Summary
Colorado Proposition JJ, the Retain Sports Betting Tax Revenue for Water Projects Measure, seeks to eliminate a current cap of $29 million on the amount of sports betting tax revenue the state allocates for water conservation and management projects. This allows the state to retain and allocate all sports betting tax revenue for water protection initiatives.
Currently, all sports betting tax revenue in Colorado is directed toward a Water Plan Implementation Fund. However, due to Colorado’s 1992 Taxpayer’s Bill of Rights (TABOR), tax revenue from the activity exceeding $29 million must be refunded to sports betting businesses. If voters approve the November measure, the cap would be eliminated, and the state may retain all additional sports betting tax revenue for its water management program.
In 2023, Colorado voters approved a similar ballot measure by a wide margin. The measure lifted the cap on tobacco and nicotine sales taxes that the state could retain to fund a universal preschool program.
Fiscal Impact
Under Colorado’s current law, 10% of the revenue generated by sports betting goes first to the Department of Revenue’s Division of Gaming to cover administrative costs. Of the remainder, 6% is transferred to a “hold harmless fund,” which is then distributed to casinos in the state to compensate them for revenue reductions stemming from sports betting legalization. All of the remaining revenue is transferred to Colorado’s Water Plan Implementation Cash Fund, where it may then be distributed for water conservation and management projects.
Since the legal sports betting market opened in May 2020, its total tax revenue has steadily increased, rising from $11.7 million in 2021—its first full year of operation—to over $27 million in 2023. As this revenue is expected to continue increasing as the sports betting market matures, the state is rapidly approaching the $29 million cap set by TABOR. According to forecasts by the state’s Legislative Council Staff, this will likely occur in the current fiscal year (FY), with non-governmental experts estimating that sports betting tax revenue will reach $35 million in FY 2024-2025.
So the bottom line is that money currently collected as tax revenue but refunded to those sports betting operations would now be retained and spent by the state.
According to the Legislative Council Staff analysis, this would increase the retained revenue for water projects by up to $2.8 million in FY 2024-2025, by $5.2 million in FY 2025-2026, and by up to $7.2 million in FY 2026-2027. Similarly, the measure could increase state expenditures on water projects by the same amounts in subsequent years, with expenditures on water projects increased to $2.8 million in FY 2025-2026, $5.2 million in FY 2026-2027, and $7.2 million in FY 2027-2028. However, while the measure will increase expenditures, it is not expected to increase costs to the state since the tax revenues are already collected under the current law.
Proponents’ Arguments
Groups supporting the measure include those who organized in favor of the original sports betting legalization bill. This includes environmental nonprofits, groups representing agriculture industry members, tourism businesses, and other business interests in the state. Surprisingly, it includes the Colorado Gaming Association, which represents casino interests that would otherwise receive refunds for sports betting tax revenue in excess of the current $29 million cap. According to the group’s executive director, Peggi O’Keefe, gambling businesses in the state always intended to pay the 10% tax on sports betting, and the fact that tax revenue exceeded expectations doesn’t change that.
The main arguments in favor of the ballot measure center on the fact that the initial $29 million cap instituted in 2019 was calculated based on limited data because Colorado was one of the first states to legalize sports betting.
They also assert that allowing the state to retain all sports betting tax revenue for water management would provide ongoing funding for critical efforts to address mounting pressure on the state’s water supply, particularly along the Colorado River. With its headwaters in Colorado’s Rocky Mountain National Park, Colorado’s mountain snowpack supplies an estimated two-thirds of the Colorado River water flow.
Moreover, supporters point to the likely increased pressure on the state’s water supplies due to the rising population, which is expected to jump by nearly 30% by 2050. According to state water experts, increasing demand from residential and agricultural water use may outstrip supply by 2050, leading to a water shortage of up to 240 billion gallons annually.
Opponents’ Arguments
Significant opposition to the ballot measure has yet to emerge. However, some individuals have expressed opposition, arguing against tying revenue to “sin taxes,” such as those imposed on gambling activities. Tony Jones, who writes a twice-monthly “Everything in Moderation” column for The Summit Daily News, recently asserted that tying critical funding to “sin taxes” causes governments to rely on funding that such taxes are meant to reduce. If successful at reducing the supposed “sin,” the state could find itself reliant on unstable funding sources. Given the critical nature of water management in Colorado, Jones argues that it is inappropriate for its funding to be tied to unreliable revenue sources that may leave these critical projects underfunded should revenue from sports betting decline. Moreover, he argues that tying funding for water projects to unrelated business taxes lets taxpayers “off the hook” for funding programs they benefit from.
Discussion
Arguments for the state to retain all sports betting tax revenue for the funding of water conservation are likely to be compelling for voters. There is particular interest in addressing the dwindling water flow along the Colorado River, which has its headwaters in Colorado’s Rocky Mountain National Park. Colorado’s mountain snowpack supplies an estimated two-thirds of the river’s water flow, which services not only Colorado cities such as Denver but also other cities all the way to Los Angeles. Due to a historic 22-year drought, river water flows have declined dramatically, with its two main reservoirs—Lakes Powell and Mead—nearly drained in 2022.
Additionally, experts estimate that Colorado’s population is likely to jump nearly 30% by 2050. According to state water experts, the increased demand from a growing residential population, as well as agricultural activities, may lead to demand outstripping supply by 2050 and a shortage of up to 240 billion gallons annually thereafter.
Addressing water shortages and contamination could impose significant costs on Colorado residents. For instance, the American Water Works Association recently estimated that mitigating PFAS contamination in the state’s drinking water could cost up to $2000 per household. PFAS, or “forever chemicals,” stem from the industrial production of waterproof, nonstick, and stain-resistant products.
The measure might facilitate improving state sports betting regulations, particularly concerning tribal gaming interests. Though tribal casinos in Colorado have been authorized to offer in-person sports betting, their multi-year attempt to gain the state’s permission to enter the online sports betting market has been unsuccessful so far. Though tribes inarguably have a right to participate in this market alongside their non-tribal counterparts, lawmakers have resisted striking an agreement that would allow their entry due to concerns that the tribe’s tax-exempt status would reduce the sports betting tax revenue available for water projects.
Tribes are sovereign nations and not subject to state taxes, and such exemptions are generally seen as supporting tribal independence and economic welfare. Penalizing tribes for their tax-exempt status by denying entry into the online sports betting market is not only inappropriate but also likely a violation of tribal sovereignty. Yet, this has not stopped Colorado from erecting barriers to tribal entry into the online sports betting market.
Currently, Colorado has just two tribal casinos. Compared to the nearly $4 billion economic impact of the state’s 33 commercial casinos, Colorado’s two tribal casinos had an estimated economic impact of $250 million in 2022. While tribes’ tax-exempt status may attract some gamblers out of the taxable commercial sports betting market, it is highly unlikely that this will result in net reductions in overall revenue collected and funds available for the state’s water projects. If voters approve the November ballot measure, allowing the state to retain all of the sports betting tax revenue collected from non-tribal casinos in the state, it may mitigate concerns about tribal entry into the online sports betting market as any reduction in taxable sports betting revenue from tribal competition would be more than offset by net increases in the tax revenue Colorado can retain from commercial sports betting.
Importantly, Colorado could accomplish its goals of increased water project funding without raising taxes. Colorado voters implemented TABOR to prevent unlimited tax revenue and to compel the state to prioritize its spending. Creating exceptions by targeting a specific group of companies or industries for higher taxes is neither fair nor sustainable tax policy, and it undermines the goals of TABOR. Reallocating existing funds could offer a more stable funding source for water projects without compromising taxpayer protections or targeting a particular industry.