04/30/2009 11:00PM

Tax bill would be a good start

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NEW YORK - The most significant economic event for the racing industry and its fans this past week had nothing to do with who won the Kentucky Derby or how many people watched and wagered on the race. It was the introduction of Bill No. 2140 to the United States House of Representatives, the Parimutuel Conformity and Equitability Act of 2009, which would amend the Internal Revenue Service code to repeal federal tax withholding on parimutuel payoffs.

The bill's prospects are uncertain in the current weirder-than-usual political and economic climate, and the legislation itself is a work in progress likely to be changed before it becomes law. It is, however, the most serious chance that racing has to change an unjust and economically destructive regulation that industry leaders have belatedly come to acknowledge has crippled growth of the national betting handle.

The IRS regulations stem from the early 1970s, when the vast majority of betting handle was on win, place, and show wagers where payoffs never were subject to the requirement that up to 28 percent of payoffs be withheld on wagers paying 300-1 or more over certain threshholds. Over the last 30 years, however, handle has shifted toward higher-odds propositions, with straight betting now accounting for barely a third of the annual $14 billion in parimutuel handle.

Horseplayers have been screaming about the withholding rules for decades, but found little support from track executives, who considered the tax consequences of high payoffs a nice problem to have for a small number of customers. Today, however, they have come to realize that withholding affects an increasing number of customers and is taking hundreds of millions of dollars out of circulation each year that would otherwise be re-bet through the windows.

"The negative impact of withholding is multi-faceted," said Peggy Hendershot, the senior vice president of legislative affairs for the National Thoroughbred Racing Association, in a statement supporting the bill. "For the betting public, it has meant a confiscatory and frequently unfair loss of available capital. That loss of reinvestment or 'churn' leads to a reduction in overall wagering that in turn means less revenue generated for state governments, racetracks, and purse money for horsemen. The PACE act would also reduce the high burden of administrative compliance for parimutuel operators."

This is a slightly new tack in the campaign for repeal. Previous efforts to amend the tax code on the grounds of its gross unfairness - withholding from individual payouts rather than actual net profits - fell on deaf ears. The Wall Street Journal's editorial page almost singlehandedly killed a previous measure by deriding it as "tax breaks for horseplayers," something no congressman could defend to his constituents. It's not about a tax "break," but about fixing a uniquely punitive system that was often confiscating 100 percent of a bettor's profits in the course of a year.

This kept getting lost in translation, though, and legislators couldn't get interested in what sounded like helping out big winners. So now the issue is being framed in terms of conformity and equitability with other forms of gambling. You can win hundreds of thousands in a casino, or on bets paying less than 300-1 at the racetrack, and there are no tax consequences, but a $602 trifecta gets reported as income and a $5,002 superfecta is subjected to $1,250.50 in withholding. Perhaps even the Wall Street Journal can understand how preposterous this is.

By conservative estimates, repealing these withholdings - or at least raising the threshold from $5,000 to a true windfall number such as $50,000 or $100,000 - could increase annual betting by somewhere in the neighborhood of $1 billion, or roughly the full amount of last year's industry-wide handle decline. Legislators are likelier to be swayed by the trickle-down impact of that surge than in the consequences for individual bettors. Lobbyists will argue that the benefits of creating or retaining jobs and increasing race purses will more than offset any revenue losses to the Treasury - revenue that is overstated because so much of racetrack withholdings disappear into the black market of illegal ticket-cashing.

Simply eliminating withholding, or vastly increasing the levels at which it kicks in, will not end the inequitable taxation of gamblers. There are several other equally abominable provisions, including the requirement that all gross winnings be declared as income with offsetting losses qualifying only as itemized deuctions, which subjects many taxpayers to a higher Alternative Minimum Tax and effectively taxes entirely phantom "winnings."

It is, however, a crucial first step and deserves the strong support of the industry.