DraftKings, FanDuel Earnings Could Be Pinched by Maryland Tax Increase Plan

DraftKings, FanDuel Earnings Could Be Pinched by Maryland Tax Increase Plan

DraftKings (NASDAQ: DKNG) and FanDuel are two online sports betting companies that might experience reduced profits if a plan to increase Maryland’s tax rate on this betting type is approved. 

Governor Wes Moore’s (D) recently presented budget plan suggests increasing the state’s tax on sports betting to 30% from 15% and raising the tax rate on table games in physical casinos to 25% from 20%. The budget was unveiled on Tuesday and, similar to previous tax hikes on sports betting, put pressure on the stocks of operators. 

On Wednesday, DraftKings' shares fell 3.20% on significant volume, whereas FanDuel's parent company, Flutter Entertainment (NYSE: FLUT), declined 1.65% with higher-than-normal trading activity. In a fresh report to clients, Truist Securities analyst Barry Jonas projected that if Moore’s plan is put into action, it might squeeze FanDuel's earnings before interest, taxes, depreciation, and amortization (EBITDA) by $45 to $50 million, while draining DraftKings' EBITDA by $25 million to $30 million. 

He mentioned that BetMGM might experience a $6 million drop in EBITDA, while Caesars Sportsbook and Penn Entertainment’s (NASDAQ: PENN) ESPN Bet would face negative effects of several million dollars each. 

At Present, Merely a Suggestion 

State hikes on sports betting and associated proposals have previously unsettled investors, and Moore’s proposal had a similar impact; however, some analysts warned that, at this point, it remains merely a concept.

"This is not a tax increase. It is a proposal. The agenda will now need to be legislated in committees, thereby likely making Speaker of the House, Adrienne Jones, a key figure in this process,” said Deutsche Bank analyst Carlo Santarelli in a note.

Jones, a Democrat, plays a key role in the situation not only due to her leadership role but also because her district hosts two of Baltimore's land-based casinos. This might cause her to hesitate in backing a proposal that raises the taxes on table game earnings from 20% to 25%. 

Truist's Jonas warned that the immediate concern for sports betting stocks like DraftKings and Flutter is the possibility of additional states contemplating increases in sports wagering taxes. Last year, Illinois implemented a graduate tax system that notably raised taxes on the biggest companies — particularly DraftKings and FanDuel. Other states have contemplated increasing sports betting taxes, and although some of these initiatives have failed, analysts and investors worry that if additional ones are enacted, gaming firms' profits will decline. 

Moore's Strategy Might Propel Maryland to a Higher Level of OSB Taxation 

At the present rate of 15%, Maryland is currently tied with Louisiana and Virginia for having the 12th-highest tax in the nation among states that allow online sports betting. Fifteen percent, plus or minus a few basis points, is the range that some executives think states and operators can agree upon. 

If Moore’s sports wagering tax rise is enacted, it would elevate Maryland to a higher ranking regarding these taxes. Only five states — New Hampshire, New York, Pennsylvania, Rhode Island, and Vermont — impose online sports betting taxes over 30%. 

The tax imposed by Illinois on the largest operators based on market share exceeds that threshold, although not every gaming company in the state is affected by that rate. 

With a tax rate of 6.75%, Iowa and Nevada feature the lowest sports betting taxes in the United States.