Commentary : New York Tax ‘Take’ from Winnings Stupid, Short-Sighted and Greedy

A civics quiz for horseplayers:

During the past 10 years the state of New York has collected approximately $600 million in tax revenue from thoroughbred racing. How have Gov. Mario Cuomo and other leaders in Albany responded to this windfall?

(a) They issued a proclamation thanking New York’s horseplayers for their contributions to the state’s welfare.

(b) They said, “Let’s squeeze a few more dollars out of these poor slobs.”

The answer, of course, is (b), for politicians have historically viewed the thoroughbred industry and its patrons as a source of endless revenue to which the state owes little or nothing in return. But even for racing fans accustomed to being gouged, the bill that Cuomo signed into law last week was appalling -- for it is stupid and short-sighted as well as being greedy.

Beginning in mid-July, New York will withhold 11.3 per cent in state and municipal taxes from gambling winnings over $1,000 where the odds are 300 to 1 or more. These are the same payoffs from which the Internal Revenue Service already withholds 20 per cent.

New York’s actions were no aberration, but are part of a national trend. Kentucky and New Jersey have both passed state withholding taxes on gambling winnings. Many other state legislatures -- including Maryland’s -- have considered such a move.

This is a deplorable policy for all the same reasons that the federal withholding is deplorable. Cash transactions occur in countless forms in our country; the racetrack is one of the few places where a $1,000 transaction requires the completion of a federal tax form. Yet even with this record-keeping, the government insists upon taking money on the spot.

“What I find offensive,” said Tom Aronson, director of legislation for the American Horse Council, “is that withholding treats people at the tracks as cheaters and criminals.”

The withholding tax takes money from people who don’t legitimately owe taxes. Gamblers have a tax liability only if they show a net profit at the end of a year -- yet very few of them do. But if the bettor happens to be a low-income individual who doesn’t itemize deductions, he can’t get the money back that is rightfully his. If he does itemize, he will have to produce complete records for his entire year of gambling, which virtually no casual fans keep.

To all of these arguments, the Internal Revenue Service will answer, in essence: tough luck. Uncle Sam has no reason to care if horseplayers are unhappy. But state governments have plenty of reason to care, since racetrack wagering puts so much revenue directly into a state’s coffers. And that’s why withholding on the state level makes no economic sense at all, especially from the state’s point of view.

Gerald McKeon, president of the New York Racing Association, laid these facts before Cuomo: Money at a racetrack is bet, paid out in winnings, bet again, etc., etc. And every time it passes through the betting windows, the track and the state take their cut. Studies have disclosed that every dollar in a horseplayer’s pocket is “churned” an average of 3 1/2 times. But when that money is taken out of circulation -- as from a withholding tax -- it is no longer churning to produce revenue for the industry and the state.

Not only do increased taxes reduce the turnover of money at the track, they threaten to alienate some customers altogether. “Those few players who bet in large denominations are sophisticated enough about wagering to know when the cards are stacked against them,” McKeon argued in a letter to Cuomo. “We don’t need any more inducements for them to transfer their business to Atlantic City.”

Certainly, New York has given its horseplayers a powerful inducement not to play the triple and the pick six. The track’s and state’s “take” from these wagers is an onerous 25 per cent -- a horrendous percentage for any gambler to try to buck.

A bettor needs periodic big hits just to survive, let alone make a profit. But if he does hit a triple that pays $1,000, he will leave the betting windows with a lot of tax-related paperwork in his hands and $687 in his pocket, for the IRS will have taken $200 and the state of New York another $113. For a horseplayer, that is the equivalent of playing against a stacked deck.