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Shares of online sports betting companies took a hit on Monday after Illinois lawmakers passed a budget that includes a surprise tax increase on online wagers. Investors expressed concern that other states might follow Illinois' lead, potentially impacting the broader market.

DraftKings saw its stock drop by 6%, while Flutter Entertainment shares fell more than 2%. The Roundhill Sports Betting & iGaming ETF (BETZ) also pulled back more than 1% in the wake of the news.

The budget passed by both chambers of Illinois’ state legislature imposes a tax of 25 cents per wager on the first 20 million online sports bets each fiscal year. This tax increases to 50 cents per bet beyond that threshold. Governor J.B. Pritzker has indicated he will sign the budget, according to local media reports.

Truist analyst Barry Jonas described the tax hike as a last-minute surprise, marking the second consecutive year Illinois has unexpectedly increased taxes on online sports betting. Jonas noted that with the new rates, Illinois’ tax burden will be among the highest in the nation.

DraftKings and Flutter's FanDuel are expected to exceed the 20 million wager mark, subjecting them to the higher tax rate for a portion of their bets. Smaller competitors, however, may face a more modest impact.

Shares of MGM Resorts, co-owners of the BetMGM platform alongside Entain, declined by 1.5%. Penn Entertainment, which partners with ESPN Bet, saw its stock dip by 0.3%.

Amid these developments, Wall Street is now closely watching to see if other states will emulate Illinois’ tax strategy to address budget deficits. Statewide online sports betting taxes as of early 2024 vary significantly, from 51% in New Hampshire, New York, and Rhode Island to a mere 6.75% in states like Nevada and Iowa. Currently, only 27 states and Washington, D.C. permit online sports betting statewide, according to the Tax Foundation.