A proposal to significantly raise the federal excise tax on sports betting is drawing attention from policymakers and analysts, with estimates suggesting it could generate close to $100 billion in government revenue over the next decade. While the potential financial gains are substantial, experts warn that the move could also alter bettor behavior and reshape the broader gambling landscape.

The Bipartisan Policy Center (BPC) recently examined the effects of increasing the federal tax rate on wagers from its current level of 0.25% to 5%. The proposal aims to bring sports betting taxation more in line with other so-called “sin taxes” applied to products like alcohol and tobacco.

Rapid Expansion of Legal Sports Betting

The discussion comes against the backdrop of rapid growth in the U.S. sports betting market following the 2018 Supreme Court decision in Murphy v. NCAA. That ruling overturned a long-standing federal ban, allowing states to legalize and regulate sports wagering.

Since then, the volume of bets has surged dramatically. Americans wagered about $7 billion in 2018, a figure that climbed to $167 billion by 2025, according to the BPC. The expansion has been driven in large part by mobile technology, with the majority of bets now placed online. By 2024, 38 states and Washington, D.C., had legalized sports betting, and most jurisdictions had introduced their own tax structures.

Andrew Lautz, tax policy director at the Bipartisan Policy Center, described the growth as “absolutely bonkers” according to Thompson Reuters, noting how deeply betting has become embedded in sports culture through partnerships between leagues and sportsbooks.

Revenue Potential and Tax Structure

Under the proposal analyzed by the BPC, a 5% federal excise tax could raise approximately $97 billion between fiscal years 2027 and 2036. A higher rate of 10% could generate as much as $182 billion over the same period, making it one of the largest federal excise taxes.

Currently, the federal tax on legal wagers has remained unchanged since 1982. Earlier adjustments saw the rate drop from 10% in 1951 to 2% in 1974 before reaching today’s 0.25%.

The proposed 5% rate would place a heavier burden on sportsbooks and casinos, which are legally responsible for paying the tax. However, analysts expect operators to pass much of the cost on to consumers through less favorable odds or pricing changes. Unlike income taxes applied to gambling winnings, this excise tax applies to the total amount wagered, regardless of the outcome.

The BPC also evaluated alternative approaches, including a fixed tax per bet. A five-cent levy per wager would raise far less revenue—around $1.3 billion over a decade—compared with a percentage-based system.

Behavioral Shifts and Market Risks

While the potential revenue gains are a central argument for increasing the tax, analysts highlight several possible downsides. One concern is that higher costs could discourage betting activity. The BPC estimates that a 5% tax might lead to a 4% annual decline in the number of bets placed, while a 10% rate could reduce betting volume by 10%.

Even so, the overall financial impact may be less pronounced. Evidence from states that have raised taxes suggests that bettors often compensate by placing larger wagers, keeping total handle and tax revenue relatively stable.

Another issue involves the risk of bettors turning to unregulated or offshore platforms. Lautz acknowledged the possibility of “leakage,” where individuals shift to illegal markets to avoid higher costs. Such a shift could undermine both consumer protections and expected tax revenues.

The proposal could also affect state-level policymaking. A higher federal tax might limit the ability of states to adjust their own rates or expand legal betting frameworks, potentially constraining future growth.

An additional complication stems from differences in how various forms of gambling are taxed. Traditional activities like poker and slot machines are not subject to the same federal excise tax, raising questions about consistency. At the same time, emerging “gray market” platforms, including prediction markets, may fall outside the scope of the proposed tax, creating potential loopholes.

Lautz noted that bettors could “just take their business” to such platforms if they offer similar experiences without the added tax burden.

Policy Debate Continues

Despite these challenges, proponents argue that increasing the federal sports betting tax would help address budget deficits while aligning gambling taxes with those imposed on other industries associated with social costs.

The ultimate decision rests with Congress, which must weigh the trade-offs between generating revenue and maintaining a competitive, regulated betting market. As the industry continues to evolve, the debate over federal taxation is likely to remain a key issue shaping its future.