COMMENTARY : Plan to Increase Withholding on Track Winnings Is a Sham

A horseplayer who hits a $5,000 trifecta may soon have his elation mixed with outrage. He will collect only $3,600, while the Internal Revenue Service collects the other $1,400. This is the consequence of two bills--one already passed by the House, the other being debated in the Senate--that would increase the racetrack withholding tax from 20% to 28%.

When the Senate Finance Committee was putting together its omnibus tax bill, it needed sources of new revenue, and it inserted the racetrack withholding measure on the premise that it would raise $107 million over five years.

When Rep. Steny Hoyer (D-Md.) sponsored a bill that would give tax breaks to charity-sponsored gambling events, he needed a revenue-raising measure, too, so he attached the withholding-tax increase. The figure of $107 million was cited as gospel. But no one who knows anything about the subject--such as horseplayers and track executives--could imagine where it came from.

The amount of money withheld from a taxpayer won’t change what he ultimately owes on April 15. He might get a refund or he might owe a further payment, but the government ultimately would wind up with the same amount, regardless of how much had been withheld. Hoyer said he thought that the additional $107 million would come from eliminating fraud, but there’s virtually no fraud now. A horseplayer must present identification and his Social Security number to collect, and he can’t dodge the IRS.

So where does that $107 million come from? It comes from the fertile imagination of the Joint Tax Committee, which prepares a smorgasbord of potential revenue-raisers for Congress to consider. It calculated that an increase in the withholding tax from 20% to 28%--which applies to lotteries and all parimutuel events--would enable the government to collect a total of $88 million during 1993 that it would otherwise not receive until April 15, 1994.

I asked a government expert about this, and pointed out that there seemed to be no new money being raised. Whether the government gets this revenue during 1993 or waits until April 15, 1994, doesn’t change the bottom line. The expert agreed but said: “It can be considered a revenue-raiser because of the way the scoring is done.” If $88 million is switched from 1994 to 1993, the Joint Tax Committee counts it as an $88-million windfall.

I laughed derisively.

“The chuckle is probably well-founded,” the expert said.

The other millions in the Joint Tax Committee’s figure come from general economic growth and an estimate that tax revenue from gambling will increase by $4 million to $5 million a year in each of the subsequent four years. In other words, this is all smoke and mirrors--$107 million in smoke and mirrors.

The only real financial effect of this measure will be the harm it does to the horse industry, which is working to salvage something from this legislation and raise the threshold for withholding from the present $1,000 to $5,000. But if this doesn’t happen, and if only the percentage of withholding is changed, the American Horse Council estimates that the increased up-front tax will cut total wagering 1% or 2%.

As a gambler, I am even more pessimistic. I fear that this tax witholding, coupled with other burdens that are being piled on top of horseplayers, will damage the game to an incalculable extent.

The whole racing industry rests on a fragile assumption: That a horseplayer who bets intelligently has a fair chance of making a profit. This is the lure that enables horse racing to compete with other forms of gambling--lotteries, slot machines, crap games--that may be more convenient to play, offer faster action and don’t charge admission.

Countless economic studies have shown that a reduction in the percentage that the track takes will have a beneficial long-term effect: More money will go into the pockets of customers, who can bet again and again. There have been occasional, short-lived moves to reduce the total take, but hard-pressed tracks, horsemen and governments have inexorably demanded a greater and greater share of the gambling dollar.

While a 17% “take” used to be standard, most tracks have increased the cut from some payouts--notably triples--to 25%. Some state governments have looked covetously on gambling winnings and have imposed their own withholding tax in addition to the federal tax. There is a point where a bettor must conclude that the percentages are so burdensome that the game has become unbeatable and unplayable. The boost in withholding to 28% would push the game closer to that point.

In fact, we might have already arrived there. New York recently passed a bill that will boost the take from triple wagering on some simulcasts to 36%. If you bet at an OTB parlor, you pay a 6% surtax. And if you get lucky and hit a big payoff, the state imposes an 8% withholding tax, New York City grabs another 4% and now, perhaps, the IRS will want 28%.

All of this adds up to an 82% tax burden. Why would you play a game with such odds when you can bet football with a bookie at only a 4 1/2% disadvantage, or shoot craps where the casino takes little more than a 1% edge and gives you free drinks to boot?

The racing game is on the brink of being taxed to death.