State vs. Federal Taxation: Who Really Benefits From US Casino Revenues?
Feb. 10 2025, Published 2:00 a.m. ET
Most stakeholders in the casino industry have been quick to advocate for the legalization of online casinos in the US, citing increased revenue as the main selling point. After all, states that have legalized online casino operations have witnessed a bump in their overall capital, which has positively affected their financial goals. What’s more, players have enjoyed the convenience of playing on online casino sites, which has increased their overall approval of the sites and the state governments that have made this move. But who benefits the most from the legalization of online casinos – is it the states or the federal government? We compare the effects on both governments to shed more light on what awaits them if more states should legalize online gambling.
The Tax Effect – A Focus on the Governments
When people talk about the positive effects of online casinos, they focus on their taxes and how these spill over into other areas of the economy. But where do casinos pay these taxes? Well, they are subject to taxation at both the state and federal levels. Let’s see how this works:
At the State Level
States determine just how much money online operators should pay them, which they base on the gross gaming revenue. This figure represents the total amount that players have wagered minus what the casino has paid out to the winners. For example, if people have wagered $10 million and the casino has paid out $7 million, the tax would be on the $3 million difference as this is what the casino would take home.
The percentage of the tax varies from one state to the other. For example, New Jersey has an 8% rate, which is considered to be one of the highest compared to the average rates in the other states. A Nevada operator, for instance, parts with 6.75% of their gross gaming revenue.
So, where does this money go? States often divert these funds to their public projects. These can be bettering health services, initiating new state programs, updating existing infrastructure, or even improving the schools. Thanks to this potential, more states have been arguing that the legalization of online casinos can help them make up for deficits in public funds.
The Federal Level
People often talk about casino legalization at the state level as state authorities determine whether an operator can set up shop. But the truth is that once a casino gets the green light to operate in a state, it also becomes subject to federal laws and, thus, federal taxes. So, how does this work?
- Excise tax. In addition to the tax that casinos pay to the states they operate in, they pay an excise tax to the federal government. This figure amounts to 0.25% of the amount wagered. While it may not seem like much, it adds up in the long term.
- Income tax. Many people have taken to playing in online casinos as a way to supplement their income, while others have chosen casino games as a professional career. But what you may not realize is that the federal government takes a cut of these winnings. So, how much do winners pay? This figure depends on your tax bracket as well as your total taxable income. It also comes down to how many losses you have made and whether your wins meet the taxable thresholds.
As such, the growth of online casinos will also have an impact on tax collection at the federal level.
Who Benefits the Most?
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While both levels of government get a share of the revenue generated by online casinos, state governments get the larger share. Why is that?
- They have higher tax rates. States are free to choose their own tax rates, which enables them to benefit more from the operations.
- They spread the revenue over a smaller region. Unlike federal budgets, which must cover nationwide projects, states focus on a smaller region. It makes it easier for them to inject the money into local projects such as schools, hospitals, and other much-needed public services.
States also charge a licensing fee to casino operators to boost their revenue collection.
