(Bloomberg) -- The National Football League opener was less than 90 days away, which meant Warren Nichols, an assistant director at the Arizona Department of Gaming, had to act fast. The state’s lawmakers had approved online sports betting as an emergency measure, normally reserved for legislation deemed “necessary to preserve the public peace, health or safety.” The designation exempted gaming regulators from the usual rule-making timeline requiring extensive notice to the public.
So it was that in June 2021, Nichols hosted 92 people — lobbyists, gambling company executives and representatives of professional sports franchises among them — for a kind of group editing session of the department’s first draft of the new regulations. Over the next hour and a half, he encouraged them to keep firing away with suggested edits. “You will see significant changes to the rules based off the feedback we expect to get today,” Nichols said during the virtual meeting.
The industry officials eagerly complied, chiming in so frequently that one of them, Andrew Winchell, director of government affairs for Flutter Entertainment Plc’s FanDuel betting app, at one point apologized for taking so much time. “Oh, don’t apologize!” Nichols responded. Citing specific line numbers from the draft’s hundreds of provisions, the FanDuel executive proposed, among other things, allowing apps more time to cash out customers’ accounts.
Another industry representative, John Pappas, teased Winchell for going over the department’s suggested two-minute allotment for speakers. Pappas — the founder of Corridor Consulting, which says it “delivers a proven, integrated approach to drive client agendas forward in Washington, D.C. and in state capitals” — had his own request. He wanted the Arizona regulator to list credit cards among the forms of payment allowed for betting on sports, and Winchell agreed.
On many of the proposals, including the use of credit cards, Arizona ultimately followed the industry script. Accounts of the lobbying there and in other states — revealed in dozens of interviews as well as documents obtained by Bloomberg News under public records laws — provide a remarkable window into how gambling interests and sports franchises tilted the playing field of a newly turbo-charged industry in their favor. Four years after the US Supreme Court overturned a federal law that had confined most sanctioned sports betting to Nevada, 36 states have passed their own legislation. Many allow bets by phone, even mid-game, opening a market of tens of millions of potential customers to apps like FanDuel and the online arms of long-standing casino brands. Americans placed $57.7 billion in legal wagers on sports last year — more than 12 times what they spent on movie tickets. Splashy gambling ads are becoming as common as beer and car commercials during NFL and NBA broadcasts.
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Before the comedian J.B. Smoove donned his gold laurel crown for the Caesars Sportsbook app, and before Jamie Foxx started wheedling tips from sports celebrities for BetMGM, came the legislative onslaught. Just as the ads dangle potential riches, so did the industry’s backers. One of the main sponsors of Arizona’s legislation predicted it would bring in “hundreds of millions of dollars” in tax receipts for education and other priorities. In the 12 months after the state legalized sports betting in September 2021, Arizona’s tax proceeds totaled $21 million, 0.16% of its $12.8 billion annual budget.
Colorado voters legalized sports betting in a 2019 initiative backed by FanDuel, DraftKings Inc. and casino operators that pledged as much as $27 million a year for water conservation projects. The Water Conservation Board started getting the tax dollars last fall. After almost $5 billion in bets, the injection to the state's water plan amounted to $11.4 million this fiscal year — about a tenth of what the drought-stricken state has estimated it needs to spend annually.
Lobbyists across the country promoted the supposed windfall on sports betting in part by drawing attention to the massive amounts wagered, known as the “handle.” Sportsbooks return much of that in winnings to customers, though, and typically only pay state taxes on the amount they keep. For every dollar wagered in sports betting, about two cents goes to the state compared with 30 cents for lotteries, says Rick Weil, an industry consultant.
In many states, taxable income has been reduced by deductions that let sportsbooks exclude the cost of “free bets” and other bonuses meant to draw new customers. By allowing the write-offs, states have left tens of millions of dollars in potential taxes on the table. None of them set aside significant funding to address the costs of treating people with gambling problems; in 2021, the highest grant was $10.2 million, in Massachusetts, and nine states awarded nothing. After surges in calls to help lines and other early signs that addiction issues are mounting, some states, including Colorado, are now moving to set aside additional funds or to close the tax loopholes.
“There are huge questions of ‘Are we getting enough money for this?’” says John Holden, a business professor at Oklahoma State University.
Despite a rare defeat in California, where voters in November rejected a legalization referendum opposed by deep-pocketed tribal casino interests, the industry is poised for further gains. In New York, Indiana and a handful of other states, lobbyists are seeking to turn the comparatively modest tax revenues thus far from sports betting into an asset, making the case that legislators should also allow online casino games that might bring higher returns.
