A day before it came up for a vote, North Carolina's massive budget was posted with a handful of new paragraphs inserted on page 626, near the end of the document, with little time for public vetting or changes.
The hasty edit — imposing a 6% tax on prediction market trading fees in the state — was made shortly after staffers for Speaker of the House Destin Hall met with lobbyists for the prediction market giant Kalshi, according to people familiar with the meetings.
While Kalshi's trading wasn't previously taxed, the addition was a big win for the company and other prediction markets because it will subject bets on the platforms to a rate about a quarter of what traditional sportsbooks will pay in North Carolina.
Prediction market operators argue that they're offering derivatives contracts, not gambling — a position the Trump administration has endorsed. But the products from sportsbooks and prediction markets offer broadly similar odds and payoffs on the outcomes of games.
Most state attorneys general — including North Carolina's — have argued in court filings that Kalshi's betting products violate state gambling laws because they circumvent regulatory and licensing requirements. The new text gave prediction markets a legislative seal of approval and explicitly recognized Kalshi's argument that the Commodity Futures Trading Commission has the power to regulate those markets instead of the states.In doing so, it handed a significant victory to Kalshi, which is waging a multipronged lobbying campaign to bring prediction markets into the mainstream despite the array of critics trying to shut them down. In giving the nascent industry more favorable treatment than legacy gambling companies — and exempting prediction markets from state-level regulation — the measure has provided Kalshi leverage in its push for similar treatment around the country.
Two weeks after the North Carolina bill was signed, Kalshi's lawyers wrote a letter to a judge overseeing one of the many cases in which it is battling with state regulators, pointing to the provision as evidence that states can and should defer to the CFTC, the federal regulatory agency whose support has given prediction markets the ability to expand.
"The tax expressly 'does not impose any license, registration, or other regulatory requirements or obligations of any kind on prediction markets,'" a Kalshi lawyer wrote of the North Carolina legislation.
Asked about the tax, Kalshi spokesperson Elisabeth Diana said, "North Carolina approached us, and we provided feedback and information as part of the standard legislative process."
State battles
Kalshi has exploded in popularity and expanded across the country — even in states where gambling offered by traditional sportsbooks is illegal — with the support of the CFTC, which has argued that such platforms should be regulated at the federal level as derivatives exchanges. Kalshi has said trading on its platform is not gambling because customers are facing off against other traders, in contrast to sportsbooks where the house sets the odds and takes the other side of customer bets.
Dozens of states have argued that those so-called event contracts are indistinguishable from the sports-betting products that come under state law. Kalshi itself recently joined the National Council on Problem Gambling, which put out a statement this week on the issue: "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."
It's increasingly likely that the company's business prospects will be decided in its legal tussles with states. While most federal courts have sided with the states, two federal appeals panels have recently split on such legal questions, setting up an expected showdown in front of the U.S. Supreme Court.
A little more than a month before North Carolina's new tax was added, state records show, Kalshi
Harrell helped craft the language that went into the budget, according to a person familiar with the conversations. Before that, Kalshi representatives met with Hall's staff and the assembly's fiscal analysis team multiple times, conducting budget forecasts and suggesting tax percentages — with Kalshi initially proposing a tax rate of 4.75%, according to two people who asked not to be identified discussing details of the negotiations.
Diana declined to comment on Harrell's role. Harrell did not respond to multiple requests for comment.
Fast vote
When the budget bill went up for a vote July 1, there was no public hearing on the new addition, which explicitly stated that prediction markets "may operate within the State lawfully." Michael Garrett, a Democratic senator, said in an interview that he and his colleagues were mystified by the language and how it got through.
"No one knew where the provision came from," said Garrett. "A lot of people were very uncomfortable with it."
Some legislators said that while it was not unusual for the Republican majority to maintain tight control over bill additions, they expected to have more input on such a substantive change to taxation. When the state passed the 2023 law that legalized sports gambling, for example, the assembly debated the issue and went through several rounds of voting over the course of three months.
