Does the racing industry get ‘a sweetheart deal’ on taxes? This Republican thinks so.
Kentucky loses many millions of dollars in potential state revenue every year by giving “a sweetheart deal” to two forms of gambling that are flourishing around the politically powerful horse racing industry, a Republican lawmaker says.
State Rep. Kim King has filed House Bill 156, which would raise the tax rates on the slots-like historical horse racing machines installed at racetracks and on advance deposit wagering, or prepaid online betting on live horse races.
“I think they’ve really been getting a sweetheart deal and it needs to be updated,” King, R-Harrodsburg, said in an interview this week.
“I’m a nerd who actually reads a lot of the data that comes through our offices,” King added. “As I was reading the reports on revenue and tax collection, I thought to myself, ‘Hmm, when you look at what we’re getting from some of these forms of gambling, it does not really add up. We’re getting half of what some other states are getting.’”
Historical horse racing and advance deposit wagering boomed over the past decade while old-fashioned betting on live races and simulcasting at racetracks did not. As a result, industry giants like Louisville-based Churchill Downs Inc. are investing heavily in these newer forms of gambling.
Last year, the total handle bet by Kentucky residents on advance deposit wagering hit $282 million, up 10 percent from the previous year, according to the Kentucky Horse Racing Commission. The total handle for historical horse racing in Kentucky was $2.2 billion, up 11 percent from the previous year.
Those large sums produced relatively little tax revenue for the state.
The tax collected on advance deposit wagering was $1.4 million, of which the state’s General Fund — which pays for the operations of state government — got only $212,093. The tax collected on historical horse racing was $33.8 million, of which the General Fund got only $15.1 million.
That’s because the Kentucky General Assembly, in 2014, set much lower tax rates for those forms of gambling than it already had in place for live races and simulcasting. Kentucky also taxes the historical horse racing machines far more lightly than other states tax traditional slot machines, critics say.
And under the law, much of the money collected from the tax on these two forms of gambling is diverted to purses, programs and development funds that benefit the horse industry rather than being deposited in the General Fund.
Raising more for state services
King’s bill would raise the tax rate on historical horse racing from 1.5 percent of the average daily handle to 3 percent while raising the tax rate on advance deposit wagering from 0.5 percent to 3 percent.
This would match the state’s 3 percent tax on simulcast betting. The tax on live betting at the state’s racetracks is 3 percent or 3.5 percent, depending on whether their average daily handle is greater than $1.2 million.
A proposal like King’s could yield more than $40 million a year in additional state revenue to pay for schools, health care and other public needs, according to a 2019 analysis by the Kentucky Center for Economic Policy in Berea.
That would be a dramatic increase.
However, the bill might be dead on arrival in the General Assembly, where the state’s racetracks over the past two years spent more than $557,000 on lobbyists.
King filed a similar bill last year that stalled in the House Committee on Licensing, Occupations and Administrative Regulations. The committee’s chairman, state Rep. Adam Koenig, this week said he does not support King’s efforts.
“This would probably go a long way toward destroying the horse industry in Kentucky,” said Koenig, R-Erlanger. “As a Republican, we’re generally against higher taxes. During this pandemic, now is not the time to do that. We should all understand that when we do raise taxes, it usually gets passed along to the consumer.”
Koenig said the legislature will focus this winter on legally protecting historical horse racing, not raising the tax on it.
The slots-like gambling machines, which allow players to bet money on the outcomes of old horse races, were thrown into legal limbo last September by a unanimous Kentucky Supreme Court decision declaring that historical horse racing is not parimutuel wagering, and therefore, not legal under the state constitution.
A bill is expected to be filed when lawmakers return to Frankfort in early February to clarify that historical horse racing should be considered legal, Koenig said.
Horse industry says ‘nay’
The horse industry says it opposes higher taxes on racing’s two high-growth gambling sectors. KEEP, the Kentucky Equine Education Project, this week credited historical horse racing in particular with helping to “save the industry” after the 2008 economic recession.
Churchill Downs, famous for its iconic racetrack in Louisville, shrewdly has invested in both historical horse racing machines and advance deposit wagering.
For example, the company’s TwinSpires.com is the nation’s No. 1 online platform for horse race betting. Its handle exploded from $87 million in 2007 to $1.4 billion in 2019. That produced revenue of $290 million in 2019, with adjusted earnings of $78 million, according to the company’s Dec. 10 earnings call with investors.
Churchill Downs is not eager to pay a higher tax on that.
“The state should be supporting its signature industries that are providing jobs and moving our economy forward,” said Tonya Abeln, vice president for communications at Churchill Downs. “Now is not the time to make it more difficult for them to operate through increased taxes that lead to fewer jobs and less money to reinvest in brick and mortar operations in Kentucky.”
Abeln said the company’s top priority in the 2021 legislative session is passing legislation to ensure historical horse racing can continue operating in Kentucky. “At the same time, we will continue to encourage legislators to oppose additional taxes on our industry,” she said.
Treading carefully on taxes
An analysis released last year by Thomas Lambert, an assistant professor at the University of Louisville College of Business, said the state of Kentucky could collect millions of dollars in additional revenue by raising the tax rates on historical horse racing and advance deposit wagering to match the tax rates on older forms of racetrack betting.
But Lambert warned that higher taxes would make gambling less attractive to bettors deciding where to spend their discretionary income. That would erode the revenue streams supporting the racetracks and horse industry, he wrote.
“A tax increase could harm an industry which is still struggling to regain a certain level of profitability that existed before the Great Recession of 2007-2009,” Lambert wrote.
Pam Thomas, a former state budget analyst who has studied gambling taxes for the Kentucky Center for Economic Policy, said she disagrees. Higher taxes would result in “a slight reduction of the takeout,” the portion of the betting pool the racetrack keeps for itself, which generally would not be noticed by bettors, Thomas said.
“People argue that there will be a negative revenue impact if we raise taxes too high. That’s true of anything generally, but when it comes to betting, rates right now are so low, this would not put them out of business,” Thomas said.
