How Michigan Online Sports Betting Will Reshape the State’s Gambling Industry

Sports betting has been legal in Michigan for almost a year. However, online sports betting hasn’t had the necessary regulations written for it yet. It’s expected to arrive as early as late November, and based on other comparable states, it could be a game-changer. Bettors will likely wager more and the state could finally see higher tax revenues. However, the additional tax revenue may not match the optimistic pre-pandemic projections.

How Michigan’s Tax System Works

Michigan’s gaming industry is made of 23 tribal casinos and three commercial casinos. Similarly, the tax burden is split differently between them. The tribal casinos pay taxes to local governments and the Michigan Strategic Fund. The Michigan Strategic Fund is operated by an economic development group that works on job creation in Michigan. It’s good for the state, but it’s not where the increased education funding comes from.

The commercial casinos in Detroit cover that part of the tax. Detroit’s three commercial casinos pay 8.1% of their adjusted gross revenue (AGR)–we’ll cover what that means in a minute–to the State of Michigan. They also pay 10.9% of their AGR to the City of Detroit. Since the commercial casinos’ taxes pay into the state education fund, we’ll focus on those three.

How Much Casino Money Gets Taxed?

Now we have to differentiate between two terms: betting handle and adjusted gross revenue. The betting handle is how much money bettors wager. It’s often referred to as revenue. However, that can be misleading. That’s the amount of money that casinos generate. But it’s not the amount they’re taxed. Before casinos pay for anything else, they have to pay gamblers their winnings. After subtracting winnings to gamblers, casinos are left with gross revenue.

However, there are still a few more subtractions to go. Casinos may subtract loyalty promotions out of their gross revenue. If loyalty members get to play on credit, that’s probably subtracted out. After those subtractions, casinos arrive at their adjusted gross revenue. That’s the pool of money that gets taxed.

What Does That Have To Do With Online Sports Betting?

Since sports betting is still retail only, we have to use the casinos’ performances to estimate how much retail sports betting will make during a normal year. Online sports betting will be trickier. We’ll have to look at other states to see how lucrative online sports betting could be.

Much Money Did Detroit’s Casino’s Generate?

Detroit’s casinos are big revenue drivers. In 2019, Detroit’s casinos made $1.45 billion in adjusted gross revenue. That’s almost a billion and a half in revenue after the casinos paid their winners.

But 2020 is radically different. When the casinos closed in March, they made about 41% of what they made the previous March. That’s a big drop. But when they reopened in August, Detroit’s casinos showed signs of steady recovery. In August, Detroit’s casinos made 58% of what they made the previous year. That jumped to 78% of the last year’s revenue in September. They’re recovering quickly. But what does that mean for sports betting?

How Retail Sports Betting Has Performed

Retail sports betting had a slow start in March. Bettors wagered a little less than $500,000 in the six days retail sportsbooks were open before shutting down. But when they returned in August, bettors came out in droves. Bettors wagered about $7.6 million at Michigan’s retail sportsbooks in August. That leaped to $14.7 million in September.

That may sound good but remember how much casinos have to pay back to winners before they get taxed. Michigan sportsbooks AGR averaged 15.62% of the total bettor handle. That means about 85% of bettor money gets paid as winnings before sportsbooks take a cut. That’s with limited data, but it’s enough to see whether Michigan is profiting off sports betting now. And more importantly, whether it will when the pandemic ends.

Retail Sports Betting In A Normal Year

If we want to see how much money sports betting would make during a normal year, we can use 2019 data. We know that 2020’s revenue figures are a percentage of what they were during 2019, so we can use them here. So far in 2020, Detroit’s casinos’ taxable revenue is 31.39% of what it was in 2020. So, let’s use that same figure on Michigan’s sportsbooks:

 Current AmountPercent of Previous YearProjected Amount
Total Handle$49,842,140.4231.39%$158,787,527.55
Total AGR$6,459,007.7631.39%$20,577,163.50
State Tax$244,150.4931.39%$777,816.78
City Tax$298,406.1629.49%$1,012,029.71
Total Tax$542,556.6530.31%$1,789,846.49

A normal year looks much better than in 2020. Projected revenues more than triple, which is great news for the State of Michigan. This is only data for Greektown Casino, MotorCity Casino, and MGM Grand Detroit. Many of Michigan’s tribal casinos have also secured partnerships with sportsbooks. Some of those partnerships will include online services when online sports betting arrives, too.

However, there’s one more figure that needs to be analyzed carefully when we start talking about how much tax revenue sportsbooks could make for Michigan.

Our $400 Million Prediction

Back in August, we predicted that Michigan’s first year of online sports betting could produce “as much as $400 million in total first-year sports betting revenue.” Readers may look at the current retail projections and wonder how it could more than double. However, online sports betting will likely make some of these figures skyrocket. In Colorado, online sports betting dwarfs retail sports betting by over 9:1 in September. Online sports betting could increase the pool of bettors in Michigan by being safer and more convenient than retail sports betting. (Remember the coronavirus?)

However, what number that $400 million represents is critical. If it’s the total handle, tax revenues are going to be low. If it’s the AGR, Michigan will receive a fat tax bill from the sportsbooks. Here’s what the difference would look like for Michigan sportsbook taxes:

 $400 Million Total Handle$400 Million AGRDifference
State Tax$2,361,744$15,120,000$12,758,256
City Tax$2,886,576$18,480,000$15,593,424
Total Tax$5,248,320$33,600,000$28,351,680

That is a striking difference depending on whether the $400 million turns out to be what bettors wagered or what online sportsbooks made after paying winnings. Currently, retail sportsbooks across Detroit’s three commercial casinos have only kept about 15.62% of bettor stakes as revenue. At that rate, $400 million in AGR would require a $2.5 billion online sports betting industry. Online sportsbooks could grow to be that large. But it’d be a massive industry shift.

What To Watch For When Online Sportsbooks Arrive

Detroit’s commercial casinos will likely see sports betting revenue increases from online sports betting. It’ll likely increase revenues beyond the retail sports betting projections. If it follows Colorado’s pattern, it could increase the sports betting market dramatically. However, don’t expect a nine-fold increase. Retail sports betting revenue could decrease as more bettors migrate online. Expect the entire pie to grow, but expect some fluctuations among its slices, too.

In tandem with tribal casino partnerships, $400 million in adjusted gross revenue still seems out of reach. Detroit’s three casinos make it 5% of the way to $400 million in AGR by themselves. If all Michigan’s casinos contributed equally at that rate, they’d still only get 43% of the way to $400 million. But it’s possible. If Michigan sportsbooks keep 15.62% of total handle as AGR, then bettors would have to wager about $208 million every month to get to $400 million in AGR in a year. That sounds like a lot, but that was Colorado’s total handle in September. It’s possible to reach that figure.

Michiganders should expect online sports betting revenues to dwarf retail sports betting revenues. However, expecting that 15.62% figure to remain steady is too optimistic. Colorado’s sportsbooks pay about 98% of their total handle back to bettors. Sportsbooks in the Centennial State only keep 2% of bettor wagers as AGR. As Michigan’s sports betting market grows, sportsbooks may keep less of their money. But only time will tell how that figure is impacted by market size.

If online sports betting is as popular and fast-growing as other states, Michigan could see the optimistic tax revenues promised to them by countless analysts. But they shouldn’t be distracted by how much bettors wager. How much sportsbooks keep will tell Michiganders how much they’ll see in tax revenues.

About the Author

Christopher Gerlacher

Christopher Gerlacher is a writer tucked into the foothills of Colorado Springs, Colorado.