They also bring greater potential harm. In one study tracking 1,277 gamblers in Spain after the country legalized online casinos in 2012, the share of those under age 26 seeking treatment quadrupled to 16% from 4% within three years. Signs of similar problems are now emerging in the US, where the Supreme Court in May 2018 struck down the law that had banned sports betting in most states. Gambling counselors who are seeing more people, especially young men, hooked on betting by phone see parallels to opioids and tobacco.
Surveys conducted for the nonprofit National Council on Problem Gambling found that 25 million more people across the US reported gambling online in 2021 than in 2018. The proportion of those saying they’d lied many times to hide their gambling rose from 3% in 2018 to 6% last year. Arnie Wexler, 85, a New Jersey gambling counselor for 30 years, measures the impact in the calls for help he’s now fielding from teenagers and their parents. “A few years from now you won’t be able to get a seat at a Gamblers Anonymous meeting,” he says.
Today’s glittery apps might not exist if it weren’t for the shuttered casinos on Atlantic City’s boardwalk a decade ago. Five closed their doors within months of each other. The scene galled Ray Lesniak, a Democratic state senator from New Jersey who was especially irked that Las Vegas continued to thrive. People around the country flocked to its casinos, and to the sportsbooks inside them, in part for the chance to wager on games — an activity barred to other states under a 1992 federal law called the Professional and Amateur Sports Protection Act. The law essentially carved out a monopoly for Nevada. Lesniak sponsored a New Jersey bill in 2012 permitting sports betting, drawing an immediate challenge from the NFL, the NBA and other professional leagues. They maintained that being associated with gambling might lead people to see the games as rigged. Former NBA commissioner David Stern cited some additional qualms as well, saying in 1993, “We don’t want to see people betting the grocery money on our games.”
Within hours of the Supreme Court striking down the federal ban as unconstitutional in May 2018, a Vancouver-based startup, GeoComply Solutions Inc., which helps apps verify a customer’s location, hosted a conference call for analysts, lawyers and consultants to map out the most promising business opportunities. A similar race kicked off in statehouses, where some lawmakers stoked hopes for a bounty of taxes — and raised fears of losing out on them without swift action. Major pro sports leagues quickly abandoned their opposition to sports betting, embracing it as a tool to increase TV viewership and advertising revenue. The teams and the gambling companies ended up collaborating on a playbook that included political donations to key legislators and outreach from lobbyists, some of whom had previously been regulators themselves.
Michigan was among the earliest states to go all in. One of the chief architects of its legalization was state representative Brandt Iden, a Republican from Kalamazoo County. He told one publication days after the Supreme Court ruling that if the state had already legalized sports betting, taxes collected during the “March Madness” college basketball tournament alone “could have equated to millions of dollars in potential revenue for our state, which could have been used to fix our crumbling roads or provide educational opportunities for the children of our state.”
Iden’s bills to legalize sports betting as well as online casino games passed the next year. Term limits forced him out of the legislature, and he took a job in January 2021 as head of US government affairs for Sportradar Group AG, a Swiss multinational that provides data for betting companies. In November, Fanatics Inc., which is poised to enter the US sports betting market, hired him as vice president of government affairs. As a representative of the industry that he helped create, he now plays down its ability to make big contributions to state budgets. “States shouldn’t be looking to implement sports betting for tax revenue,” Iden said in an interview in July, calling it a “very low margin” business.
Indeed, in Michigan, the state’s share of taxes and fees from online sports betting in 2021 came to $7.3 million, a tiny fraction of the $3.5 billion it’s borrowing to fix roads.
In many states, lawmakers had already legalized cannabis and saw sports betting as a similar chance to draw tax revenue from a vice widely available on the black market. Opponents warned of the downside. “I think the legislature is pouring fuel on the addiction issues in our state,” said Republican Representative Andy Holt when the Tennessee House approved sports betting in a 58-37 vote.
Few states went as far as Arizona in mingling gambling and sports interests. Working through Orrick Herrington & Sutcliffe LLP, a law firm whose clients included the NBA, Major League Baseball and apps like FanDuel, the gambling companies secured a unique arrangement that put the marketing muscle of the state’s pro sports teams behind them. In legislation sponsored by state lawmakers T.J. Shope and Jeff Weninger that Governor Doug Ducey signed in April 2021, Arizona became the first state to award statewide licenses for mobile sports betting directly to the teams. Three of them — the Arizona Diamondbacks, the Arizona Cardinals and the Phoenix Suns — reached deals to open sportsbooks with betting partners. A fourth team, the National Hockey League’s Arizona Coyotes, had an even more direct interest: The franchise partnered with a betting app called SaharaBets started by its owner, Alex Meruelo, who also owns the Sahara, a hotel and casino in Las Vegas.
