The Impact of Free Play Tax Deduction Limitations on Sportsbook and State Tax Revenue

The impact of limitations on free-play tax deductions has remained understudied despite calls for research on the topic. I leverage the expanding legal sports betting market in the United States and substantial tax policy variation among states to examine state-level outcomes. Using a multi-year panel across 30 jurisdictions, I analyze how these limitations impact total sportsbook handle, gross gaming revenue, hold percentages, and state tax revenue. I find that limiting free play deductions increases handle and gross gaming revenue, resulting in higher gaming tax revenue relative to states without limitations. Furthermore, hold percentages decrease, suggesting sportsbooks adjust offerings with lower margins to attract players using fewer promotions. These results are robust to an instrumental variable approach exploiting neighboring state policies and two-way fixed effects estimation focusing on states that changed policies during the sample period. These findings highlight the tradeoffs created by state tax treatment of promotional allowances.