U.S. States Face Over $1 Billion Shortfall in Tax Revenue from Prediction Market Growth

The American Gaming Association released new figures in May 2026 showing that states across the country have missed more than $1 billion in potential tax collections because prediction market platforms continue to operate outside traditional gaming regulations, and these platforms function in ways that mirror sports betting without contributing to state coffers. Data from the association points directly to companies such as Polymarket and Kalshi as primary drivers behind the shortfall, since these services allow users to trade on event outcomes that include athletic competitions while remaining subject only to lighter oversight. Observers note that the expansion of these platforms coincides with broader legalization of sports betting in dozens of states since 2018, yet the prediction markets avoid the licensing fees and tax obligations that apply to established operators. The AGA describes the situation as one where unregulated or lightly regulated entities create what amounts to backdoor access to betting activity, and this dynamic leaves state budgets without the revenue streams that regulated markets generate through established tax frameworks.

Details Behind the Revenue Estimate

Figures compiled by the American Gaming Association calculate the lost revenue by comparing the volume of activity on prediction platforms against the tax rates that would apply if similar transactions occurred through licensed sportsbooks, and the total exceeds $1 billion when aggregated across multiple states. The estimate covers periods of rising participation in event contracts that focus on sports results, where users place positions on outcomes without the platforms remitting gaming taxes at the state level. According to the association's analysis, this pattern has intensified as more users turn to these alternatives amid expanding legal sports betting options nationwide.

States continue to face challenges in capturing revenue from these platforms because many prediction markets operate under interpretations of commodity trading rules or other federal guidelines that place them beyond direct state gaming jurisdiction. The result shows up in annual budget projections where expected collections from gambling activity fall short, and regulators in affected states have begun reviewing options to address the gap without immediate clarity on enforcement paths.

Role of Specific Platforms in the Trend

Polymarket and Kalshi stand out in the AGA assessment because their contract structures allow trading on sports-related events alongside other topics, and this setup attracts users who might otherwise use regulated betting apps that pay taxes. Activity on these platforms has grown steadily, with volumes that the association ties directly to the billion-dollar revenue impact when measured against state tax benchmarks. Those who've tracked the sector note that the platforms maintain compliance with federal requirements in some cases, yet this does not extend to state-level gaming taxes that licensed operators must handle.

The distinction matters because regulated sportsbooks in states with legalized betting contribute through percentages on handle and revenue, whereas prediction markets often structure their operations to fall outside those categories. Data indicates that the cumulative effect across multiple jurisdictions adds up to the reported shortfall, and the association highlights this as an area requiring attention as betting markets evolve.

Regulatory Tensions and Market Expansion

Tensions between regulated gambling operators and prediction market platforms have surfaced more clearly in 2026 as states assess the revenue picture, and the AGA report underscores how the two sectors compete for user attention without equivalent tax responsibilities. Licensed operators must navigate strict rules on advertising, age verification, and tax payments, while the prediction platforms operate with different constraints that allow quicker market entry in some instances. This environment creates ongoing friction, since established companies point to lost market share and states see reduced collections from the overall betting ecosystem.

Expansion of sports betting since the 2018 Supreme Court decision has brought new revenue to many states through taxes on gross gaming revenue, but the parallel rise of prediction markets has diverted portions of that activity. The association's estimate places the scale of diversion above $1 billion when viewed cumulatively, and this figure reflects volumes that could have generated tax payments if channeled through regulated channels. States grappling with the issue include those that have embraced legal betting frameworks, where officials now evaluate whether adjustments to oversight might capture additional revenue.

Context of State Budget Impacts in 2026

State budgets in May 2026 reflect the effects of this revenue pattern, as projections for gaming taxes fall short of targets in jurisdictions where prediction platforms have gained traction. The AGA calculation accounts for the difference between actual collections and what would have come from equivalent activity under full regulatory structures, and the total surpasses $1 billion across the board. This development occurs against a backdrop of continued growth in legal sports betting, where overall participation rises yet tax yields do not match expectations due to the shift toward alternative platforms.

Regulators and industry groups have discussed the need for clearer boundaries, and the association's findings provide data that could inform future policy considerations. The report emphasizes that prediction markets deliver similar user experiences to sports betting in many cases, which amplifies the revenue implications for states that rely on these taxes for public funding. Those monitoring the sector observe that the situation remains fluid as platforms and regulators navigate overlapping areas of activity.

Conclusion

The AGA estimate of more than $1 billion in missed tax revenue highlights the scale of activity occurring outside traditional state gaming systems, and it directs attention to platforms such as Polymarket and Kalshi as central to the trend. As states continue to expand regulated betting options, the contrast with prediction markets that avoid equivalent tax obligations stands out in budget analyses from 2026. The association's figures offer a concrete measure of the gap, and they connect directly to ongoing discussions about how different market structures interact with state revenue needs. Further tracking of volumes adn regulatory responses will determine how these dynamics evolve in coming periods. Sports Event Contracts resources from the association provide additional context on related market activities and their regulatory standing.