08/23/2001 11:00PM

Taxation without comprehension

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SARATOGA SPRINGS, N.Y. - The final presentation at last Sunday's Jockey Club Round Table was a proposal to change the way that racetracks are taxed. The idea is that if tracks were taxed on their profits rather than their gross handle, they would be more likely to experiment with takeout reductions that might increase overall business and customer satisfaction.

It is a worthy and long overdue initiative, and it was heartening to hear that the National Thoroughbred Racing Association is offering funds to help tracks lobby for this change on a state-by-state basis.

There is, however, an equally important tax-reform initiative that seems to have disappeared from the industry's legislative agenda, one that would not only spur investment by the sport's best customers but also send the message that the NTRA cares as much about unfair taxes on horseplayers as it does about unfair taxes on racetrack owners: eliminating the dreaded W2-G form that bettors must file when they hit a $1,000 winner and that confiscates 28 percent of their gross winnings when they hit for $5,000 or more.

A few years ago, the industry scored a major victory when the threshold for withholding was raised from $1,000 to $5,000, but the practice of withholding from gross winnings should be eliminated altogether. It is absurdly unfair in its mechanics, hurts the industry by taking millions in betting money out of circulation, spawns an underground tax-cheat industry, and drives some big players away from the game entirely.

One major problem is that the withholding rules are written with no understanding of how people actually bet on horses. In addition to the $5,000 threshold level for withholding, it only applies if the winning bet returns 300-1 - based on a $2 payoff, not on your actual investment. So if you bet $1,000 to win on a 50-1 shot, you collect over $50,000 and there is no reporting or withholding. However, if you invest that same $1,000 into a superfecta, pick four, or pick six that pays $5,001, Uncle Sam steps in and takes $1,400 away from you. Your winnings are treated as if you had made a single $2 cold punch on the winner at odds of better than 2,500-1. Even if you spend $6,000 to get back $5,000, your $1,000 loss is turned into a $2,400 loss because the government believes you won a single $2 bet and gives you no credit for the other 2,999 losing $2 bets.

This is, of course, completely crazy. If you were running a restaurant that took in $6,000 in dinner receipts against $5,000 in expenses, you would be taxed on your $1,000 profit. If the government treated you the way it treats horseplayers, it would march in at the end of the evening and confiscate $1,400. How long could you stay in business?

Sure, you can get some of it back a year later as a tax refund if you itemize your deductions and claim losses against your so-called winnings. In the meantime, however, it is easy for even a well-heeled player to have his entire bankroll tied up in an interest-free loan to the government.

I have been claiming legitimate losses against W2-G winnings for 20 years, and have survived two IRS audits by saving my Daily Racing Forms and keeping a credible log of every bet I make. The last time I was audited, the IRS agent didn't even bother to look through my documentation once it became clear that I actually bet on most days of the week that end with a "y".

"We know you guys lose more often than you sign," he informed me. "We just wanted to make sure you weren't running a 10-percent scam."

The "10-percent scam" is what withholding has created: a network of racetrack lowlifes and crooked tellers who generously offer to keep your name a secret from the IRS for an additional 10 percent of the gross by signing their names to your W2-G or filling out the form with entirely bogus information. Otherwise honest and intelligent horseplayers patronize these crooks because they are afraid of any dealings with the IRS or want to conceal their gambling activities from the better half of their joint tax returns. They end up throwing back 38 percent of their rightful winnings out of fear.

It's a tough sell to say that all gambling winnings should go completely untaxed, but there could be an easy solution here that would require only some language changes that just might sneak through: Report and tax winnings at the current minimum 300-1 level but make the base the actual cost of the entire winning ticket rather than $2. In other words, if someone puts $48 into a superfecta box or part-wheel, consider it taxable only if the winner gets 300-1 on his $48 investment ($14,400) rather than pretending he made just one winning $2 bet. Treat a $512 pick six ticket that returns $5,120 as an untaxable 9-1 winner instead of a single, winning 2,559-1 lottery hit.

This technical change would eliminate the vast majority of withholding, create more tax revenue through increased handle than it would sacrifice in income tax, put most of the 10-percenters out of business, and bring some heavy hitters back to the game. If there are lobbying resources to spare, it is well worth the effort.