PASPA and the Supreme Court Decision That Legalized US Sports Betting

PASPA stands for the Professional and Amateur Sports Protection Act. Congress passed it in 1992. The law forbade states from legalizing sports betting. The intent was to protect the integrity of sports from the perceived contamination of gambling. The effect was to preserve the federal government's monopoly on the decision to allow gambling.

In practice, PASPA meant that sports betting was illegal across most of the United States from 1992 onward. Nevada was grandfathered in under the law and allowed to keep its sportsbooks. Everyone else faced federal prohibition.

This is an interesting case for studying how law constrains and enables markets.

How PASPA Worked

PASPA prohibited states from authorizing, operating, or allowing sports betting. The law had a narrow exception for Nevada's existing sportsbooks and New Jersey's Atlantic City casinos (which had one year to launch sports betting before the exception closed). New Jersey's governor declined to pursue it, so that exception expired. Nevada remained the only legal market.

The restriction was legally premised on the Commerce Clause. Congress claimed authority to regulate interstate commerce in sports betting. But as constitutional scholars noted, this created an asymmetry: if Congress could ban sports betting, could Congress mandate that states allow it? The question hung unresolved for decades.

Meanwhile, offshore betting sites flourished. Americans wanting to place sports bets used unregulated offshore operators or found illegal bookmakers. The supply of gambling was not eliminated; it was driven into the informal economy. This is a standard lesson from prohibition: demand does not disappear. Supply moves to unregulated providers.

The Supreme Court Case: Murphy v. NCAA (2018)

In 2018, the Supreme Court heard Murphy v. NCAA. The case centered on New Jersey's desire to repeal its own sports-betting ban and allow its Atlantic City casinos to offer sports betting. The NCAA sued, arguing that PASPA forbade this. The case went to the Supreme Court.

The Court ruled 6-3 that PASPA violated the Tenth Amendment. The reasoning: Congress cannot command states to maintain a prohibition. States have the sovereign right to regulate commerce within their borders, including the decision to permit sports betting. By banning state authorization of sports betting, PASPA was effectively commandeering state sovereignty.

This is not a ruling that says sports betting is good. It is a ruling about federalism: the balance of power between federal government and states. The Court said Congress overstepped by using the Commerce Clause to dictate state-level prohibition.

Immediately after the ruling, states began legalizing sports betting. New Jersey moved first. Michigan, Pennsylvania, and others followed. Within four years, 30+ states had legalized some form of sports betting.

The Economics

Legalized sports betting generates two revenue streams: state tax revenue and operator profit. The economics are straightforward.

A sportsbook takes a bet. If the bet loses, the sportsbook keeps the stake. If the bet wins, the sportsbook pays out. The margin comes from the "vig" or juice: the difference between the amount risked and the amount that would be returned if the bettor won. On a typical -110 line, the bettor risks 110 to win 100. The 10-unit vig is the house margin.

States then tax the operator's profits (usually 10-15% of gross revenue). In 2023, combined US sports betting handle exceeded 75 billion USD. Tax revenue exceeded 1 billion USD. This is real money for state budgets.

However, the marginal economic benefit is smaller than it appears. The money gambled on sports betting is money not spent elsewhere in the economy. If a bettor spends 100 USD on sports bets instead of a restaurant meal, the state gains a sports-betting tax but loses restaurant sales tax and the restaurant loses revenue. The net effect depends on tax rate differences and behavioral responses.

What Changed

Before Murphy, bettors had three options: drive to Nevada, use an unregulated offshore site, or find an illegal bookmaker. After Murphy, bettors could place bets through regulated operators in their home states. This reduced transaction costs and reduced risk. The market expanded.

However, the supply that materialized was not identical to the demand. Some states legalized betting but placed restrictive caps on the number of operators. New York, for example, initially limited its sportsbooks to a small number, creating artificial scarcity and high operator profits. Other states allowed open entry, which compressed margins but increased consumer choice.

The Constitutional Question

Murphy revealed a limit on federal commerce power. Congress cannot use the Commerce Clause to mandate state inaction. This principle has implications beyond sports betting, though most of those implications remain hypothetical.

The case also revealed why law lags behind preferences. PASPA lasted 26 years despite clear evidence that Americans wanted to bet on sports. The law did not prevent gambling; it prevented legal gambling. Once legal channels opened, demand was immediate and large.

This is a lesson in how prohibition creates deadweight loss without creating abstinence. The demand was always there. It was satisfied through inefficient channels. Once efficiency improved, the market scaled rapidly.