While Garrett voted against the legislation, Julie Mayfield, a Democratic senator representing the Asheville area, said she set aside how much she "loathed" the prediction market measure because the consequences of holding up the broader budget outweighed those objections. The state hadn't passed a full budget in nearly three years, and it included new funding to support pay raises for state employees, as well as hurricane relief in her district, she said.
In an emailed statement, Hall said the House and Senate chambers "considered multiple options before jointly settling on this approach." The Republican described the provision as a way to keep the state out of the legal battles over prediction markets playing out elsewhere.
"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," he said. "Like all other states, we will monitor the ongoing litigation and adjust our laws as needed."
Diana, the Kalshi spokesperson, said the tax rate on prediction market bets should be lower than on gambling companies because they have a different structure and stand to collect less profit from wagers on their platform because their role as an exchange means that they do not make more money when customers lose.
But the 6% tax rate, which takes effect in January, has drawn fire from other state officials who say it could reduce the tax revenue the state collects if customers shift their business from sportsbooks to prediction markets. The state generated more than $132 million from online sports betting in 2025, up from $105 million the previous year.
Under the new provision, tax revenues from prediction markets' net fees are not likely to reach that level any time soon,
New playbook
Unlike the gambling taxes, the prediction market tax is not specifically earmarked to fund programs for problem gamblers. Advocates for such programs fear that means funding won't keep pace if a growing number of addicts shift their betting to prediction markets.
Kalshi has been looking for other states where it can copy the North Carolina model and offer tax revenues in exchange for states recognizing CFTC authority over prediction markets. In New York, the company proposed a similar tax framework to head off a $36 billion lawsuit filed by the state's attorney general. Governor Kathy Hochul rejected the offer, and the state's lawsuit is moving ahead.
"Kalshi came to New York, blatantly violated state law, knowingly took actions that put consumers – including minors – at risk, and deprived New Yorkers of billions in revenue dedicated to critical programs like education," said Sean Butler, a spokesperson for Hochul. "Weak attempts to self-regulate are meaningless; if a company willfully violates state law, they must face consequences."
Diana dismissed such criticism as "political theater" and said that states "can't just shut down a federally licensed exchange." She also defended Kalshi's proposal to New York, saying it "included dozens of consumer protections and billions in tax revenue for education and healthcare."
State officials
In North Carolina, while Hall said he wanted to keep the state out of any legal wrangling, it is already involved. Jeff Jackson, a Democrat, was one of more than three dozen state attorneys general who months prior signed on to an
A spokesperson for Jackson, Nazneen Ahmed, said the attorney general's office was not consulted about the state's prediction market legislation. "We had no involvement in the recent budget bill provisions about markets," Ahmed said.
Onotse Omoyeni, a spokesperson for North Carolina Governor Josh Stein, a Democrat, declined to comment directly on the prediction market provision, which he signed into law as part of the broader budget, but noted that the governor did not have the power of a line-item veto. Omoyeni also pointed to a recent executive order from Stein limiting state employees' ability to place wagers.
"There's a lot more important work that needs to be done in this emerging area, and Governor Stein looks forward to identifying solutions that protect the public," Omoyeni said in an emailed statement.
Gaming industry officials said the process was a striking change from the way legislation and taxes affecting their industry have been proposed and passed in North Carolina and other states.
"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," said Tres York, vice president of government relations at the American Gaming Association. "Going through a normal process will likely prove very difficult for them, and daylight isn't their friend."
Opposition to North Carolina's move wasn't just from the gaming industry and Democrats.
"Prediction markets, in my opinion, are not all that different from sports betting," said Stephen Ross, a Republican state representative. "You're betting on an outcome, and it probably all should be regulated the same way."
Ross said that he didn't know where the tax provision originated, and was frustrated that such a sizable change happened without an open debate.
"Any tax policy should be debated," he said. "I don't have an answer for what happened, how it got there."
