Why prediction markets might take a bite out of New York's tax revenue

Mobile sports betting has emerged as New York's second-largest source of gambling revenue. The introduction of prediction markets, which are not subject to state taxation, may pose a threat to this revenue stream. Increased problem gambling and a shift toward prediction markets could potentially burden the state's finances. New York has embraced mobile sports betting through apps like DraftKings and FanDuel, generating around $328 million in tax revenue during the first quarter of 2026.

The state accounts for a third of all state tax collections on sports betting revenues nationwide. However, prediction markets like Polymarket and Kalshi offer sports gamblers an alternative, with lower federal taxation. While only about 1% of DraftKings' sportbook customers overlap with Kalshi in legal states, a shift of even 1% of sportsbook activity to prediction markets could result in a $13 million revenue loss, according to an analysis from the Tax Policy Center.

Regulation differs between prediction markets and sports betting platforms, with the latter taxed at a higher rate. In response to the growth of prediction markets, New York has sued Polymarket, arguing that the company preys on consumers and threatens tax dollars. The rise in prediction markets has accelerated since they added sports, with trading volume on Kalshi increasing by nearly thirteenfold after they added sports contracts.

Polymarket also saw significant growth after introducing sports betting. However, prediction markets may not only affect revenue but also increase costs associated with gambling activity. New York has seen an 8.5% increase in calls to its gambling hotline since 2020, and has doubled funding for problem gambling services from $6 million to $12 million.

Traditional sportsbooks have also experienced volatility, as illustrated by the New York Knicks' historic NBA finals win, which resulted in a $14.4 million revenue loss for mobile sportsbooks. Any volatility in sportsbook revenue, potentially exacerbated by prediction markets, could have significant financial implications for the state.