When the Kansas City Chief’s offense had a catastrophic meltdown in the final minutes of the AFC championship game against the Cincinnati Bengals, it cost the team’s supporters more than just another shot at a Super Bowl title.

It also cost thousands across the U.S. for those who bet money on the Chiefs, seven-point favorites heading into last week’s game. On the flip side, the Chiefs loss meant a huge payday for the minority putting money on the underdog Bengals.

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Such is the risk millions of Americans take each week in the 33 states that have a regulated form of sports wagering. Now, Hawaii lawmakers are considering whether to join those ranks and regulate betting in the islands.

Top proposals include bills to regulate sports wagering on mobile devices and others to permit fantasy sports websites to operate in the state. Lawmakers also have introduced proposals for a casino in the state, but some see betting as more palatable than other types of gambling.

“In some cases, the public sees sports betting as something much less taboo than casino gaming and other gambling products,” said Kahlil Philander, an economics professor at Washington State University who studies gambling.

A primary reason Hawaii lawmakers have considered gambling legislation in the past is to increase state revenues. Another reason is to tamp down on illegal betting. But experts warn that sports betting alone, or even paired with casinos, may not bring the anticipated tax windfall.

Billions of dollars may be wagered, but sportsbooks typically keep just 5% of all bets as profits, according to Drake University law professor Keith Miller. State governments are left to pick from that small pot of money.

“A state looking to patch all the potholes or pay teachers a six-figure salary is going to be really disappointed,” said John Holden, a professor at Oklahoma State University who specializes in gaming laws.

Fantasy Sports Still A Pipe Dream

Legislators have put forward two types of bills that seek to legalize betting on sports in Hawaii. Some deal with traditional sports betting, where bettors gamble on the expected winners and losers of a sporting contest.

The other set of proposals would legalize daily fantasy sports contest, which allows players to put money on certain outcomes or players statistics such as yards gained for a football running back or points scored by a shooting guard in basketball. Proponents argue those contests are based on skill and shouldn’t be considered gambling at all.

But since 2016, the state Attorney General’s office has ruled that daily fantasy sports contests are illegal under state law, which prohibits Hawaii residents from betting money on contests of chance.

Because fantasy contests still involve elements that could be out of a bettor’s control — an athlete may be injured, bad weather or officiating may throw off the game —  the AG’s office reasoned that fantasy sports should still be considered games of chance.

The state AG’s office has ruled since 2016 that fantasy sports contests should be illegal under Hawaii law. Some legislators disagree. Screenshot/2022

Rep. Angus McKelvey believes fantasy sports bettors aren’t risking their money on games of chance but rather are looking at a myriad of elements like how a team’s performance could be affected by injuries to key players and how teams have matched up in the past.

“It’s not something like roulette,” McKelvey said. “It’s a very skill-based thing that takes into account a number of factors.”

McKelvey has introduced House Bill 2004, which would legalize fantasy sports betting by exempting it from the state’s definition of gambling. The measure would be limited to operators of online fantasy sports websites like DraftKings or FanDuel.

Rep Angus McKelvey chair of the Consumer Protection and Commerce. Capitol. 22 feb 2017
Rep. Angus McKelvey is pushing for a measure that would regulate daily sports fantasy contests. Cory Lum/Civil Beat/2017

HB 2004 would ban betting on any high school or college sporting events. The measure also would require fantasy sports websites to register with the state and implement strict monitoring programs to ensure minors aren’t betting.

McKelvey said the websites would work directly with the state Department of Taxation to deliver state revenues from fees and taxes on winnings much in the same way short-term vacation rental companies in Hawaii act as a tax collector between the consumer and the state.

Miller said that Hawaii would need to find out-of-state experts with experience regulating gaming companies before it embarks on legalizing sports betting.

On Friday, the House Economic Development Committee deferred HB 2004, meaning it’s probably dead for this year. Rep. Sean Quinlan, the committee chairman, said he wants to work on the issue ahead of the next legislative session.

“At some point, this is something we absolutely should do,” Quinlan said. “It’s a huge market, and we’d be missing out on tax revenues.”

Sportsbooks Aren’t Cash Cows

Sports betting laws expanded in the country after the U.S. Supreme Court ruled in 2018 that states should have the right to legalize sports wagering in their own jurisdictions. Since then, states have seen mixed results on revenues coming back from sports betting.

In the first three weeks that online sports betting has been legal in New York this year, mobile wagering sites in the Empire State reported more than $91 million in gross gaming revenue, which will be taxed at a rate of 51%.

But not all states are as profitable.

Virginia also recently launched online-only sports betting, similar to several proposals being considered in the Hawaii Legislature. While books in Virginia reported $3.2 billion in revenues in 2021, after payouts to bettors and other deductions, companies were left with $130 million in adjusted revenues. Of that, Virginia got just $20 million.

Miller warned that states shouldn’t rely too much on sports betting to generate revenue. And they should tread lightly when considering measures that would expand the market for betting, such as lowering the gambling age.

“Trying to fill a budget hole with any form of gambling proceeds, that could be a form of addiction itself,” he said.

Experts see mobile betting as a double-edged sword that could help control illegal betting but one that could also increase the occurrence of problem gambling. Cory Lum/Civil Beat/2020

House Bill 1973, introduced by Rep. Chris Todd, would permit companies that run mobile betting websites like Caesars Sportsbook or BetMGM to operate in Hawaii. The measure would allow an unlimited number of licensees to operate in Hawaii. Applicants would need to pay a $50,000 fee to acquire a license and another $50,000 for each renewal. Licenses would be good for three years.

Companies would need to agree to pay 10% of gross profits less winnings to the state.

Todd said the 10% tax rate is just a placeholder, and he’d like to consider other ranges if the bill gets a hearing.

Rep. John Mizuno is proposing another sports betting measure through House Bill 1815, which would tax companies at a rate of 55% on gross profits.

None of the measures would consider allowing for a traditional sportsbooks with a physical location where people can go and place bets.

Increasing access to online betting could help states eat into the illegal booking market, according to Holden.

“If you have mobile sports betting, we could all do that from the couch,” Holden said, adding that some sportsbooks on the mainland could be an hourslong drive away.

Holden said states have many options when considering how to set up their tax and regulatory schemes. Those seeking to stamp out illegal activity may want to open up the regulated market by allowing an unlimited number of licensees and setting barriers of entry low, like offering low applications fees. Jurisdictions that want to maximize revenue could offer a limited number of licenses with high tax rates on operators.

But there’s also concern that the ease of access could fuel gambling addictions.

A 2016 study by researchers in Australia and Germany found that gamblers using mobile devices to place bets had greater rates of gambling problems than those who used computers or went to a physical location to bet.

All three lawmakers who introduced sports betting measures, Mizuno, Todd and McKelvey, said they would want to divert portions of state tax revenue on sports betting to addiction treatment programs.

“I think the mitigation of any negative impacts needs to go hand in hand with any revenue generation,” Todd said.

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