When a Tax Becomes a Ban: CFTC's Fight Over Illinois and Kentucky

Illinois's FY2027 budget, signed by Governor JB Pritzker on June 16, 2026, imposed a per-wager transaction tax on sports-event contracts: 1.75 percent on an operator's first 5 million wagers each fiscal year, rising to 3.5 percent on every wager after that. The tax took effect July 1, 2026.

Kentucky went further. Its General Assembly enacted a flat 14.25 percent excise tax on prediction-market operators' transaction fees in April 2026, more than double the rate North Carolina settled on for the same category of product, with the tax set to take effect January 1, 2027.

Both figures dwarf the per-trade fees a designated contract market charges its own users. That gap is the entire basis for the CFTC's legal argument in both states.

The CFTC sued Illinois in April 2026 over its cease-and-desist enforcement posture, then amended that complaint on June 18 to add a direct challenge to the new tax, filing a motion for a preliminary injunction to block it before its July 1 effective date. The agency argues that at the 3.5 percent tier, the levy meets or exceeds the per-trade fees a DCM charges, so it operates as an outright ban on federally regulated exchanges rather than a genuine revenue measure.

CFTC Chairman Michael Selig called the tax regime "an attempt to drive federally regulated prediction markets out of the state through discriminatory taxation rather than outright prohibition." The theory does not ask a court to decide whether event contracts are swaps, the question dividing circuits elsewhere. It asks whether a facially neutral tax rate can be punitive enough to amount to the prohibition the Commodity Exchange Act's preemption clause already forecloses.

Kalshi filed its own, parallel suit against Illinois on June 24, challenging both the tax and a separate state licensing requirement in the same budget bill. Illinois is the rare case where a CFTC-registered operator and its own federal regulator are litigating the same statute side by side, rather than the CFTC intervening on an operator's behalf after the fact.

In Kentucky, industry moved first. The Coalition for Prediction Markets, whose members include Kalshi, Polymarket, and Crypto.com, sued on June 12, 2026, calling the 14.25 percent excise tax discriminatory because Kentucky taxes horse-track wagers at only 9.75 percent, and preempted because, per the complaint, no state currently levies a tax of any kind specifically on derivatives transactions executed on a federally designated exchange.

The CFTC filed its own suit against Kentucky eleven days later, on June 23, adding a second claim on top of the tax fight: a request to block the Kentucky attorney general's separate state-court enforcement suits against Kalshi and Polymarket over alleged unlicensed sports wagering. Kentucky was the first state with a Republican attorney general the CFTC sued in 2026, breaking a pattern in which every prior target had a Democratic one.

As of this writing, neither Kentucky's Franklin Circuit Court nor the Illinois federal court has ruled on the pending injunction motions in either case.

North Carolina's Senate Bill 257, signed in July 2026, imposes a 6 percent tax on operators' net trading-fee revenue from state residents and explicitly recognizes the CFTC's "exclusive federal regulatory authority" over prediction markets in state statute. No one has challenged it, because at that rate no operator has much incentive to.

New Jersey lawmakers narrowed a bill that would have banned election, disaster, and death-related contracts outright into a 9 percent surtax instead, opting for revenue over a fight that CEA preemption arguments would likely complicate. Both states illustrate the same principle the Illinois and Kentucky suits are trying to establish as a matter of law: a tax rate low enough to leave an operator's business intact functions as a tax, and one high enough to end it functions as a ban, whatever a legislature calls it.

Illinois Republican state representative Travis Weaver filed House Bill 5811 on September 2, 2026 to repeal the tax entirely, though the bill has not been assigned to committee and is more likely to be taken up when the legislature returns in January 2027 than in this fall's veto session. A legislative repeal would moot the CFTC's tax claim in Illinois without a court ever reaching the preemption question.

Until a court rules on either injunction motion, the practical test for operators, and for other states weighing a similar levy, has no settled number attached to it. What the two pending cases will eventually supply, if either reaches a decision on the merits, is the first judicial answer to how steep is too steep, a question North Carolina and New Jersey's legislatures have so far been left to answer for themselves.