California sports betting bills deemed 'critical to the future of the entire industry' likely to fail

The 2022 midterm elections had the potential to become one of the biggest days in the sports betting industry, which has been experiencing years of seemingly exponential growth in the market.

But Tuesday will likely be when one of the fastest-growing industries in the U.S. gets a reality check, given that two ballot sports betting measures in California are expected to fail.

California voters will be asked to decide on Proposition 26, which would allow in-person sports gambling on tribal lands, and Proposition 27, a bill that would allow mobile sports gaming everywhere in the state.

“California is just too big of a market to leave behind,” Joel Simkins, managing director of investment banking at Houlihan Lokey focusing on gaming, told Yahoo Finance. “It's obviously very critical for the future of the entire industry, especially on the commercial side to make the economic model work. If we get the California domino to fall, then Texas happens and Georgia, and then now we've got some scale to make it work.”

A recent poll from the Public Policy Institute of California indicates that a majority of voters oppose neither proposition, potentially eliminating a crucial stepping stone in gambling expansion. The study found that among likely voters, 67% would vote no on Prop 27, 57% would vote no on Prop 26, and 48% of those likely voters think sports betting in general would be a “bad thing.”

"It does not look good at all for either one,” Kathy Fairbanks, a spokesperson for the Yes on 26/No on 27 campaign, told Yahoo Finance.

Tribal power

The Supreme Court overturned the federal ban on sports betting in 2018, leaving the activity’s legality up to individual states.

Since then, 35 states and Washington D.C. have legalized sports betting. The market has grown rapidly, with sports betting producing nearly $3.1 billion in Gross Gaming Revenue through the first half of this year, a 66% year-over-year increase, according to the American Gaming Association.

At the same time, California’s strong denial of Proposition 27 is proving a clear statement: In some states, tribes have more power than publicly-traded companies.

Tribes are the main gambling operators in California. Legislation largely limits other forms of gaming outside of card table operators and horse racing tracks.

The stories of Proposition 26 and Proposition 27’s failures center around tribes defending that position while outside national gambling operators like FanDuel (PDYPY), DraftKings (DKNG), BetMGM (MGM), and Penn Entertainment (PENN) attempt to penetrate the market.

Prop 26 was approved first and would allow tribes to offer sports gambling on their premises. The tribes argue this is a more responsible solution for sports gambling, in part because in-person wagering helps solidify the verification process and ensure minors aren’t gambling online.

Prop 27 specifically allows for mobile sports gambling operations outside of tribal lands. This would open the state up for any operators and severely impact the tribe's current monopoly on traditional casino revenues.

Unless the tribes, which believe they have the pulse of voter sentiment in California, join forces with the operators, a continued stalling in the state could hamper sports gambling expansion across the country. California, unlike some other states, requires this type of legalization to be passed at the polls not by state legislators.

“We've got to defeat 27,” Fairbanks said, admitting that Prop 27 failing is more important than Prop 26 passing. “That is far and away our No.1 priority.”

Prop 27 is 'one way to help states solve problems'

Gambling operators in support of Prop 27 argue that the expected hundreds of million dollars in state tax revenue from their operations can be used towards funding “mental health treatment and solutions to homelessness and addiction.”

“Especially entering a bear market where we'll probably be in deficits soon as a state, creating a safe and regulated online sports betting market marketplace is one way to help states solve problems,” Nathan Click, a spokesperson for the Yes on 27 campaign, told Yahoo Finance.

Prop 27 would bring a 10% tax rate on sport bets placed, after subtracting other expenses. New York’s deal is far more lucrative, with a 51% tax rate, while Pennsylvania charges operators 36%.

Opposers of Prop 27 say it’s more than just about the money. Prop 27 leveraged three tribes backing the legislation to run ad campaigns with statements such as “the act supports every California tribe.”

More than 50 tribes and organizations across the state don’t support the legislation. Mark Macarro, chairman of the Pechanga tribe, told PlayCA in October that tribes aren’t interested in working with sportsbooks to legalize mobile sports gambling.

“To investors, California might be an opportunity, but to tribes it is home," Jacob Mejia, the Pechanga Band of Indians vice president for public affairs said. “It has always been home. It will always be home, and they must respect the single industry that has uplifted tens of thousands of Native Americans out of abject poverty. As long as that continues to be ignored, California will remain closed for sports betting. California is not a profit center.”

Thus lies a potential conundrum for gambling operators after election day. DraftKings CEO Jason Robins has already called for another run at the ballots in 2024. He and other companies have already invested heavily in eventual legalization in California and seem intent on returning.

While things can change, sentiment that tribes would join forces and change the narrative in 2024 doesn’t appear optimistic.

"We have to respect the will of the voters,” Meija said. "We have to discern what they're saying. To many of us they're confirming what we've said for years and that is voters don't support online sports betting. And so tribal leaders will have conversations about what is next and we'll see.”

Josh is a reporter and producer for Yahoo Finance.

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