The $500 Million Tax Leak and Why State Budget Offices Are Starting to Notice
The American Gaming Association’s State of the States 2026 report put a number on something state treasurers had suspected but could not quantify. Prediction market platforms diverted more than $500 million in potential sports betting tax revenue in 2025.¹ Kalshi and the platforms that followed it into the market collected that revenue from the same population of consumers who would otherwise have wagered through licensed sportsbooks. The difference is that licensed sportsbook operators remit state gaming taxes. Event contract platforms, regulated by the CFTC as Designated Contract Markets, remit nothing to the states.
That gap is not an oversight. It is the direct consequence of Kalshi’s regulatory architecture, and it is the primary reason state legislators are moving faster than most observers anticipated.
The Tax That Was Never Collected
Licensed sportsbooks pay state gaming taxes on gross gaming revenue, the share of wagers they keep after paying out winners. The rates vary considerably: New York collects 51 percent of GGR from online sportsbooks, which produced approximately $1.30 billion in state revenue in 2025.² New Jersey raised its rate from 13 to 19.75 percent during 2025. Maryland moved from 15 to 20 percent. Louisiana moved to 21.5 percent. Illinois added per-wager transaction fees on top of its existing graduated structure.³ Every dollar wagered through a licensed sportsbook generates a predictable, auditable tax payment.
Event contract platforms generate none of it. A client who trades a yes/no contract on a sports outcome through Kalshi is engaging in economically similar activity with one critical structural difference: the transaction flows through a federally regulated exchange that operates entirely outside state gaming tax authority. The states cannot assess a tax on a transaction they do not regulate.
The AGA’s $500 million estimate reflects one year of operation. The figure will be higher in 2026 as event contract trading expands into states where licensed sportsbooks have no legal presence. Every user in California or Texas who trades sports event contracts on a federally regulated platform generates revenue that no state tax regime currently reaches.
The Pushback That Does Not Survive Scrutiny
State officials who have reviewed this dynamic tend to make one of two arguments.
The first is that prediction market volumes are too small to matter. They were, briefly. The Third Circuit explicitly acknowledged Kalshi’s scale in its April 2026 ruling.⁴ At a reported valuation of $22 billion and with sports-related contracts accounting for roughly 90 percent of trading volume, this is not a niche platform.⁵ The $500 million in diverted tax revenue reflects one year of operating at that scale. The trajectory does not point down.
The second argument is that the legal fight will resolve the question before the fiscal impact becomes significant. The litigation timeline does not support that view. Three federal circuits have active appeals. The CFTC filed affirmative suits against Arizona, Connecticut, and Illinois in April 2026, adding federal agency complexity to a dispute already spanning more than a dozen jurisdictions.⁶ A Supreme Court resolution, even if it arrives before year-end 2026, recaptures none of the revenue already foregone.
How Fiscal Pressure Reshapes the Legislative Landscape
Court schedules move slowly. Budget pressures move faster. A state collecting $200 million annually from licensed sportsbooks that simultaneously watches a portion of its taxable base shift to federally regulated event contract platforms faces a problem that does not wait for appellate timelines.
Several states have already moved. Minnesota passed a statewide ban on event contract trading, signed into law May 18, 2026, with an August 1 effective date. A federal court stayed the ban July 27, 2026, pending appeal.⁷ Other states will attempt to tax. Neither approach is available without either prevailing in court or passing legislation with its own federal preemption exposure under the argument Kalshi successfully advanced at the Third Circuit.
The political framing is available to any state budget director who wants to use it: a federally approved competitor is capturing market share from taxpaying operators while contributing nothing to state revenue. That framing is accurate. It is also politically durable, which means the legislative pressure on this question will outlast the current appellate cycle regardless of how the courts rule.
What This Means for Your Clients Today
Your clients who trade event contracts on federally regulated platforms do so in a product category whose regulatory and tax treatment is actively contested at multiple levels of government. The value proposition they see today, a federally supervised exchange with no state gaming tax drag, may not be the value proposition they see in two years. That is not a prediction about which party prevails in court. It is an observation about the range of outcomes that are all plausible.
Firms that understand this dynamic can frame it accurately for clients now. The current structure of event contract trading is a consequence of an unresolved jurisdictional question, not a permanent feature of the regulatory landscape. When that question resolves, whether states win the right to tax, Congress clarifies federal preemption, or SCOTUS draws a line all parties must respect, the product changes. The advisors who have already had this conversation will be in a stronger position than the ones who are still treating the status quo as stable.
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Endnotes
¹ Yashinski, Lior. “Sports Betting Statistics 2026: US Handle & Revenue by State.” Track360, 18 July 2026, track360.io/blog/sports-betting-statistics-2026-us-handle-revenue-by-state. Accessed 15 Aug. 2026.
² American Gaming Association. “State of the States 2026.” American Gaming Association, 12 May 2026, www.americangaming.org/resources/state-of-the-states-2026/. Accessed 15 Aug. 2026.
³ Yashinski, Lior. “Sports Betting Statistics 2026: US Handle & Revenue by State.” Track360, 18 July 2026, track360.io/blog/sports-betting-statistics-2026-us-handle-revenue-by-state. Accessed 15 Aug. 2026.
⁴ KalshiEX LLC v. Flaherty, No. 25-1922 (3d Cir. Apr. 6, 2026).
⁵ Martinak, Jason. “The Kalshi Legal Battle Is Heading Toward the Supreme Court.” Bettors Insider, 20 Apr. 2026, bettorsinsider.com/sports-betting/2026/04/20/the-kalshi-legal-battle-is-heading-toward-the-supreme-court-heres-the-circuit-split-that-gets-it-there/. Accessed 15 Aug. 2026.
⁶ Weishaar, Blake. “Prediction Markets Legal Timeline 2026: Every Major Ruling, Ban, and Regulatory Update.” RotoWire, 7 Aug. 2026, www.rotowire.com/prediction-markets/legal-timeline. Accessed 15 Aug. 2026.
⁷ Weishaar, Blake. “Prediction Markets Legal Timeline 2026: Every Major Ruling, Ban, and Regulatory Update.” RotoWire, 7 Aug. 2026, www.rotowire.com/prediction-markets/legal-timeline. Accessed 15 Aug. 2026.
