Let’s do a sports book

It makes no sense to continue banning it in Mass.

MASSACHUSETTS IS FACED with some big decisions in the wake of the US Supreme Court’s decision last month to scrap the federal law that prohibits states other than Nevada and (in limited form) Montana, Delaware, and Oregon from allowing sports betting within their borders.

In the Murphy case, the Supreme Court did not affirmatively legalize sports betting; rather, it simply held that Congress could not unilaterally prohibit it. The court held that the law prohibiting sports betting unconstitutionally infringed on the states’ 10th Amendment prerogatives to legislate social policies within their borders.

In Massachusetts, through an array of statutes, conventional sports betting is just as illegal and subject to criminal prosecution today as it was before Murphy.  The question before us now is whether that should change. Drawing on my experience at the Massachusetts Gaming Commission (my term as the attorney general’s appointee ended in March) and research conducted by the agency, I recommend that the state legalize sports betting and allow the existing casino licensees and possibly the Lottery to get into the business.

My point of departure on this issue is a recognition that here in Massachusetts, as well as around the country, there is an enormous black market in sports betting.  It is estimated by the American Gaming Association that more than $100 billion is wagered annually in the United States. It is an extremely popular, albeit illegal, American pastime.

A related but somewhat contrary point, however, is that not all sports betting in Massachusetts is illegal.  Betting on horses has been legal in Massachusetts since the 1930s and in recent years it has been allowed at off-site locations at former horse and dog tracks. In addition, online betting on horses has been permitted since 2001 through so-called “advance deposit wagering.”

More recently, with the attorney general in 2015 choosing to regulate the burgeoning daily fantasy sports industry—Draft Kings, Fan Duel, et al—rather than to prosecute it (as the New York attorney general initially chose to do), Massachusetts is the home of perhaps the most technologically sophisticated sports betting operation in the country. (Personal aside: The line advanced by the daily fantasy sports industry that its products do not comprise “gambling” under existing Massachusetts law is utterly unpersuasive.)

There is no sense, in my view, to leave things as they are as to sports betting any more than it made sense to perpetuate the laws against casino gaming in 2011.

With the sports betting black market being as wide and deep as it is, respect for the rule of law is correspondingly diminished.  Further, in pure dollar and cents terms, there is a lost opportunity to capture tax revenue to fund the state’s other public priorities. Since the 2015 opening of the Plainridge Park slots casino, the Commonwealth has received almost $230 million in tax revenue from it. And gaming tax revenue is about to jump dramatically with the August opening of the MGM Springfield casino and next year when the Encore Boston Harbor resort in Everett comes on line.

There are no consumer protection mechanisms currently in place with sports betting, except in the case of daily fantasy sports. The Massachusetts gamer is presently at the mercy of his or her bookie.

Legalizing the sports gaming market would allow the problem of compulsive and problem gambling to be more openly and strategically addressed.  An unquestionably positive development flowing from the 2011 Expanded Gaming Act is the comprehensive (statutorily mandated) research program directed by the School of Public Health at UMass Amherst, the UMass Donahue Institute, and the Cambridge Health Alliance that focuses on, among other issues, the nature and extent of problem gaming and the efficacy of policies and practices that have been targeted to reduce it.

In practical terms, the first issue likely to arise with the onset of a regulatory regime for sports betting is the taxation issue, i.e., at what rate should the Commonwealth tax the emerging “sports books”?  Here, a reality constraint is necessary.

The massive size of the sports betting market obscures an essential point:  Sports gaming is a very low margin business, especially in comparison to margins enjoyed by resort or slots casinos.  What this means is that the honest sports bookmaker does not make much money.  Based on the Nevada experience, his or her profit margin is only about 5 percent, whereas casino margins are many multiples greater. Taxes paid or to be paid by the casinos are correspondingly high: 49 percent of gross gaming revenue (net after payment of winnings) in the case of the Plainridge slots casino and 25 percent of gross gaming revenue prospectively with MGM Springfield and Encore Boston Harbor.

With this in mind, it is essential that the tax rate to be imposed in a legalized regime be modest. In Nevada it is 6.75 percent (with an additional .25 percent federal tax), and that appears to be compatible with a healthy above-board sports gaming regime.  (In Europe most countries’ sports book tax rates exceed 20 percent.)  In my view, lawmakers must resist the temptation to be blinded by the awesome size of the market and impose a tax rate that would drive the industry’s participants back into the black market. Remember, your corner bookie pays no tax at all now, and so it is essential that, if he or she is to operate above board, the reward structure be one that permits the lawful sports betting operator a reasonable profit.

A final consideration is the question of who is to be authorized to run the sports books and approve the content of the products on which wagers are allowed.

In this internet and high-tech age, there is a dizzying and constantly evolving variety of betting products.  An illustration:  The most popular currently trending sports wagers are those on “in-game” events — betting via the internet on the outcome of the next play in a football game.

The existing record (based largely on Nevada’s, and to a lesser extent New Jersey’s online betting experience) suggests that the current casino licensees—Penn National at Plainridge Park, MGM Springfield, and Wynn Resorts in Everett—would be the most effective vehicles through which to implement the Massachusetts sports betting regime under the regulatory oversight of the Gaming Commission.

Each is eager to add a sports book to their own offerings, and they could function as the intermediary for expanded online offerings outside of the brick and mortar of their physical premises as may be subsequently approved by the Legislature.

There is an added benefit to the Commonwealth, since sports books at casinos would likely increase the appeal of the casinos. Casino revenues would likely increase as the sports bettors drawn to them patronize the casinos’ table games and slots.  As discussed before, that business is higher margin for the operators and is subject to higher tax levels. Thus, there is the tangible prospect of a significant net boost to the state’s finances beyond what is strictly generated by sports bets alone.

To suggest the above is not to exclude an appropriate complementary role for the Lottery’s licensed operators or the existing horse racing licensees.

There is much room for alternative approaches to the introduction of broad-based sports gaming in Massachusetts.  However, what in my judgment is not in doubt is the harm that would occur if the status quo is extended.  The most immediate harm would be the perpetuation of the current black market that exposes players to unregulated harm and corrodes the integrity of our economy.

It undoubtedly would result, as well, in the mass migration of bettors to the Connecticut, Rhode Island, and New York facilities that are poised to open their own sports books.

Such a migration would result in a triple loss to the Commonwealth: The loss of direct sports book revenue; the loss of tax revenue because of the reduced appeal of the Massachusetts-based casinos; and the loss of the opportunity to objectively research the social and economic impact of expanded legal sports gaming and the loss of the opportunity, as well, to track and promote responsible gaming in the sports betting context as has been possible with casino gaming.

Meet the Author

Lloyd Macdonald

Former judge and also commissioner, Massachusetts Gaming Commission
It is time to take a cue from the attorney general’s wise response to the explosion of fantasy sports betting in 2015:  Regulate sports betting in an open, objective, and transparent regime.

Lloyd Macdonald is a retired Superior Court judge and former commissioner of the Massachusetts Gaming Commission. His views are his own and not the commission’s.