When Colorado voters OK’d Proposition DD last month, they were told sports betting would deliver millions in tax revenue toward solving the state’s water problems.

But a new analysis from the Polis administration shows that likely won’t happen in the first full year of wagering.

The Division of Gaming expects sports betting, which starts in Colorado in May, to generate between $1.5 million and $1.7 million in tax revenue in the 2020-21 fiscal year, which begins on July 1. That amount isn’t enough to reach the threshold under which funds would be transferred to water projects.

The projection is wildly different from what state lawmakers anticipated when they put the measure on the November ballot. In fact, it’s about the same amount the Colorado General Assembly’s fiscal analysts projected would be generated in the first two months of sports betting.

The annual revenue expectation also is far less than the $16 million in tax revenue that legislative analysts forecast would be collected each year for the first five years of sports betting in Colorado. The state is authorized to collect up to $29 million in sports betting tax revenue annually under the Taxpayer’s Bill of Rights.

Most of the revenue is slated to go toward the roughly $40 billion in needs identified by the Colorado Water Plan, the state’s rivers and reservoirs outline to meet the demands of a rapidly growing population. But first the money is supposed to cover $2 million-plus in startup costs and then be provided to the Division of Gaming for operations. Local governments and efforts to address gambling addiction are supposed to get a share. Then, the remainder of the money flows to the water plan.

The Division of Gaming’s estimates were presented Thursday to the Joint Budget Committee as it prepared to draft the $30 billion-plus spending plan for the coming fiscal year. And members of the panel expressed concern.

“I want to talk to the department to find our what the differences are in the fiscal note that we had attached to the bill last year, the campaign promises that were made during this summer and this fall, and what the reality is going to be now that it’s being implemented,” said state Rep. Daneya Esgar, D-Pueblo, the chairwoman of the Joint Budget Committee. “I want to find out what happened where and where we are actually standing.”

Colorado Avalanche center Nathan MacKinnon (29) blows past Vancouver’s Tanner Pearson (70) during their NHL game at Rogers Arena on November 16, 2019 in Vancouver. The Avalanche won the game 5-4 in overtime. The Division of Gaming expects sports betting, which starts in Colorado in May, to generate between $1.5 million and $1.7 million in tax revenue in the 2020-21 fiscal year, which begins on July 1. That amount isn’t enough to reach the threshold under which funds would be transferred to water projects. (Derek Cain, Icon Sportswire via AP Images)

It’s likely that enough tax revenue will be generated in future years to go toward the water plan, but how much water managers can expect appears lower overall given the latest projections by the gaming division. Proponents of sports betting are bullish that tax revenue figures will rise once the industry matures in Colorado, though they admit initial estimates were likely too high.

A spokeswoman for the Department of Revenue, which oversees the Division of Gaming, noted “that all of these numbers are still projections.” She added that the department has been consistently conservative in its assumptions about sports betting revenue when speaking with lawmakers and legislative analysts.

“The Department of Revenue will have a better picture of revenue once the industry has been operating in Colorado for a period of time,” said Suzi Karrer, the spokeswoman. “It is also important to note that our more conservative projections were communicated early and often.”

One reason revenue projections are lower: The gaming division doesn’t believe the state’s casinos, which will operate sports betting, will be willing to pay the $125,000 per license — which would have to be renewed every two years — to offer wagering as originally projected. Instead, gaming officials think that the most they could reasonably charge for a license fee would be $40,000 and possibly much less, according to a memo presented to the JBC on Thursday.

Because the cost to implement sports betting is expected to exceed the tax revenue generated in the first months, it could actually end up costing taxpayers money.

If that deficit were to happen, the Joint Budget Committee would likely ask the Department of Revenue to dig into its pockets to cover the difference. The funds could, however, ultimately have to come out of the legislature’s discretionary fund, which goes toward paying for things like transportation and education.

The state says it plans to hire new employees only as needed to keep administrative costs in line with actual revenue levels because of the reduction in estimated tax revenue. Karrer said the agency is “committed to funding the regulatory program through license fees and leaving as much revenue as possible for the water plan and other beneficiaries.”

That being said, she added they have informed the water plan’s managers to have “low expectations” about getting sports betting tax revenue in the 2020-21 fiscal year.

The division’s revenue estimates came after the agency gathered 75 people representing gambling companies and operators from around the world to help create its rules around sports betting. The agency also visited other states where sports betting has been legalized, like New Jersey, to better understand how to implement the wagering in Colorado and what to expect.

The Colorado Sun reported in September that sports betting revenues have been notoriously difficult to estimate and also fickle in other states that have recently allowed wagering.

An Air Force Academy football game in Colorado Springs. With the passage of Proposition DD, Coloradans will be able to bet on collegiate sports starting in May 2020. (Mark Byzewski, via Creative Commons)

Also, Colorado policymakers have overestimated gambling revenue in the past, such as with the state’s gambling expansion in 2008. The expansion promised additional revenue for community colleges and other public services, but the roughly $10 million it generated annually was disappointing.

Proposition DD narrowly passed in November, despite not having much organized opposition. One criticism of the ballot question was that it would not provide enough money for the water plan and, thus, wasn’t a serious solution to Colorado’s water needs. The ballot question was referred to voters by the legislature in a bipartisan vote earlier this year.

The measure established a 10% tax on casinos’ net sports betting proceeds, or the amount casinos keep after deducting payouts to winners and after they pay a federal excise tax.

Starting in May, people 21 and older in Colorado will be able to legally wager on everything from professional sports and esports to collegiate games and the Olympics. The 33 casinos in Colorado will manage the betting either at their locations in Cripple Creek, Central City and Black Hawk, or online and through mobile devices.

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