The good news: Kentucky state Senators are trying to legalize sports betting in the state next year. The bad news: the taxes they propose will kill the industry before it starts.

Senator Julian Carroll (D – Dist. 7) pre-filed BR 29, essentially getting it all set to go so that he can quickly introduce it next year. The bill would require the Kentucky Horse Racing Commission to implement a sports betting system. Sports wagering would be permitted at licensed horse racing tracks and off-track betting venues.

Professional sporting events would, of course, be permitted to be wagered upon, as would college sports. College sports, because of the perceived vulnerability of student athletes when it comes to things like fixing games or shaving points, are often desired to be out of bounds for sports betting by some lawmakers. The compromise that is usually discussed and/or implemented is to not allow betting on sports involving schools in the state. There does not appear to be any restriction in that regard with Kentucky.

Licenses would cost $250,000 per year. The taxes, though, are astounding, and this is where there could be significant problems. Carroll’s bill proposes a 3 percent tax on handle, which is the total amount wagered on sports. Now, to many, 3 percent might sound like nothing, but again, let me reiterate that this tax would be on all wagers, not on the amount the sports books make after paying out winnings.

For example, if I ran Katz’s Sports Betting Emporium and my customers bet a total of $100 on Saturday (I am not a major player in the industry) and won $45, I would make $55 in gross gaming revenue that day. That would be my profit from sports betting. Kentucky wouldn’t tax me 3 percent on the $55, but instead tax me on the $100 that was wagered.

To illustrate how insane that is, I refer you to gambling law expert, Professor I. Nelson Rose, who explained it in a blog post when talking about the integrity fees the professional leagues wanted in Indiana earlier this year. He said the average Nevada sports book generates $25 million in bets each year – that’s $25 million in handle. They make only about 4.16 percent on this, so $1.04 million.

If that sports book then had to pay 3 percent of its handle to the state, it would be forking over $750,000, leaving it with only about $250,000. And that’s before all other expenses, like salaries, corporate taxes, utilities, rent, insurance, etc. The sports book would be broke before it even started. The 3 percent tax on handle in this case is an effective tax rate of nearly 75 percent. Even if margins were larger, it would still amount to an untenable tax bill.

Now, there is no integrity fee to the sports leagues in the bill, but the way the tax rate is setup, it doesn’t matter. The whole thing is borked. Hopefully by the time it is introduced next year, someone will make Carroll and friends aware of what’s going on so they can make the necessary adjustments.

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