U.S. States Face Over $1 Billion Tax Revenue Shortfall From Prediction Market Platforms

The American Gaming Association released new figures in May 2026 showing that states across the country have lost more than $1 billion in potential tax revenue because prediction market platforms operate outside traditional gaming regulations, and these platforms function in ways that closely resemble sports betting without the same tax obligations. Data from the association points directly to this shortfall as sports betting expands in more jurisdictions while certain event contracts on platforms like Polymarket and Kalshi continue to draw users who place wagers on outcomes that mirror regulated bets. States continue to expand legal sports betting frameworks yet find themselves competing against these prediction markets that do not collect or remit state gaming taxes in the same manner. The AGA describes the situation as one where prediction markets act as backdoor sports betting, which allows participants to engage in activities that produce similar financial results to licensed operators but without contributing to state coffers at the established rates.

Details Behind the Revenue Estimate

Figures released by the association calculate the cumulative impact over recent years as more users turn to platforms that offer contracts on sporting events and other outcomes. Those who have reviewed the data note that each avoided tax payment adds up across multiple states that have legalized sports betting since the 2018 Supreme Court decision, and the total now exceeds the $1 billion threshold according to the AGA analysis.

Prediction markets differ from traditional sportsbooks in their structure because they use event contracts rather than direct wagers, yet the economic effect remains comparable when users predict results of games and matches. Researchers tracking these platforms have documented steady growth in trading volume on Polymarket and Kalshi, which correlates with the rising revenue gap reported by state regulators.

Platform Operations and Regulatory Context

Polymarket and Kalshi function under frameworks that classify their products as event contracts instead of gaming activities, which places them in a lighter regulatory category in many jurisdictions. This classification allows the platforms to avoid the licensing requirements and tax structures that apply to state-approved sports betting operators, and the distinction creates the revenue disparity highlighted in the May 2026 report.

States that have authorized sports betting collect taxes on gross gaming revenue from licensed companies, but prediction market activity bypasses these collections entirely. Observers note that the growth of these platforms coincides with broader expansion of legal sports wagering, which makes the lost tax amounts more noticeable to budget officials who expected higher returns from the legalized market.

Tensions Between Regulated Operators and Prediction Markets

Regulated gambling companies have expressed concerns about competition from platforms that operate without equivalent oversight or tax responsibilities. The American Gaming Association has linked these issues to broader discussions around sports event contracts and their effects on state revenue streams, and industry representatives argue that consistent rules would level the playing field across all forms of betting activity.

As more states consider additional gaming legislation in 2026, the distinction between prediction markets and traditional sports betting remains a point of focus for lawmakers. Data shows that users participate on both types of platforms, which means the revenue that flows to state governments depends heavily on which operators capture the activity and whether those operators fall under full gaming tax regimes.

State Responses to the Growing Shortfall

State officials continue to examine options for addressing the revenue gap, including potential new legislation that could bring prediction market activity under existing gaming tax structures. Several jurisdictions have already begun reviewing how event contracts fit within their definitions of betting, and the AGA estimate adds concrete numbers to those policy discussions that were previously based on general estimates of market size.

The report arrives at a time when sports betting markets show continued expansion in states that legalized the activity years ago, which makes the parallel growth of unregulated platforms stand out in revenue reports. Those who track state budgets have started including projections that account for both licensed operators and the prediction market segment when forecasting future collections.

Conclusion

The American Gaming Association estimate of more than $1 billion in missed tax revenue provides a specific benchmark for understanding the scale of activity on prediction market platforms. States that have built regulatory systems around licensed sports betting now face ongoing questions about how to incorporate or address event contracts that operate in similar spaces, and the May 2026 figures offer data that policymakers can reference as they evaluate next steps in the evolving U.S. gambling landscape.