Julia Chirkova
In a move that blindsided many lawmakers and regulatory bodies, North Carolina’s monumental state budget, poised for a crucial vote, underwent a last-minute alteration. Tucked away on page 626, a mere handful of new paragraphs were inserted, introducing a 6% tax on prediction market trading fees within the state. This significant amendment, enacted with minimal opportunity for public scrutiny or legislative debate, has ignited a firestorm of questions regarding transparency, lobbying influence, and the evolving definition of gambling.
The eleventh-hour addition reportedly followed meetings between staffers for Speaker of the House Destin Hall and lobbyists representing Kalshi, a prominent prediction market operator. While Kalshi’s trading activities were previously untaxed in North Carolina, this new levy, significantly lower than the tax rate imposed on traditional sportsbooks, represents a substantial victory for Kalshi and the nascent prediction market industry. This preferential tax treatment not only grants prediction markets a legislative seal of approval in the state but also bolsters Kalshi’s ongoing national campaign to legitimize its operations against a backdrop of considerable opposition.
The core of the controversy lies in the classification of prediction markets. Operators like Kalshi assert that their platforms offer derivative contracts, distinct from gambling. This stance has found an unlikely ally in the Trump administration, which previously endorsed this view. However, critics, including many state attorneys general, argue that the products offered by prediction markets and sportsbooks are functionally similar, providing broadly comparable odds and payouts on event outcomes. North Carolina’s own Attorney General, Jeff Jackson, has previously joined numerous other state attorneys general in court filings, contending that Kalshi’s offerings violate state gambling laws by circumventing essential regulatory and licensing requirements.
The newly inserted provision in North Carolina’s budget appears to directly address these concerns, at least from Kalshi’s perspective. It explicitly recognizes the argument that the Commodity Futures Trading Commission (CFTC) holds the authority to regulate these markets, rather than individual states. This legislative endorsement has provided Kalshi with a significant advantage in its broader legal and lobbying efforts to gain mainstream acceptance, potentially influencing similar regulatory battles across the nation.
A Timeline of Unforeseen Developments
The sequence of events leading to the inclusion of the prediction market tax paints a picture of a carefully orchestrated maneuver. Approximately one month before the North Carolina budget bill was finalized, state records indicate that Kalshi engaged the services of Jim Harrell, a former state legislator with close ties to Speaker Hall. Harrell is reported to have played a key role in drafting the language that ultimately found its way into the budget. Prior to this, representatives from Kalshi reportedly held multiple meetings with Speaker Hall’s staff and the assembly’s fiscal analysis team. During these sessions, they conducted budget forecasts and proposed tax percentages, with Kalshi initially suggesting a tax rate of 4.75%, according to sources familiar with the negotiations.
The inclusion of this tax provision in the budget bill was notably devoid of public hearings or extensive debate. When the bill came up for a vote on July 1st, the new language, which explicitly stated that prediction markets "may operate within the State lawfully," caught many lawmakers by surprise. Democratic Senator Michael Garrett expressed his bewilderment, stating in an interview, "No one knew where the provision came from. A lot of people were very uncomfortable with it." Legislators accustomed to rigorous debate and multiple voting rounds on substantive tax changes, such as those preceding the legalization of sports gambling in 2023, found this rapid insertion highly irregular.
While Senator Garrett voted against the budget bill due to his objections to the prediction market provision, other lawmakers, like Democratic Senator Julie Mayfield, felt compelled to support the broader budget. Mayfield explained that she "loathed" the prediction market measure but prioritized the passage of the budget, which had been stalled for nearly three years. The budget included crucial funding for state employee pay raises and hurricane relief, factors that outweighed her specific concerns about the prediction market tax.
Official Responses and Industry Analysis
In response to the controversy, Speaker of the House Destin Hall issued a statement asserting that the House and Senate chambers "considered multiple options before jointly settling on this approach." He characterized the provision as a strategic move to preempt legal entanglements that other states are facing. "Given the evolving federal regulatory framework and ongoing litigation, the goal was to provide clarity under state law, capture revenue from activity occurring in North Carolina, and avoid unnecessary legal uncertainty and costly litigation," Hall stated, adding that the state would monitor ongoing litigation and adjust its laws as needed.