Under the emergency provisions, Arizona’s law went into effect immediately that April, skipping the usual waiting period that might have complicated efforts to launch betting in time for the NFL season. The law gave the gaming department 60 days to adopt rules. That same month, a lobbyist working for FanDuel forwarded a news release to Shope and Weninger, both Republicans. The headline said Colorado had reached $2 billion in total sports betting wagers. (Actually, that number was the handle; the state’s tax collections that month were just over $1 million.) “Wow! See below,” wrote Kelsey Lundy, managing partner of Compass Strategies in Phoenix. “This is why (the Arizona Department of Gaming) really needs to look at CO rules when drafting the AZ rules. CO did a great job and their launch has been VERY successful. All the regulated community agrees that CO is a good roadmap. :)” Lundy later donated $1,000 to an unsuccessful run for state treasurer by Weninger.
The feedback sessions started soon after the gaming department produced its first draft that June. During one virtual meeting lasting almost an hour and a half, Nichols, who oversees gaming compliance for the department, was upbeat — much like the profile picture on his LinkedIn page, a studio still of the actors Will Ferrell and John C. Reilly from their Step Brothers comedy film. “Alright, Andrew!” he frequently greeted Winchell, the FanDuel official. The only off-key moment came near the call’s end, when the camera shifted to a woman sitting under a ceiling fan in a small office in front of a bookshelf and framed photos.
It was one of the few Arizona legislators who had opposed the gambling expansion, Sally Ann Gonzales, a Democrat from Tucson, who asked Nichols why the “small audience” of lobbyists had been afforded such special favors. The virtual meeting was taking place on a Friday, and the department had set the following Monday as the deadline for receiving written comments. “To me that’s a very short period for the general public, maybe not for the industry because they’re on top of this, that’s their business,” she said. Nichols, now terse, responded that the department’s options were limited because of the need to meet the legislation’s accelerated timeframe. As the call closed, he thanked all the callers. “You made it very efficient,” he said.
The department accepted many of the suggestions offered by FanDuel’s Winchell and other industry representatives. Instead of requiring operators to “immediately” pay out winning wagers, for example, the final rules included a clause that said this would take place “upon verification” by the operator — something Winchell had argued was necessary in order to complete checks for fraud or money laundering. Another change allowed the operators seven days, instead of five, to honor customer requests to withdraw funds from their accounts. An early draft of the rules listed cash, cash equivalents, debit cards and personal checks among the acceptable forms of payment. The final rules added credit cards to the list, as Corridor’s Pappas had requested. Some states bar the use of credit cards for betting, and addiction counselors warn they can worsen gambling problems. Pappas, who was representing an online betting trade group backed by companies including FanDuel and DraftKings, says he was simply trying to clarify the issue because the Arizona law didn’t explicitly prohibit using credit cards, and consumers often prefer using them.
Nichols declined to comment for this story. “Most of them were small changes, some were a little larger,” says Maxwell Hartgraves, a department spokesman. The department, he adds, had a “robust public process” to develop the rules, and its solicitations for feedback went beyond what was required in the legislation. This included multiple public comment sessions “announced in our social media channels and emailed to stakeholders” — some of which were covered by media outlets.
FanDuel’s Winchell, for his part, held up Arizona as a model to his industry counterparts. At a sports betting conference at the Meadowlands Exposition Center in New Jersey in July, he raved during one panel about the access Arizona and a few other states had provided. “It felt like a press conference,” Winchell said. “The regulators let us go as long as needed to address every one of our issues. It ended up with a significant improvement of what was originally put forward.”
Arizona met its deadline, and in September 2021, Ducey celebrated with Caesars spokesman Smoove, who was clutching a golden chalice and wearing his crown of laurels, during a news conference at the Diamondbacks’ Chase Field in Phoenix. The ticket windows had been relabeled betting windows. That afternoon, Ducey went down the street for a ribbon-cutting of the FanDuel sportsbook at the Phoenix Suns’ Footprint Center, joined by Weninger and others who’d supported the legislation.
The Suns’ owner, Robert Sarver, had ramped up his donations to Ducey, contributing at least $110,000 to political action committees aligned with him in 2018 and 2019 — compared with $18,912 from 2014 to 2017. Sarver also gave Weninger $2,500 for the treasurer's race. The governor, Weninger and the Suns didn't return emails seeking comment.
