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- Lucas: So the gaming association just dropped a number that stopped me. They figure states have lost at least one billion dollars in tax revenue because of prediction markets. Luna: One billion — that's a big number. From what, exactly? People betting on election outcomes instead of football games? Lucas: Exactly. Legal sports betting is taxed, regulated, states get a cut. Prediction markets like Polymarket or Kalshi operate in a much grayer zone, and the money that flows there is money that's not being wagered at the local sportsbook. Luna: So the state sees a direct hit to its budget. And with inflation still running above three percent, that gap hurts more. Lucas: Right. CPI is at 332.4 as of April, up from 330.29 a month earlier. Core is even higher. Every dollar of tax revenue the state expected and didn't get is a dollar that has to come from somewhere else — higher taxes, fewer services, deferred maintenance. Luna: And it's not just one state. The report covers the whole country. A billion dollars spread across fifty states still stings. Lucas: Especially for states that leaned heavily into sports betting as a revenue source after the Supreme Court cleared the way in 2018. New Jersey, Pennsylvania, Illinois — they built budget assumptions around that tax stream. Luna: And now those assumptions are wrong. Because people can bet on the Super Bowl or the election from their phone with a few clicks, and the platform might not be based in the U.S. at all. Lucas: That's the problem. The money leaves the regulated ecosystem entirely. No tax, no oversight, no consumer protections. And the volume has exploded — Polymarket alone processed something like nine billion dollars in volume during the 2024 election cycle. Luna: Nine billion. And the states got zero tax from that. Meanwhile, the legal sportsbooks are reporting slower growth. Lucas: We saw this with the broader market this week. The S&P 500 at 7,561, up one and a half percent in five days. Small caps up three point four percent. There's a lot of capital flowing into speculative areas. Luna: Right. And prediction markets feel like another form of speculation. It's not just about the election anymore — there are markets on interest rate decisions, CPI prints, even the next Fed chair. Lucas: That's actually a useful signal for investors, believe it or not. The probability implied by those contract prices can be more current than surveys. But it creates a fiscal blind spot when the activity is offshore. Luna: So what can states do? They can't easily tax a platform based in the Seychelles. Lucas: Some are trying. A few states have introduced bills that would explicitly ban unlicensed prediction markets or require platforms to register. But enforcement is tough. And the federal government hasn't stepped in — the CFTC has been cautious. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: That's a small thing that makes a big difference. Keeps us independent and focused on the numbers that matter. Luna: Exactly. So back to that billion-dollar gap — what does it mean for the average person? Lucas: It means your state might be looking at a budget shortfall. That could translate to higher property taxes, reduced funding for schools, or cuts to infrastructure projects. At a time when inflation is already squeezing household budgets. Luna: And it's not just about lost revenue. There's also the cost of enforcement, litigation, potential consumer harm from unregulated platforms. Lucas: The gaming association's report focused on the tax loss, but the indirect costs are real. If a platform goes under or gets hacked, who bails out the bettors? No one. That's not a state problem until it becomes a social problem. Luna: So this is a classic case of regulation lagging behind innovation. And inflation makes the stakes higher. Lucas: Because the purchasing power of that lost tax dollar is also eroding. A billion-dollar shortfall today buys less than it would have two years ago. So the gap is actually bigger in real terms. Luna: One more reason to pay attention to where your state's money comes from. And where it doesn't. Lucas: Next time you see a prediction market contract on the next CPI print, remember — that bet is happening outside the system that funds your roads and schools. It's not just clever. It has a cost. Luna: And the cost is being passed on to everyone, whether they place a bet or not.