Sports betting vs Cannabis in Arizona: One industry generates the lion's share of tax revenue
Arizona's Tax Dilemma: Marijuana vs Sports Betting - Who Pays More and Why It Matters.
In 2021, two industries that operated for years illegally in the state of Arizona – recreational marijuana and sports betting – were suddenly legitimate, bringing in hundreds of millions of dollars of new taxes to the state. One of those industries has brought in a lot more than the other.
An analysis of the of Arizona tax data by the Business Journal found that sports betting appears to be more popular in the state per capita, but only generates a fraction of the taxes paid by the cannabis industry.
In 2023, the amount wagered at sportsbooks in Arizona was nearly five times higher than total cannabis sales, but marijuana companies paid more than eight times the amount in total taxes from retail sales.
More than $6.5 billion was wagered at sportsbooks or over sports betting apps in Arizona in 2023, according to the Arizona Department of Gaming. In total, the state of Arizona collected just over $34.8 million from sports betting operators that goes to the state’s general fund.
During that same time, Arizona’s retail cannabis sales, both medical and recreational, totaled around $1.36 billion, with $284.3 million collected in taxes, according to the Arizona Department of Revenue.
Cannabis retail sales actually dropped from $1.41 billion in 2022 to $1.36 billion in 2023 – a 4.4% decrease. But at that same time, the amount collected in taxes from cannabis retail sales increased 3.15% to $284 million.
Cannabis industry faces a heavy tax load
The reason the two industries pay such wildly different tax rates is because of the laws that legalized both industries. The cannabis industry faces a very heavy tax load, with multiple taxes levied on each sale.
Cannabis dispensaries have to report both medical and adult-use sales to the state and besides paying a sales tax, they also have to pay a 16% state Marijuana Excise Tax. The funds coming in from the Marijuana Excise Tax go towards community colleges, public safety, the Arizona Highway User Revenue Fund and a state justice reinvestment fund.
The way Arizona’s sports betting law is written, sportsbooks don’t pay taxes on the amount bet, but rather how much they have left after winning bets are paid out. So, the more bettors win, the less funds make their way into the state’s coffers. In 2023, sportsbooks in Arizona kept $545.4 million after paying out winning bets, just 8% of what was wagered.
On top of that, the law allows sportsbooks to deduct free bets and promotions from their gross, cutting back the amount paid in taxes. In 2023, sportsbooks in Arizona gave out more than $196 million in free bets – cutting almost $20 million that could have gone back to the state.
Arizona collects 10% of gross wagering receipts from sportsbook companies, which is less than most other states with legalized sports betting. Illinois has a 15% tax on sportsbook profits, Massachusetts has a 20% tax and New York, Rhode Island and New Hampshire all have a 51% rate.
Can the laws be changed?
While the Arizona Legislature could potentially make changes to both laws, it would prove difficult because both laws were not passed directly by the Legislature. Arizona voters approved in 2020 the Smart and Safe Arizona Act, which legalized recreational marijuana use for adults 21 and over. And sports betting became legal through a renegotiated gaming compact between the state government and Arizona’s Native American tribes.
On social media and in other communications, several prominent leaders in Arizona's cannabis industry have called out the state government for the disproportional tax situations for their businesses and the sports betting industry.
Lilach Mazor Power, the founder and CEO of the The Mazor Collective, a vertically integrated cannabis company that includes the Giving Tree Dispensary in north Phoenix and three cannabis retail brands, told the Business Journal she is frustrated that her industry has more of a tax burden while she feels it has greater social value.
“We're in an industry that has a plant that really improves people's well-being. And we put sin tax on it that is a hardship for the customer and for the business,” Mazor Power, who is also a board member of the Arizona Dispensary Association, said. “And on the other hand, the state allows sports gambling, which really does not improve anyone's well-being and doesn't tax it and brings no benefit to our community.”
Overall, Arizona’s cannabis industry is proud to generate hundreds of millions of dollars for the state’s public safety and community colleges, Mazor Power said. But she said Arizona’s sports betting industry could be doing more.
And while cannabis sales numbers seem impressive, Mazor Power said that doesn’t mean everyone in the industry is so rich.
“It's funny because I think when people hear ‘a billion dollars in sales in 2023’ – they think all the cannabis operators are going home and swimming in their rooms full of cash,” she said. “That’s not right. This is a very hard business.”
Similarly, gaming industry officials regularly point out that sports betting isn’t a very profitable business, especially compared to other gaming ventures like board games or slot machines.