Calls and texts to Arizona’s gambling help line soon started rising. The state had recorded 18 calls and 10 texts in the month the law passed, says Elise Mikkelsen, director of the Division of Problem Gambling. Through August this year, it was averaging 54 calls a month and 57 texts, though the agency says that may be partly due to more advertising of the help line. Rick Benson, who runs the Algamus Gambling Treatment Center in Prescott, Arizona, says the number of people it has admitted seeking treatment for addiction to sports betting has doubled to about 70 annually over the past two years. “People right now are really excited by what’s going on, and they’re playing and having a great time,” Mikkelsen says. But her experience as a behavioral health clinician tells her what follows — “the crash and burn.”
Colorado originally set aside $130,000 for gambling treatment and prevention — $30,000 to operate a crisis hotline and $100,000 for education and workforce development. After calls to the hotline surged 45% from 2020 to 2021, from 6,688 to 9,686, the Problem Gambling Coalition of Colorado asked lawmakers for more help. In June, the governor signed new legislation that increased annual spending on research and treatment to as much as $3 million. The law also limited companies’ ability to deduct customer bonuses.
David Forman, vice president of research at the American Gaming Association, says such deductions are no different than those other companies get for marketing spending and other business expenses. He says the promotions also help draw customers from the black market, increasing tax revenue. The tax receipts in many states including New York, New Hampshire, Illinois and Tennessee have exceeded the trade group's projections, Forman says.
Still, some lawmakers feel burned. Virginia this year imposed its own restrictions on the deductions after collecting just over $5.5 million in sports betting taxes in fiscal 2021. “It was my bill and I thought it was reasonable, but I didn’t really know they were talking about giving people free bets and free money,” says Mark Sickles, the Democratic delegate who sponsored the state's original legislation. “Then I realized ‘Oh, so you’re going to lose money on purpose for months and months.’ We had 12 licensed sportsbooks and only four of them paying any taxes.” (Sickles has received at least $37,500 in political contributions from gambling interests since August 2019, according to the nonprofit Virginia Public Access Project.)
‘Father of Sports Betting’
In April, a few dozen industry veterans — lawyers, analysts and executives from gambling companies — braved Covid’s omicron wave to meet at the Marriott Marquis hotel near Times Square in New York for the “All American Sports Betting Summit.” The mood was celebratory, starting with the keynote speaker: Lesniak, the former New Jersey legislator who had been so instrumental in overturning the law that had kept Las Vegas as the king of sports bookmaking. A London-based consultant, Christina Thakor-Rankin, began her introduction of him by throwing out what she considered a few comparable names in history. Among them: Elvis and Muhammad Ali. She called Lesniak “the father of regulated sports betting in the US.”
Lesniak, smiling, said sports betting had indeed been the savior of New Jersey’s casinos. Far from cannibalizing customers, online gambling appears to be helping casinos there and elsewhere attract new ones, based on data from the American Gaming Association. In the third quarter of this year, US revenue from online gaming jumped 28.5% to $1.2 billion while the total commercial gaming revenue rose 8.8% to a record $15.2 billion. States where it isn’t yet legal, Lesniak said, are now “feeling the pressure.” He displayed a copy of his recently published political memoir, Cultivating Justice in the Garden State. In it, he writes about growing up with a distant father, an alcoholic, who had him place bets at the corner grocery store. On summer Saturdays they bet on horses at the Monmouth Park racetrack. “It was one of the few things we did together,” he writes.
Bill Pascrell III, a lawyer who advised New Jersey on the state’s challenge of the federal law, had a word of warning for attendees of the betting summit. One of his clients is Entain Plc, a London-based company that backs the BetMGM app. Entain owns Ladbrokes betting shops in the UK, where after 15 years of legalization operators are facing a public outcry over suicides tied to problem gambling. In August, UK authorities fined Entain a record £17 million ($20.3 million) for failing to enforce measures to prevent money laundering and protect player safety. Apps in the US must do more than pay lip service to looking out for customers, Pascrell said, or they could suffer a similar backlash. “Go home tonight and call the 1-800 number on any of the online sports betting apps you use and we’ll compare notes tomorrow — there’s nothing behind those 1-800 numbers,” he said.
The human costs, meanwhile, are rising. As of June, New Jersey’s Division of Gaming Enforcement counted 13,914 people who’d excluded themselves from online gambling, compared with 2,140 the year before the Supreme Court ruling. New Jersey counselor Wexler, who's been in gambling recovery himself for 54 years, says he used to mainly see older faces at his 12-step meetings. Now, some of them are teenagers. This summer, Wexler got an e-mail from a 21-year-old at a Midwestern university, a wide receiver on the football team, who pleaded for help. “He won’t go back to college because he tells his mother, quote, ‘Everybody is gambling — I’ll be an outcast.’”
--With assistance from Samuel Dodge and Todd Gillespie.
(Updates to add Arizona Department of Gaming comment about its help line in 30th paragraph.)
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