The Bipartisan Policy Center (BPC) analyzed a proposal to markedly increase the federal excise tax to align with other “sin taxes” on alcohol and tobacco, a move that could generate nearly $100 billion in revenue over 10 years, but not without downstream effects.
Sports Betting Booms After Supreme Court Ruling
The sports betting landscape has been completely transformed since 2018, when the Supreme Court’s decision in Murphy v. NCAA struck down a 1992 federal law that had largely prohibited the practice. The ruling “effectively allowed states, any state, to legalize sports betting,” said Andrew Lautz, tax policy director of the Bipartisan Policy Center, leading to what he described to Checkpoint as “absolutely bonkers growth.”
Since that decision, Americans’ sports wagers have skyrocketed from $7 billion in 2018 to $167 billion in 2025, a nearly 24-fold increase, according to Lautz. This explosion has been fueled by technology, with user-friendly apps making it easier than ever to place a bet; of every 20 bets placed in 2024, 19 were online, he said. As of the end of 2024, 38 states and Washington, D.C., had legalized sports betting, with 32 of them taxing the activity, he added.
The integration of betting into the viewing experience through numerous partnerships between sportsbooks and professional leagues has made it “an ubiquitous part of sports these days,” Lautz added.
Proposed Excise Tax
While states have established their own tax structures, the federal excise tax on legal wagers has remained at just 0.25% since 1982. A March 18 BPC brief authored by Lautz and Policy Analyst Fredrick Hernandez considered a policy option that would increase this rate to 5%.
The Yale Budget Lab estimates that increasing the tax on bets could raise $97 billion between fiscal years 2027 and 2036. The federal excise tax on lawful and unlawful gambling was first enacted in 1951 at a 10% rate, which Congress later reduced to 2% in 1974 before settling on the current 0.25% rate.
Lautz said the 5% figure was chosen to be comparable to other established sin taxes. A 5% tax on a $10 bet would be 50 cents, more than the average federal excise tax on a six-pack of beer (33 cents) but less than on a pack of cigarettes ($1.01).
The tax’s legal incidence, as in the responsibility for payment, would fall on the sportsbook or casino. However, the BPC report suggests the economic incidence, or who actually bears the cost, would likely fall on the gambler through less favorable betting lines. This excise tax applies to the amount wagered regardless of whether the gambler wins or loses, making it distinct from income tax on winnings.
Prior to 2026, gamblers could fully net their winnings and losses for tax purposes. However, a change under the One Big Beautiful Bill Act limits the deduction for gambling losses to 90% of winnings. For example, a gambler who wins $15 on one bet and then loses that $15 on a second bet would have $0 in net winnings but would be taxed on $1.50 of so-called phantom income ($15 in winnings minus a $13.50 allowable loss).
Weighing Revenue Gains Against Behavioral Changes
The primary argument for raising the tax is the substantial revenue it could generate, which the BPC report notes “could modestly help plug growing federal budget deficits.” Proponents also argue that it would create parity with other sin taxes designed to address social costs.
However, a substantial tax hike comes with risks. The most prominent concern is the potential for driving gamblers away from legal, regulated platforms and toward illegal black markets. Lautz acknowledged the risk of “leakage,” with some bettors moving their activity to offshore books to avoid the tax. A higher federal tax could make these illicit options more attractive, undermining the goals of regulation and revenue collection.
Beyond pushing bettors to illicit markets, a higher federal tax could cut into state revenue streams. Lautz said that it might “box in states” that are thinking of legalizing betting or increasing their own rates, as a high federal tax would limit their policy flexibility. The BPC report also raises the issue of uneven tax treatment, as many forms of “traditional” gambling, such as poker and slots, are not subject to the federal excise tax on bets.
A particularly complex challenge comes from the rise of “gray market” prediction platforms, which operate in a legal gray area. Lautz warned that taxing traditional sports betting apps but not these platforms could create a major loophole. He described a scenario where bettors could simply “just take their business” to the untaxed prediction markets if they offer a similar experience, another trade-off for Congress to consider as the ball remains in its court.
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