A recent wave of states have legalized online gambling since 2018. And sports betting app downloads have risen five-fold since 2019. That year, the Supreme Court ruled that states could decide whether to legalize online sports betting, shifting the decision from the federal to the state level. In new research, SMU Cox Marketing Professor Wayne Taylor and coauthors discuss the implications of states’ legalizing online gambling, particularly since the legality of online sports betting. Considerable legislative activity has occurred, with many states deciding whether to legalize online sports betting and, in some cases, online casino gaming.

Gambling legalization resembles illegal substance policy debates, according to Taylor and coauthors. He emphasizes that their research “does not aim to tell states what to do but rather examines the consequences of legalization.” Theirs is a “dispassionate analysis.” They found that ‘especially’ when online casino gaming is introduced alongside sports betting, irresponsible gambling behaviors increased. In general, the research found that online casino gambling policies increased tax revenue and irresponsible gambling the most.

Taylor has a unique connection to the industry. “Before my PhD, I worked in the casino industry in Las Vegas for a few years, so I’m familiar with how it operates,” he offers. “Despite being a huge industry, it hasn’t received much attention in marketing research.” This surprises Taylor given the amount of direct marketing spending and the popularity of gambling.

Rise of online gambling

In 2023, 33 million online sports betting app downloads occurred, five times that of 2019. Taylor highlights that online gambling’s appeal lies in its ease of implementation and rapid scalability, much different from the traditional retail casino gaming phenomenon of heading to a physical casino in Las Vegas.

Taylor notes that while gambling generates tax revenue, the social costs, particularly among lower-income groups, are significant. “We looked at issues like harmful gambling behavior, suicide rates, and gambler helpline call center activity,” Taylor says of the research. For instance, after legalization, there’s often an increase in irresponsible gambling behavior, especially when online casino gaming is legalized alongside sports betting. Connecticut and Michigan, for example, saw significant increases in these behaviors.

In the U.S., twenty-six states have legalized online gambling since 2018. Online casino gaming —online wagers on casino games such as blackjack, poker, roulette, and slot machines— is currently legal in 7 states. Its taxable revenue grew 12-fold between 2019 and 2023, reaching $5.9 billion. Online sports betting trends correspond strongly to popular sporting events, especially professional football, the collegiate basketball tournament, and professional basketball playoffs. Online sports betting grew 14-fold over the same period, reaching $113.9 billion.

The study estimates how online sports betting (OSB) policies–both with, and without, online casino gaming (OCG)–changed operator revenue, tax collected, helpline calls, and suicides, as well as gambling behaviors.  Their panel included 717,724 gamblers over five years.

States vary greatly

Why the rise in online gambling activity? “Online gambling is easy to implement and scales quickly,” offers Taylor.However, this ease also leads to more problematic behavior, much like social media use does. Some states try to control this by restricting where and when you can use gambling apps, but the accessibility still leads to significant impacts.

Their research showed that out-of-state retail casino spending declines when a state legalizes online casino gaming. “People don’t need to travel to Las Vegas or Atlantic City anymore—they can gamble from home,” Taylor notes. “Interestingly, in Tennessee, which has no physical casinos, we saw an increase in out-of-state casino spending after they legalized online sports betting.” The online interest seems to have piqued people’s interest in visiting real casinos, at least in Tennessee.

States vary in how much they’ve legalized sports betting. Some states, such as Arizona and Ohio, legalized online sports betting at the same time as retail sports betting. Other states legalized online sports betting well after retail sports betting was established. “Each state is different, so we had to group them into broad categories in our research.” For instance, Tennessee only has online sports betting and no retail options, which makes it unique. A few state-specific data points and observation are noted from the paper:

• Connecticut generated about $2.50 per person of online sports betting (OSB) taxable revenue, comparable to most non-online casino gambling (OCG) states, and slightly more than double in OCG revenue per person.

• Michigan generated less OSB revenue per person than most comparable states (about $1.40), and significantly more OCG revenue, more than $11 per person.

• The disparity between Connecticut and Michigan suggests that a state’s OSB activity per capita may not reliably predict its likely OCG activity per capita.

• Overall, total online gambling tax revenue is modest compared to annual total state and local tax collected per capita, which ranged from $4,192 in Alaska to $10,266 in New York in 2021 (Tax Foundation, 2023).

• The largest proportional contribution of gambling taxes to state revenue occurred in Michigan, generating 0.8% of annual state and local tax revenue.

Taylor points out that states differ in how they implement gambling laws, which affects outcomes. For example, while Tennessee saw an increase in out-of-state casino spending after legalizing online sports betting, other states like Connecticut and Michigan experienced a rise in harmful gambling behaviors after legalizing online casino gaming.

“There is no one-size-fits-all approach to gambling legislation,” Taylor concludes.  “Each state must weigh the benefits of tax revenue against the potential social costs.”

The paper “Online Gambling Policy Effects on Tax Revenue and Irresponsible Gambling” by Wayne Taylor, Cox School of Business at Southern Methodist University, Daniel McCarthy of Emory University, and Kenneth Wilbur of University of California, is under review.

Written by Jennifer Warren.