A rollback of the Handle Tax in 1974 led to Las Vegas sports gambling and an oddsmaker (Jimmy “The Greek”) on network TV, alongside VSiN’s Brent Musburger.
While a sweeping new tax reform bill is set to pass in the US Congress, Representative Dina Titus wants to eliminate the “handle tax” on legal sports betting. The handle tax, says Titus, is an outdated provision which no longer does what it was intended to do.
In a letter to the US House of Representatives’ leadership, Dina Titus called for the elimination of a handle tax. If the Congress is going to eliminate burdensome and irrational taxes on businesses, then the handle tax is a classic example of a federal regulation which should go.
The handle tax, sometimes known as the “turnover tax”, was passed into law by the Revenue Act of 1951. It was designed to fund federal enforcement of illegal sports betting operations or, as the statue states, “to facilitate the enforcement of state criminal laws against gambling.”
Dina Titus v. The Handle Tax
This is not the first time Rep. Dina Titus has called for an end to the handle tax. In August 2014, she introduced a bill to eliminate the tax. At the time, CG Technology CEO Lee Amaitis asked her what happened each year to the handle tax revenues, which were about $9 million a year in 2013.
Titus inquired with the Internal Revenue Service and got a suprising answer. The congresswoman said, “The IRS didn’t even know it existed. The money just went into some black hole in the general fund.”
Thus, the funds are not earmarked for the very purposes they were instituted. The money is supposed to go to gaming regulators, but they simply go into the US federal government’s general fund. It would be a hard argument to say the tax money goes “to facilitate enforcement of…laws against gambling.”
Revenue Act of 1951
Under terms of the Revenue Act 1951, legal sports books had to pay a 10% excise tax on the total amount wagered on sporting events, along with a $50-a-year occupation stamp tax and registration requirement for operators. In the Internal Revenue Code, sections 4401 and 4411 deal with the handle tax, which the IRS calls “the excise tax on sports betting”.
After it was passed in 1951, the excise tax had a withering effect on legal sports betting in the United States. Sports bettors know a 10% tax on a sportsbooks’ turnover (not its profits) wipes out any profit from the vigorish, or “juice”. The casino has to beat the sports bettor heads-up to make a profit on the bet, which means it’s not worth the trouble to many bookmakers.
Stamp Tax Undermined Sportsbooks
The other provision in the Revenue Act is even worse. A $50-a-year stamp tax might seem like chump change at first, but what the stamp tax requirement forces sportsbook operators into a Catch-22 dilemma. The Shumaker, Loop & Kendrick law firm quoted one unidentified author as saying, “If they register and provide the information required by the act, they may be subject to prosecution as violators of state anti-gambling laws. On the other hand, if they refuse to register, the sanctions on the wagering statute become operative.”
Kevin Braig, an attorney at Shumaker, Loop & Kendrick, LLP, said on the firm’s blog, “Sports betting is now a legitimate business that’s run by very reputable companies and to continue to have this tax just doesn’t make sense.”
Handle Tax Is Unconstitutional
In fact, the US Supreme Court found that both taxes were unconstitutional. In two 1968 cases, Grosso v. U.S. (payment of tax) and Marchetti v. U.S. (stamp tax), the Supreme Court ruled that the requirements violated a sportsbooks rights against self-incrimination.
A compromise was found. In 1974, Nevada Senator Howard Cannon convinced the US Congress to reduce the turnover tax from 10% to 2%. Immediately, Las Vegas casinos began to open sportsbooks, because they became profitable. Jackie Gaughan was the first, opening a sports book at the Union Plaza Hotel and Casino. Cannon’s law had a cultural impact, too; Jimmy “The Greek” Snyder joined CBS’s The NFL Today as a studio analyst (alongside current Vegas Stats and Information Network (VSiN) lead broadcaster Brent Musburger). Sports gambling had made it onto network television.
1974 and 1984 Handle Tax Reductions
The tax was reduced again in 1984 to the current 0.25% tax rate. That might sound negligible, but Nevada imposes a 6.25% tax rate on gross gaming revenue and an additional 1% licensing fee on sports betting operators’ pay. All told, the effective tax rate is nearly 12%.
History shows that Las Vegas sportsbooks can carry that tax burden and compete with illegal bookmakers, but research shows an important threshold for gamblers. Betting statistics show that sports bettors start to leave the legal sportsbooks for the offshore sites and their local bookies, when the tax rate reaches 15%. Bookies tend to increase the vig in order to compensate for the dangers of prosecution and delinquent bettors, so the sportsbooks can compete up to about 15% tax rate. Beyond that, the system breaks down.
Three Ten-Millionth of 1% of Taxes Each Year
The Urban Institute & Brookings Institution’s Tax Policy Center calculated in 2015 that the turnover tax was 0.00000003% of the IRS’s $3.3 trillion it collected that year. It is a negligible part of the IRS tab each year, but that 0.25% could help Las Vegas sportsbooks undermine the black market sports betting industry in America. As U.S. Congresswoman Dina Titus has argued for several years now, there is a net gain of eliminating the handle tax.
Dina Titus said recently in a letter to congressional leadership, “We have tried to get the IRS and accounting of this and they just don’t have any information. I say let’s get rid of the handles tax….This is about $10 million a year and it comes almost completely from Nevada companies. I think we could use that $10 million in the state for other purposes.”
