PHOENIX — Arizonans bet nearly $780 million in the first two months that the state allowed gambling on sporting events.
But all that wagering, pushed by Gov. Doug Ducey, translated to just slightly more than $1 million in state revenues. That’s because of a provision in the law he signed has the state effectively financing free games to entice people to gamble.
And if the pattern doesn’t change, the state will wind up with far less than the $100 million a year in new revenues that proponents were claiming.
That's not the only issue.
It turns out that that revenue sharing from the tribal casinos, which until this past fall had a monopoly on gaming, was less than $21.5 million for the last three months of 2021. The Department of Gaming reports that is 32 percent less than from the same period a year earlier.
Max Hartgraves, spokesman for the agency, acknowledged the numbers — and the fact that the 2020 legislation built in five years' worth of what amount to credits the gaming industry can use to offset what they owe the state. But he said the low net revenue numbers for the state are likely to be only temporary.
“It’s basically to jump-start the market in the state,” he said of the deductions the gaming companies can take.
Gubernatorial press aide C.J. Karamargin agreed.
“These numbers are going to go up,” he told Capitol Media Services. And he boasted of Arizona already having the fifth highest “handle” of wagers in the entire country.
That, however, has so far not translated into actual dollars into state coffers — the prime reason behind the legislation.
Newly legalized fantasy sports — wagering on made-up teams of real players — also has not taken off, with the state collecting only about $24,000 in gaming taxes in its first two months.
The new reports are the first since Ducey signed legislation in August allowing the sports franchises that are being given licenses to take bets on professional and college games to give away free samples.
As adopted, the franchises or the outside firms they hire to run their gaming operations can provide free bets or promotional credits.
But the key is the law says these operators can reduce what they report in adjusted gross receipts — the amount used to compute what they owe the state — by up to 20% for each of the first two years they are in business to compensate them for those free bets.
That drops to 15% in the third year of gaming and 10% in years four and five. After that, write-offs are not allowed.
So, in September, the state reported $291.2 million in gross wagers, virtually all of that placed on phones and other mobile apps.
The companies paid out $258.9 million in winnings, leaving them with $31.6 million in net wagers.
But the companies also took $31.2 million in “promotional credits,” leaving them with about $392,000 subject to the state tax of 8% on in-person bets and 10% on mobile — or just $31,393 owed to the state.
It got somewhat better in October, with $486.1 million in wagers.
But here, too, after deducting the promotional credits, that left $10.4 million in net revenues — and slightly more than $1 million for the state
Karamargin, however, preferred to focus on the gross handle rather than what wound up in state coffers. He said the Arizona numbers are incredible, given that Nevada, in that same month, had $1.2 billion in gaming handle.
Rep. Jeff Weninger, R-Chandler, who was the sponsor of the House version of the legislation, said the numbers in the reports — at least those showing the level of gaming — are a positive sign.
“It shows there’s clearly demand,” he said. “People of Arizona are responding and are embracing this.”
If there is all that interest, does the state need to incentivize enticements for people to gamble?
Yes, said Sen. T.J. Shope, R-Coolidge, the sponsor of the Senate version.
“I’m likening it to a store offering a holiday sale or something like that,” he said. “You need to entice people into the door to get them interested in doing something that they may have never done before.”
Shope said that’s particularly true for online sports wagering.
“This is something new for Arizona,” he said.
Karamargin said he cannot say that the incentives are necessary to get people to wager on sports. Instead, he said, all he can work with is the big increase from September — gaming actually started Sep. 9 — and October with the $1 million in state revenues.
“How do we know it would have been that?” without the incentives, he asked.
Weninger had his own explanation.
“What it’s really geared for is enticing the existing illegal bettors to come over to these platforms, to bring them into the legal fold,” he said.
Weninger said the companies that operate the sports wagering will voluntarily begin to scale back their giveaways and enticements once Arizonans are in the habit of betting on sports.
“You saw a big drop from September to October,” said Weninger, with the amount of credits taken dropping from $31.2 million to $26 million. It's no different, he said, with how he operates his own restaurants, providing incentives to get new customers that aren't necessary after they become regulars.
Anyway, Weninger said, it would be wrong to look at the benefits of legalized sports gaming based solely on the tax on net profits of the wagering companies, even after the promotion deductions.
“I believe there’s a lot of indirect revenue that comes through this, through economic development, through lots of tourism,” Weninger said. And that, he said, doesn't count all the money that TV stations in Arizona are making from the blizzard of commercials promoting gambling and the free wagers.
The numbers do not include the initial $14 million in licensing fees for the operations plus the $3 million a year the state expects to get in renewals.
Weninger said he was not surprised that tribal gaming numbers are down. He said it reflects the fact that this form of gambling — things like slot machines, keno and blackjack tables — require physical presence.
“You have to be masked up the entire time you’re in there,” Weninger said. “So I’m sure COVID is affecting that somewhat right now, and has been.”
Hartgraves agreed. He said that casinos tend to cater to the older crowd, those who may be less willing to risk contracting the virus.
The tribes, however, were willing participants in the deal in hopes of eventually generating additional dollars for themselves.
In exchange for agreeing to off-reservation sports gaming, they get to operate not only more slot machines and table games like blackjack and poker but add craps, roulette and baccarat to their offerings. They, too, are able to take bets on sporting events and fantasy sports.
And rural tribes were given a big break in how much they have to share of their handle with the state.
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