Prediction Markets Draw Scrutiny as States Report Significant Revenue Shortfalls

The American Gaming Association released new figures in late May 2026 showing that U.S. states have missed out on more than one billion dollars in tax revenue because prediction markets have expanded rapidly into sports event contracts, and those platforms operate outside traditional regulatory frameworks that generate state and tribal income.

Bill Miller, the organization's president and CEO, pointed directly to the revenue gap during public statements, noting that the shortfall affects funding streams for community projects and essential services that states and tribes have come to rely upon from regulated gaming activity, while prediction markets continue to accept wagers on sports outcomes without the same tax obligations.

Understanding the Revenue Impact

Data compiled by the AGA traces the losses to the growing volume of sports-related contracts traded on prediction platforms, contracts that function in ways similar to sports betting yet remain classified differently under current federal oversight, which means states collect no taxes from those transactions even as betting interest shifts away from licensed operators.

Observers note that the one billion dollar figure represents cumulative shortfalls across multiple jurisdictions where prediction activity has grown fastest, and the association ties those numbers to specific categories of sports event contracts that have drawn increased trading volume since 2024, creating a measurable diversion from taxed channels.

Regulatory Disputes and Legal Actions

Disputes between the Commodity Futures Trading Commission and state regulators have intensified because platforms such as Kalshi and Polymarket offer contracts tied to sports results, prompting lawsuits that challenge whether these products fall under CFTC jurisdiction or should instead face state-level oversight similar to licensed sportsbooks.

State attorneys general have filed actions arguing that the contracts constitute a form of unregulated sports betting, while the platforms maintain their offerings qualify as event contracts under existing federal rules, a disagreement that has left enforcement unclear and allowed continued operation without state tax collection during the litigation process.

Effects on State and Tribal Budgets

Revenues from regulated gaming support a range of public initiatives, and the AGA estimate shows that the absence of comparable taxation on prediction markets reduces the resources available for those same programs, particularly in states where sports betting legalization has already created established tax streams that now face competition from untaxed alternatives.

Tribal gaming operations, which operate under compacts that direct portions of revenue toward community development, encounter parallel pressure because prediction platforms draw participants without contributing to the same tribal funds, an imbalance that Miller highlighted when discussing the broader economic consequences for sovereign nations that depend on gaming income.

Platform Scrutiny and Market Growth

Kalshi and Polymarket have faced direct examination from regulators over the classification of their sports contracts, with ongoing reviews examining whether these products require additional licensing or tax structures to align with state requirements, a process that continues while trading volumes on sports-related events keep rising.

The association's report connects the revenue shortfall to this expansion, showing that prediction activity has accelerated in areas where sports betting is already legal, suggesting participants migrate toward platforms that do not impose the same tax burdens or regulatory costs on operators.

Looking Ahead

Legal proceedings between states and the platforms remain active, and the CFTC continues to evaluate the scope of its authority over event contracts, developments that observers expect will shape future tax collection and market structure well into the remainder of 2026 and beyond.

Figures from the AGA indicate the one billion dollar loss serves as a baseline rather than a final total, with additional shortfalls likely as prediction platforms introduce new contracts and attract further participation from users previously engaged with state-regulated options.

Conclusion

The American Gaming Association's May 2026 estimate places the revenue impact of prediction markets at more than one billion dollars, a sum derived from the growth of sports event contracts operating outside taxed channels, and the association links that gap to ongoing regulatory uncertainty involving the CFTC along with active lawsuits filed by states seeking oversight parity. Data on sports event contracts continues to inform discussions about how these platforms intersect with existing gaming tax systems, while state and tribal budgets absorb the documented effects of the shift.