quickly capture the New York market and then pivot to more profitable strategies later on, according to Regulus Partners.

“Operators are being driven to take unsustainable tax losses by adopting their unworkable standard business model out of a fear of losing initial market share,” it said in a note last weekend.

With nine total sportsbooks expected to begin operations this year, the battle for the New York market may well drag on for an extended period.

In an effort to encourage competition, New York’s sports betting revenue tax rate scales with the number of platforms as well as operators in the state. If the state reaches 13 total operators, the tax rate will bottom out at 35 percent.

Some operators, including BetRivers, have decided not to join the others in investing heavily in marketing and promotion in the state in an attempt to boost their bottom lines.

In addition to competing in a crowded field, legal sportsbooks have to compete with established black and gray market operators as well as overseas operations. Estimates vary wildly for the size of the U.S. market for sports betting. Jay Zagorsky, an economist at Boston University’s Questrom School of Business, puts it at $67 billion.

“It would not surprise me if after the initial excitement of legal sports betting in New York that the gaming commission is forced to lower the tax rate because of competition from New Jersey with its lower tax rate and illegal betting establishments, who don’t pay any taxes at all,” Mr. Zagorsky told the Sun.

These are among the reasons Regulus Partners described the New York market as “dead on arrival.”

It is too early to tell whether New York will be the golden goose that operators want and the lucrative tax generator the state hopes it will be.

DraftKings, for one, apparently does not plan to turn a profit for two to three years, Legal Sports Report reports.

“It’s harder with such a punitive tax rate, but we do see a path to typical contribution profit levels,” Jason Parks, DraftKings’ CFO, said.

The high tax rate is perfectly in character for the Empire State.

The state already taxes tobacco at $4.35 per pack, second only to the District of Columbia’s $4.98 per pack. New York also collects $6.44 per gallon on all liquor sold in the state.

Similar policies might also affect the state’s soon to be legalized marijuana industry, which will could disrupt the estimated $3.5 billion black market trade in New York, according to the state’s report on the subject.

New York State will impose a 13 percent retail tax rate on cannabis products, with nine percent going to the state and the remainder to local governments.

While this would not be the highest rate in the country, New York State cannabis sellers will have to compete with a robust tax-free illegal market: The state has an estimated 1.27 million marijuana consumers.

“New York State should consider lessons learned in other states. Washington State initially had higher tax rates and restructured their taxation after the realization that the taxes were cost prohibitive,” a state report on the issue said.

“Price point is crucial because if it is too high, consumers will not transition from the unregulated market to the regulated market,” the report said.

Regardless of whether the legalization of sports wagering or marijuana proves to be the public benefit that advocates for the moves predicted, it is clear that high taxes are leaving these industries relatively uncompetitive with their counterparts in other states and with their balck market predecessors.

While high taxes might swell state coffers and pay for the regulation of these industries in the short term, only time will tell whether it is a sustainable winning strategy for years to come.

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Image: Via Wikimedia Commons.