With Kentucky HHR bill passed, focus switches to tax rates

LEXINGTON, Ky. – The Kentucky racing industry dodged a bullet on Thursday night when the state’s House of Representatives joined the Senate in passing a bill allowing for the continued operation of historical horse racing machines by licensed racetracks, but the battle over the devices is not over.

The bill passed despite opposition from socially conservative Republicans in both chambers – a largely rural faction that is increasingly clashing with the more business-aligned conservative representatives of urban areas of the state – and in the face of calls from Democrats for the machines to be subjected to a higher tax rate. Both causes are sure to haunt the operation of the machines in the future.

The legislation was set to be brought up in the House early in its proceedings on Thursday, but the House took a two-hour recess mid-afternoon before re-convening to open the floor to debate on the bill. During the recess, according to officials, supporters of the bill were attempting to ensure they had the votes to get the legislation over the finish line, and when the chamber came back into session, some legislators had a statement in hand from Kentucky’s tracks promising to “work constructively to revise and raise the tax structure on the devices.”

The devices, which use already run horse races to generate random numbers determining payouts to players, are currently taxed at 1.5 percent of gross handle. In the last fiscal year, ending in June of 2020, total handle on the devices, which are in place at five locations in the state, was $2.26 billion, of which $2.07 billion was returned to players as payouts, according to records maintained by the Kentucky Horse Racing Commission. Operators of the devices retained $156.0 million from the gross, before expenses.

While it’s difficult to tell just how profitable the machines are using the revenue number, the amount of capital investment by Kentucky tracks indicate that the devices generate a healthy return. In just the past three years, Churchill Downs Inc. invested $100 million in a casino at its Trackside training center, bought Turfway Park for $46 million and plans to invest another $100 million in a new casino there, and, in partnership with Keeneland, built a new Standardbred track and casino on Kentucky’s southern border for what the company said will eventually total $150 million. In addition, the company has said it plans to build a casino and hotel at its flagship Louisville track to capitalize on the devices.

Legislators said during the debate on the House floor that legislation will be introduced next week creating a task force to examine the tax rates on the devices. Some were skeptical of that process, including Rep. Mary Lou Marzian, a Democrat representing Louisville, who read portions of the tracks’ letter into the record while promising to “hold these CEOs of these tracks to what they wrote.” Marzian eventually voted for the bill.

“We’ve been promised a task force,” Marzian said. “And we all know that when you don’t want to pass a bill, you create a task force. It’s really what you say you are going to do when you know you’re not going to do it.”

Testimony in the House on the tax rates and the revenue generated by the devices was riddled with misinformation, so it’s understandable that the legislative leadership punted on the chance to address the tax concerns in order to get a bill passed as quickly as possible. Casinos were likely to be shut down as early as March if the legislation did not pass.

“We need to do it right, instead of doing it fast,” said Rep. Adam Koenig, who shepherded the bill through the House, in reference to the debate over the tax rates.

Then there are the ongoing issues over the legality of the machines themselves. In September, the Kentucky Supreme Court ruled that a certain type of machine in use at some tracks did not fit the state’s definition of pari-mutuel wagering, which would make them illegal under the state constitution. As part of its ruling, the Supreme Court required the Franklin Circuit Court to re-issue a ruling that held the devices were legal. The Franklin Circuit Court has not done so yet, which is why all but one of the casinos have remained open since the Supreme Court issued its opinion.

The bill that was passed by the legislature changed the statutory definition of pari-mutuel wagering to include horse races that were “previously run.” As justification for that approach, supporters of the bill pointed to the final paragraph of the unanimous Supreme Court opinion, in which the justices wrote that “if a change … in the long-accepted definition of pari-mutuel wagering is to be made, that change must be made by the people of this Commonwealth through their duly-elected legislators.”

During a House committee hearing on the legislation earlier in the week, Bill Lear, Keeneland’s legal counsel and a trustee at the company, said that the bill’s reworking of the definition of pari-mutuel wagering laid a firm foundation for the operation of the devices without a constitutional amendment, as some have argued.

“It is consistent with the classic principles of pari-mutuel wagering, in that you are not betting against the house,” Lear said.

While that may appear to settle the case in favor of the bill’s supporters, opponents of the bill are still likely to launch legal challenges to the legislation or press for the state to put a measure on a future ballot asking voters to approve language that would prohibit or allow for the devices. The Family Foundation of Kentucky, a conservative religious group whose legal challenges led to the Supreme Court ruling, is almost certain to resurrect a judicial-branch fight against the devices.

In the meantime, Kentucky’s racing industry has learned that its clout in the state has limits (even if some of the anti-gambling testimony was performative, given that most legislators were aware the bill had enough votes to pass). More than a dozen Republicans hammered the bill on Thursday on strictly moral grounds, disregarding the impact the devices have had on the state’s “signature industry.” Since the devices were first installed at Kentucky Downs in 2012, purses in the state have doubled, making awards in the state competitive with jurisdictions that have been using casino subsidies to prop up purses for decades.

“This is not about horses, this is not about hay, what we’re talking about today,” said Rep. Bill Wesley, a Republican from Ravenna who is a chaplain for the local police department, during the House debate. “We’re not going to get nothing but heartache and trouble.”