Prediction market platforms such as Kalshi claim to offer legal sports trading (or even betting) in all 50 states. Several states have aggressively challenged this notion, but actions against companies have varied significantly across jurisdictions.
Some of the most aggressive states include Arizona and Nevada, which both have revenue-sharing agreements with licensed betting operators. Are these deals driving the enforcement actions and creating a conflict of interest?
The Arizona Department of Gaming (ADG) is funded by gaming revenue. It receives roughly 10% of the total revenue generated by tribal groups. Last quarter, that was $33 million, an 8.6% increase from the previous year. As a result, the ADG received $3 million directly.
“The ADG has incentive to act not on the merits but because it impacts their resources,” Wake Forest Economics professor Koleman Strumpf told CasinoBeats on X. “If they clamp down on prediction markets, this can boost tribal revenues and thus their budget.”
ADG Head Represents Tribal Interests
Strumpf added that the head of the ADG, Jackie Johnson, represented tribes before assuming office. For 15 years, Johnson worked at Rothstein Donatelli LLP and Quarles & Brady, working as an attorney representing tribes. Part of this included negotiating revisions to the tribal compacts in 2021.
“Tribal gaming contributions provide critical support for state and local initiatives that help keep
communities across Arizona safe, strong, and thriving,” Johnson said when announcing the latest revenue figures last month.
Previously, she also said that tribal gaming “contributions further cement the strong partnership between the state and tribal partners”.
She is a first descendant of the Confederated Salish and Kootenai Tribes and was born and raised on the Tribes’ reservation.
Defend This House
Prediction market commentator Steve Ruddock argues that Arizona’s aggressive stance against sports markets and their intrusion on tribal gaming and licensed gambling is natural.
“The licensed sportsbooks (partnered with the tribes) and DFS operators also contribute to these funds, with the expectation the regulator will enforce state law to preserve the market that they have paid a lot of money to operate in,” wrote Ruddock in his Straight to the Point newsletter.
“I’m not sure why people would expect states, tribes, and licensed sportsbooks to simply roll over,” he added.
The revenue-sharing agreement in Arizona, however, creates “bad incentives,” according to Strumpf.
“The Arizona Benefits fund is a proportion of tribal gaming revenues, some of which comes from event wagering/fantasy sports. So the ADG gets a bigger budget if the tribes have more business,” Strumpf told CasinoBeats via email.
“This creates bad incentives: for example, limiting problem gambling might be the right policy, but it is not fully implemented since it lowers revenues. In short, bad optics. I am not saying this happens, but it is best to avoid the appearance of incentives to promote gaming.”
Prediction Markets Not Part of Plan
The ADG is not alone in fighting against sports prediction markets. Kalshi is facing legal actions in over 13 states. Not all of those have revenue-sharing agreements as Arizona does.
The argument against sports prediction markets is that they are illegal under state and federal laws. These types of companies were not intended to be beneficiaries of gambling.
Strumpf notes a difference between illegal gambling operations in the past, stating, “Illegal sports bookmakers (the ones I studied in the 1990s) are quite different from prediction markets. A key point is they allow betting on credit rather than fronting money, which creates different incentives for traders (addiction may be more likely).”
Arizona’s 2020 Gaming Act, which brought legal sports betting, was negotiated with tribal interests in mind. Johnson, who helped negotiate the compacts on behalf of the tribes, also claims the compacts are designed to enrich the entire state.
“The Act is thus a reflection of the fact that the people of the state wanted only certain entities to operate event wagering, to eliminate illegal sports betting in the state, to carefully limit and regulate event wagering in a manner reflecting Arizona values, and to use it to raise money for all Arizonans,” said Johnson in a letter against prediction markets last year.
CasinoBeats reached out to the ADG for comment on whether its revenue-sharing agreement affects its actions and why it is taking a particularly hard line on prediction markets compared to other states. A spokesperson responded, commenting, “The Arizona Department of Gaming is unable to provide a response due to ongoing litigation in these areas.”
Nevada Ramps Up Action With Revenue Sharing Agreement
States with revenue-sharing agreements have an added incentive to fight against the markets, however. Nevada has been the most successful state in fighting prediction markets, driving out Polymarket, Kalshi, Crypto.com, and even forcing DraftKings and FanDuel to give up betting licenses.
The state’s gambling regulator receives increased revenue as licensees generate higher profits. The Nevada Gaming Control Board and the Nevada Gaming Commission are, therefore, also incentivized to protect the industry.
“The Board is charged with the responsibility of strictly regulating gaming in the State of Nevada because gaming is vitally important to the State, its economy, and the general welfare of its inhabitants,” said the complaint against Kalshi.
Other States Taking Action
In other states, such as New York, licensed sportsbooks pay a percentage of revenue to the state in taxes. New York charges a 51% premium, the highest in the country. Yet, the New York State Gambling Commission does not necessarily increase its budget if operators increase profits.
First, the money goes to various state funds, and the regulator’s budget is set by the legislature. New York has also taken action against prediction markets, sending a cease-and-desist letter to Kalshi. The company responded by filing a lawsuit against the regulator, and the Commission agreed not to take action while a judge decides whether to grant Kalshi an injunction.
Ohio has also ramped up action against prediction markets, threatening Kalshi with a $5 million fine over its alleged illegal gambling operations. The state has a model similar to New York in that the Ohio Casino Control Commission receives its funding from the legislature.
Thus, regulators are taking action against prediction markets even if they are not directly incentivized to do so, but it is notable that Arizona and Nevada are two states that have taken considerably more aggressive stances against the markets.
In economic terms, as Strumpf notes, this makes sense.
