Lawmakers Propose Closing a Key Tax Loophole
In a strategic move to bolster funding for Colorado’s water projects, state lawmakers have introduced legislation that would tax “free bets” offered by sports betting operators. Known as House Bill 1311, the proposal aims to generate nearly $12 million in additional annual revenue by closing a tax loophole that previously excluded promotional bets from taxable income.
Under current law, sports betting companies entice new and existing customers with free bets — promotional wagers that, until now, have not been subject to state taxes. While this tactic has been a cornerstone of market growth, Colorado officials argue that it’s time these promotional dollars contribute their fair share to vital public needs, especially as the state’s water resources face increasing strain from drought, climate change, and population growth.
If passed, the new tax measure would add to the roughly $30 million in annual sports betting revenue already earmarked for water programs, boosting the total by more than 30%.
Why Colorado Is Shifting Gears
Since Colorado legalized sports betting in 2019, the industry has exceeded early revenue expectations. However, with competition growing as more states legalize sports wagering, Colorado’s tax revenue from betting is expected to stabilize or even decline in the coming years. Unlike other states that have responded by dramatically raising sports betting tax rates — like Illinois’ recent hike to a 40% maximum — Colorado is opting for a more targeted approach by capturing untaxed promotional revenue.
Legislators sponsoring the bill, including Senator Dylan Roberts and Speaker Julie McCluskie, argue that this change is necessary not only to stabilize the water fund but also to ensure fairness in how gaming revenues are taxed.
Broader National Context
Colorado’s approach reflects a broader trend across the U.S. where states are reassessing how to maximize sports betting tax revenues. States like Ohio, Massachusetts, and Illinois have all moved to significantly increase tax rates as the initial “gold rush” of legalization begins to plateau. In contrast, Colorado’s strategy to tax free bets could provide a politically palatable middle ground — generating new funds without raising headline tax rates on the gaming industry.
Potential Impact on Operators and Bettors
For sports betting operators, this change would alter the economics of customer acquisition. Promotions and free bets have been essential marketing tools, helping sportsbooks grab market share in a fiercely competitive landscape. Taxing these promotions could force companies to rethink how aggressively they offer incentives, potentially leading to fewer free-bet offers for customers.
However, for Colorado residents concerned about the state’s long-term water security, the new funding could make a tangible difference. The nearly $12 million in expected new revenue would be directed toward conservation efforts, irrigation improvements, and water rights purchases, all critical as Colorado navigates persistent drought conditions and rising demand.
The Road Ahead
House Bill 1311 is just one piece of a larger conversation happening among Colorado lawmakers, who are also exploring the creation of a special commission to identify additional revenue streams for water projects. With traditional sources like severance taxes declining, the state recognizes the urgent need to diversify its funding base.
As sports betting continues to mature, Colorado’s decision to tax free bets may offer a model for other states looking to balance industry growth with sustainable public investment.
