Illinois lawmaker moves to repeal new prediction market tax

An Illinois representative introduced legislation this week to eliminate the state's tax on sports prediction market transactions, a measure that became law less than three months ago and is already the subject of a legal challenge from Kalshi and the CFTC.

The proposal comes from Rep. Travis Weaver and would repeal a tiered levy of 1.75% to 3.5% on sports prediction market trades. That Illinois enacted the tax at all was notable — it represented one of the first attempts by a state legislature to extract revenue from prediction market volume rather than simply ban it or defer to federal regulators. The assumption built into that approach was that the legal status of these contracts was settled enough to tax. It was not.

Kalshi and the CFTC moved to challenge the tax almost immediately, arguing that a federally registered exchange operating under CFTC jurisdiction cannot be subjected to state-level transaction levies. That argument has not been adjudicated, but it doesn't need to be resolved for the repeal effort to gain momentum. A law that generates litigation before it generates revenue is a difficult thing to defend in a chamber already watching federal courts produce contradictory rulings on whether states have any authority here at all.

The timing matters in a specific way. The Third Circuit ruled in Kalshi's favor on federal preemption in April. The Ninth Circuit ruled against Kalshi in the Nevada case shortly after. New Jersey filed a Supreme Court petition this week asking the justices to resolve what the circuits cannot. A state legislature considering whether to maintain a tax on an industry whose legal foundation is actively contested at the Supreme Court level is not in a comfortable position.

The consensus read on this repeal effort is that it is a pragmatic retreat — Illinois getting out before a federal court makes the tax unenforceable anyway. I don't think that's quite where this lands. The repeal bill is better understood as a signal about what the tax was always meant to be: a placeholder, enacted while the legal question was nominally open, now abandoned because the question has clarified against the state's position faster than the legislature expected. Illinois is not conceding that prediction markets are ungovernable. It is recalibrating which tools of governance are available.

That distinction matters for the states watching this unfold. Bans have been tested in Michigan and faced sustained federal resistance. Taxes, as Illinois is learning, invite preemption arguments before they collect a dollar. What remains is registration, disclosure, and age verification requirements — the regulatory instruments that don't directly conflict with CFTC jurisdiction and are therefore harder to challenge on federal grounds. Several state attorneys general have begun framing their arguments in exactly those terms.

The copper perpetuals filing Kalshi submitted in August, and the CFTC's position that contracts outside digital commodities require individual review, adds another dimension. A platform expanding into commodity futures while simultaneously fighting state tax authority in the courts is demonstrating that the jurisdictional question is not academic — it has a direct bearing on how much of the financial system these exchanges can eventually touch.