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Gaming Guru

Jeff Haney

Jeff Haney explains how a Reagan-era tax cut sparked the growth of legal sports betting in Nevada

19 December 2007

LAS VEGAS, Nevada -- Arne Lang was telling a roomful of IRS workers about a bundle of cash he won by betting on sports.

And yes, he was doing so freely and voluntarily.

The wager in question, a landmark in Lang's illustrious Las Vegas gambling career, was on Super Bowl IV for the grand sum of 18 dollars and 15 cents.

It was broken down like this:

$15, the amount Lang was trying to win.

$1.50, the standard 10 percent "vigorish," or house fee.

$1.65, a 10 percent federal tax passed along by the sports book to consumers (well, some consumers - mostly rookie bettors such as Lang, as we'll see in a moment).

When he came back to cash his ticket, Lang collected $31.50 for a $13.35 profit. If you risk $18.15 in a Las Vegas sports book today, with the 10 percent federal tax long gone, you stand to collect $34.65.

"Look at the difference," Lang said at a recent IRS seminar at the MGM Grand on federal excise taxes and how they apply to sports wagering.

"It's significant, especially if you compound it and do it every day of the week, betting several games a day."

The elimination of the big federal tax, Lang said, "made it possible for bettors to win, to beat the 11-10 (standard vigorish), if you're disciplined and you do your homework."

Discussion at the seminar, which also featured presentations by Howard Schwartz of the Gambler's Book Shop and oddsmaker Ken White of Las Vegas Sports Consultants, underscored the delicate relationship between gamblers and the IRS.

It was only after the federal tax was reduced to 2 percent, then to one-quarter of 1 percent during the Reagan administration, that sports betting was able to thrive in Nevada as an aboveboard enterprise with appeal to the masses.

When Lang first arrived in Las Vegas, handwritten betting tickets gave rise to various schemes that made it easy for sports book operators to dodge the federal tax.

"No bookie could ever survive a 10 percent tax," said Lang, an author and longtime bettor and handicapper. "They had their ways to circumvent it. None of the regular bettors ever paid it.

"So in a sense all of these legal sports betting establishments in Nevada, circa 1970, they were illegal bookie joints. They were authorized by the state of Nevada to take bets, but if they didn't circumvent the tax, they would have had to shut their doors."

The federal tax is low enough today for Nevada's legal sports book operators to absorb it rather than pass it along to bettors.

The sprawling illegal sports betting market across the nation presents a separate challenge for tax collectors.

Underground bookies fail to pay an estimated $7 billion annually in federal wagering excise taxes, IRS officials estimate.

The figure is reached by taking 2 ¯percent of $380 billion, the upper range of the estimated annual revenue in illegal sports gambling reported in 1999 by the National Gambling Impact Study Commission.

Because street bookies aren't forthright in filing their taxes, the gap is likely to hold steady under the current system.

"Are illegal bookmakers aware of the federal excise tax?" Lang said. "You can be damn sure they are. They know they're operating in an underground economy. They know they're operating in the shadows.

"Others who operate in an underground economy, for example, vice lords, don't pay taxes on their earnings either. It would be naive to think that illegal bookmakers would. It's a cat-and-mouse game, and I expect it's going to go on and on and on."

Even in some alternate universe where bookies were model taxpaying citizens, the extra fees would crush their customers.

"One of the attractions of sports betting is it's a beatable game," Lang said. "If illegal bookies pay all their excise tax and pass costs along to the consumer, it won't be anymore."

Schwartz brought up the possibility of establishing a regulated national sports book, perhaps run by licensed operators in Nevada.

"How many billions of dollars would be brought in?" Schwartz said. "You could knock out illegal operations. You wouldn't be losing all the money to offshore, hidden money ... God only knows where it's going."

In other words, one-quarter of 1 percent of $380 billion is a lot more than 2 percent of nothing.

Doug Dunlap, supervisory forensic examiner with the FBI, called legalization an imperfect solution at best. For example, he said, state-run lotteries have not eradicated illegal numbers games. Instead, underground bookies often use the legal lottery to generate their own numbers - and they pay 600-1 on a three-digit lottery winner rather than the standard 500-1.

"It's the same thing with sports betting," Dunlap said. "If you have a national sports bookmaking service, it would be good (in that) it would generate more (tax) income. But you will still have the illegal operators out there, because they offer credit, because of convenience, because of better odds.

"You can legalize it, but you'll never get rid of the illegals too."

Schwartz advocated finding a middle ground.

"There's always going to be somebody running something out of their basement," he said. "But we're missing so much revenue. People are going to bet, so why not let them play?

"This is not a 'give me liberty or give me death' speech. I'm just saying, regulate them. Tax them. As they said in 'The Bad News Bears': Let them play."