Illinois considers taxing prediction markets, raising them on again on sports betting

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Illinois pushes further into high-tax territory

Illinois’ latest move to raise more money from sports betting and prediction markets follows a pattern that has made the state one of the most closely watched gambling tax laboratories in the U.S. Since legal online sports wagering launched in 2020, Illinois has turned the industry into a major revenue source, collecting more than $1 billion in taxes from more than $59 billion wagered. That success has also made the market a recurring target when lawmakers seek new funds.

The current proposal would extend that strategy in two directions. It would increase the tax burden on sportsbooks already dealing with a layered system of revenue and per-wager levies, while creating a transaction tax on prediction market operators. The proposal comes after a series of recent tax changes that shifted Illinois away from a more conventional percentage-of-revenue model and toward a structure that directly charges operators for betting volume.

That shift has sharpened the debate over how much a legal gambling market can absorb before consumers change behavior. Lawmakers see a durable tax base. Operators argue the state is testing the limits of regulated betting by making small wagers less economical and giving unregulated competitors an opening.

The per-wager tax changed the economics

The key turning point came when Illinois adopted the first U.S. per-wager tax on online sports bets. The measure charges sportsbook operators 25 cents per wager for the first 20 million bets each year and 50 cents for each wager above that threshold. It followed a 2024 increase that moved Illinois to a progressive tax system on sports betting revenue, with the largest operators facing higher rates than smaller rivals.

Wall Street analysts were surprised by the late-stage budget measure. In a prior report on how the Illinois tax increase surprised analysts, Truist Securities and Deutsche Bank analysts warned that the combined effect of revenue taxes and handle-linked charges would fall most heavily on FanDuel and DraftKings, the two dominant operators in the state. Their scale made them the main targets of the per-wager design, because they process far more bets than competitors.

The analysts said sportsbooks had few easy ways to absorb the cost. They could reduce promotions, worsen odds, raise minimum bet sizes or add customer surcharges. Each option risked weakening the appeal of regulated platforms. The analysis also foreshadowed a central concern now driving industry opposition: If legal operators must make betting more expensive or less attractive, some customers may migrate to offshore books or newer products outside state gambling rules.

Those warnings carried particular weight because Illinois is not a new market. Operators have already spent years competing for customers, refining promotional spending and building mobile platforms. That leaves less room to offset new taxes through efficiency gains than in a market still scaling up.

Bet counts fell even as handle stayed strong

Early data after the per-wager tax gave both sides evidence for their arguments. State figures showed that the number of bets placed fell sharply year over year, while total wagering initially remained resilient. In September 2025, Illinois recorded about five million fewer bets than a year earlier, even as the amount wagered rose 9% to a record $1.4 billion, according to figures from the Illinois Gaming Board. The average bet size climbed 28% to $46.44.

That pattern, described in coverage of how Illinois sports bets fell after the betting tax while the amount wagered hit a new high, suggested the tax was changing customer behavior rather than simply shrinking the market. Smaller, lower-dollar bets became less attractive for operators to process, and companies had incentives to discourage them through fees, minimums or product changes.

By October, the decline in bet volume had become harder to dismiss. Illinois Gaming Board data showed 6.4 million fewer wagers than a year earlier, marking another annual drop after September’s decline. The Sports Betting Alliance, which represents major operators, said the figures showed tax hikes were pushing customers away from the legal market. In its response to the October data, covered in a story on how the Sports Betting Alliance blamed the Illinois tax hike for a drop in gambling, the group warned that higher fees could leave bettors either paying more or abandoning regulated books.

The state’s public data, available through the Illinois Gaming Board sports wagering reports, has become central to the dispute. For lawmakers, continued tax receipts show the market can generate meaningful revenue. For operators, falling bet counts signal pressure beneath the headline handle numbers.

Local taxes and state limits added another layer

The tax debate has not been confined to Springfield. Chicago’s effort to raise more from sports betting added another layer of uncertainty for operators already facing higher state charges. Mayor Brandon Johnson proposed an additional 10.25% tax on sports gambling revenue, raising concerns that local governments could stack levies on top of state taxes and further alter market economics.

A pending state bill that would prevent local governments from imposing such taxes underscored a broader policy question: whether sports betting should be taxed primarily through a uniform state framework or left open to additional local claims. For operators, the risk is cumulative. Even if each individual levy is framed as modest or targeted, the combined burden can affect pricing, promotional strategy and product design.

The Illinois experience also fits into a wider national reassessment of sportsbook tax policy. Colorado lawmakers, for example, considered changing how sportsbooks account for promotional bets, a measure that would increase taxable revenue by ending some deductions for free-bet credits. That effort stalled when the legislative session ended, but the debate over Colorado’s proposed changes to online sports betting promo taxes showed that states are looking beyond headline tax rates and scrutinizing the mechanics that determine how much operators pay.

For Illinois, the broader trend matters because other states are watching. If Illinois raises revenue without a major loss of taxable activity, more jurisdictions may follow. If bet counts keep falling and offshore activity grows, the state could become a cautionary example.

Prediction markets widened the fight

The proposed tax on prediction market operators expands the Illinois fight beyond traditional sportsbooks. Prediction markets such as Kalshi offer event contracts through a federal derivatives framework, creating tension between state gambling regulators and the Commodity Futures Trading Commission. Illinois’ proposal would tax trades at 1.75% for the first five million transactions and 3.5% thereafter, but litigation has complicated implementation.

Kalshi and the CFTC have sued the state, with the case pending in the U.S. District Court for the Northern District of Illinois. Until that dispute is resolved, Illinois cannot impose the event wager tax. The lawsuit reflects a larger conflict over whether states can treat certain event contracts like gambling products or whether federal commodities law preempts state enforcement.

That issue has drawn attention in Washington. Democratic lawmakers led by Sen. Jeff Merkley of Oregon urged the CFTC to tighten oversight of prediction markets and restrict event contracts tied to elections, military action, government decisions and sports. Their letter, covered in a story on Democrats urging the CFTC to increase oversight of prediction markets, argued that fast-growing platforms risk undermining market integrity without clearer federal rules.

For Illinois, prediction markets represent both a revenue opportunity and a regulatory challenge. If event contracts compete with sportsbooks but avoid state gambling taxes, lawmakers may see them as eroding the tax base. If states move too aggressively, they risk federal preemption fights that delay or block enforcement.

The stakes for the regulated market

The central question now is whether Illinois can keep extracting more revenue without weakening the regulated market it built. Sports betting has become a dependable contributor to state funds, but the market depends on customer participation, competitive pricing and trust that legal platforms offer a better alternative than offshore sites.

Operators have warned that high taxes can produce a feedback loop: higher levies lead to fees or worse odds, which reduce customer activity, which then pressures the tax base lawmakers were trying to expand. The early decline in bet counts after the per-wager tax gives that argument more force, even though handle and revenue have not moved in lockstep.

Lawmakers face a different calculation. Illinois’ budget demands are immediate, while the risks of market erosion may emerge gradually. The state has already shown that sports betting can generate substantial tax revenue, and adding prediction markets to the tax net would prevent newer products from growing outside the fiscal framework applied to sportsbooks.

The outcome will shape more than Illinois. Other states are weighing higher sports betting taxes, limits on promotional deductions and rules for prediction-style products. Illinois is testing how far those policies can go before the regulated market begins to lose the customers and volume that made it valuable in the first place.