Kalshi spokesperson Elisabeth Diana offered a different perspective, claiming, "North Carolina approached us, and we provided feedback and information as part of the standard legislative process." She further defended the lower tax rate for prediction markets compared to sportsbooks, citing their different business models and lower profit margins as an exchange. Diana also dismissed criticisms as "political theater," asserting that states "can’t just shut down a federally licensed exchange."
The implications of this legislative maneuver extend beyond North Carolina. Two weeks after the bill’s signing, Kalshi’s legal team cited the North Carolina provision in a letter to a judge overseeing a case involving state regulators. They argued that the legislation demonstrated that states can and should defer to the CFTC, a federal regulatory agency whose support has been instrumental in prediction markets’ expansion. The letter highlighted that the North Carolina tax "expressly ‘does not impose any license, registration, or other regulatory requirements or obligations of any kind on prediction markets.’"
Broader Implications and State Battles
Kalshi’s rapid growth has been fueled by the CFTC’s stance that such platforms should be regulated at the federal level as derivatives exchanges. This has allowed Kalshi to operate and expand in states where traditional sports betting remains illegal. However, this federal alignment has put the company at odds with numerous state governments. Dozens of states maintain that these "event contracts" are functionally indistinguishable from sports betting and should therefore fall under state law.
The National Council on Problem Gambling (NCPG) has also weighed in, issuing a statement that, "Regardless of how prediction markets are currently legally defined, NCPG believes it is functionally gambling and can expose consumers to many of the same risks and harms associated with traditional gambling." This sentiment is echoed by many state attorneys general, including North Carolina’s Jeff Jackson, whose office stated they were not consulted on the budget provision and had no involvement in its drafting.
The financial implications for North Carolina are also a subject of discussion. While the 6% tax on prediction markets is set to take effect in January, public fiscal analyses project significantly lower revenue generation compared to sports betting. The state collected over $132 million from online sports betting in 2025. In contrast, tax revenues from prediction markets are estimated to generate only $2 million in the upcoming year, with a projected increase to just under $8 million by 2030, owing to the nascent industry’s smaller customer base.
Furthermore, unlike gambling taxes, the prediction market tax is not earmarked for programs supporting problem gamblers. This raises concerns among advocates that funding for addiction services may not keep pace if individuals facing gambling challenges shift their betting activities to these newly legitimized platforms.
A New Playbook for Emerging Industries?
Kalshi has reportedly sought to replicate the North Carolina model in other states, offering tax revenue in exchange for federal regulatory authority over prediction markets. In New York, the company proposed a similar tax framework to avert a substantial lawsuit filed by the state’s Attorney General. However, New York Governor Kathy Hochul rejected the offer, and the state’s legal challenge is proceeding. A spokesperson for Governor Hochul criticized Kalshi’s actions, stating, "Weak attempts to self-regulate are meaningless; if a company willfully violates state law, they must face consequences."
The gaming industry has voiced strong criticism regarding the secretive process employed in North Carolina. Tres York, vice president of government relations at the American Gaming Association, commented, "The secrecy around the North Carolina situation is unique and I believe the so-called prediction markets will certainly be sneaking something into a must-pass bill in other states. Going through a normal process will likely prove very difficult for them, and daylight isn’t their friend."
Opposition to North Carolina’s legislative action was not confined to the gaming industry or Democrats. Republican State Representative Stephen Ross expressed his view that prediction markets are fundamentally similar to sports betting and should be regulated accordingly. Like other lawmakers, Ross conveyed frustration over the lack of open debate on such a significant tax policy change, stating, "Any tax policy should be debated. I don’t have an answer for what happened, how it got there."
The controversy in North Carolina highlights a growing tension between traditional gambling regulations and emerging digital platforms. As prediction markets continue to push for broader acceptance, their legal and regulatory battles are increasingly likely to be shaped by legislative maneuvers, lobbying efforts, and the ongoing debate over what constitutes gambling in the 21st century. The state’s decision to embrace prediction markets with a distinct tax structure, while seemingly offering clarity, has instead opened a new front in this complex and rapidly evolving regulatory landscape.
