Every year, hundreds of millions of dollars' worth of horses go through Kentucky auction rings, most without generating a penny in sales tax for the state.
Since 2003, according to state estimates, almost $3.7 billion in exempt sales of horses have cost the state more than $220 million in tax revenue.
The top buyer of Kentucky Thoroughbreds, Dubai's ruler Sheikh Mohammed bin Rashid al Maktoum, has bought more than $60 million in broodmares at Keeneland's November sales since 2002. Those purchases alone would have generated more than $3.6 million if they'd been taxed at 6 percent.
While no one has raised the issue of eliminating any specific tax break, some legislators have said the General Assembly should consider overall tax reform to address the state's severe recurring budget shortfalls. Economists say that eliminating special exemptions such as the sales tax break for horses could mean a lower overall tax rate for everyone.
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Advocates for social services, which have been hit hard by the state's repeated budget shortfalls, called on Friday for re-examining the state's tax code, including an evaluation of tax breaks.
"There's no question we need a lens of accountability on every tax break, just like we need accountability on how we spend money," said Terry Brooks, executive director of Kentucky Youth Advocates. "The caution I would give is don't just look at one. ... The worst way to look at them is piecemeal." All tax breaks, whether for an individual industry or corporation, should be considered in context, he said. "Are there positive results, and what would be the consequences of severing that tax break?"
Tax policy experts recommend that all exemptions come with a "sunset" provision so they are re-evaluated rather than automatically renewed. Many states typically include end dates on exemptions; Kentucky does not.
Sales of horses purchased for breeding and sales of horses less than 2 years old to non-residents and sent out of state immediately, have been exempt since 1976.
Richard Dobson, sales tax expert at the state Department of Revenue, said the exemptions are designed to promote the export of young horses and to encourage breeding in Kentucky.
"The horses are sold, obviously, for large amounts of money," Dobson said, but when horses are standing at stud, they become mini-factories, continually creating jobs, demand for more raw materials and new foals to sell.
"As far as horses less than 2 years of age, we have horses bred here in Kentucky and sold throughout the world. It's to create that incentive and maintain what's historically been a trademark of the state," Dobson said.
In creating the exemption, lawmakers decided that levying sales taxes on horses would be a burden for potential buyers, he said.
There is no data on whether or not the tax breaks, which cost the state more than $30 million a year, have made any difference in horse sales, Dobson said.
"Obviously, Kentucky is competing with other states," he said. "We're not targeting out-of-state buyers in a vacuum. Kentucky-bred horses have a reputation, and this is just another piece to protect that."
In fiscal year 2009, which stretched from July 2008 through June 2009, there were $667 million in Thoroughbred sales at Kentucky's two auction houses; the state estimates that $550 million worth of horse sales, including other breeds, were tax-exempt.
Kentucky dominates horse sales so completely that a recent analysis by the University of Kentucky Department of Agricultural Economics found that the state accounts for almost 97 percent of all farm receipts for horses and mules in the U.S., according to 2008 USDA data.
Despite that fact, horse breeders worry that taxing more sales would cost Kentucky a competitive edge.
David Switzer, executive director of the Kentucky Thoroughbred Association/Kentucky Thoroughbred Owners and Breeders, said other states exempt horse sales and if Kentucky didn't, buyers would go elsewhere. Maryland, New York, California and Florida also exempt breeding stock. Other states, including Pennsylvania and Texas, offer tax exemptions for horses.
"I'd go to Florida, where I don't have to pay that 6 percent," Switzer said.
Eventually, he said, the horse sales would leave as well.
Jay Blanton, spokesman for Keeneland, the world's largest horse auction house, said re-imposing the sales tax would be akin to adding an additional injury to an already weakened industry.
"We've got a gaping wound here," Blanton said, referring to a year in which horse sales were down. "Why would we create another wound someplace else?"
Keeneland just wrapped up its January Horses of All Ages Sale, with gross sales of less than $24 million, which was down 27.2 percent from last year. The sale's total was a third of what the same sale grossed two years ago.
He said that, compared to other sectors of agriculture and manufacturing, the tax structure on the horse industry is fair and equitable.
"And, moreover, it should be designed to keep us competitive," Blanton said. "Creating disincentives or making us less competitive relative to other states is counterproductive, particularly when we know our industry faces significant competitive challenges in a down economy already."
Blanton pointed out that sales of many horses, including those of racehorses, are taxed, and that horse farms pay sales taxes that other agricultural enterprises don't. Feed and hay for cattle, for instance, are exempt while the same products for horses are taxed.
Boyd Browning, president and CEO of Fasig-Tipton, said taxing more horses would be of short-term gain to the state.
"Kentucky does have a dominant position right now in breeding stock. That breeding stock stays in the state of Kentucky, creates thousands of jobs, creates millions of dollars in tax revenue vis-a-vis other forms of tax collections," Browning said.
But Sen. Damon Thayer, R-Georgetown, says revenue from a re-instituted sales tax could be used to shore up the incentives already in place for the horse industry. The $30 million in lost sales tax "would sure look good in the Breeders' Incentive Fund," he said.
That fund is financed with the sales tax on stud fees, which the state chooses to tax rather than the sales of horses themselves.
Thayer said it makes sense to periodically have those who receive exemptions make the case for keeping them.
"It's certainly cause for serious debate," he said. "I'm not prepared to endorse any version of tax reform because we need to have that debate, but these are the kinds of questions that need to be asked."
Mark Taylor, president of the Consignors and Breeders Association, agreed that there is a place for those kinds of philosophical discussions. He's just not sure that the time is right.
"Our margin of error right now is zero. It is very hard to keep your head above water," said Taylor, who is vice president of public sales for Taylor Made Sales, which handles about 15 percent of all Thoroughbreds sold at public auction.
Taylor said the horse industry needs all the economic assistance it can get. "If you take away all incentives, the horse business will not be based here in full strength, like it is now," he said. "They need to be thinking about how to keep the horse business ... not how to tax it into oblivion."