COMMENTARY / HORSE RACING : Horseplayers Are Indifferent to Politics of Withholding Taxes

Outsiders often look from afar at the workings of Congress and surmise that the legislative process is pretty screwed up. But when you understand something about an issue and see the way it is handled on Capitol Hill, you know the system is really screwed up.

Horseplayers may be generally indifferent to politics, but they do know that the one time Congress addressed racetrack betting the results were disastrous: a 20% withholding tax on payoffs returning more than $1,000 and at odds of 300 to 1 or more. Everybody involved in the sport understands how unfair and counterproductive this tax is, but the bad law went into the books, Congress won’t change it and regularly threatens to make it worse.

This month, as the House Ways and Means Committee was considering the current tax bill, H.R. 11, a Midwestern congressman had a brainstorm for raising more revenue: Strike out the 300-1 threshold and withhold 20% from every racetrack payoff over $1,000.

If you know absolutely nothing about gambling, this might seem reasonable. But consider a hypothetical gambler with $2,000 in his bankroll. He wins $1,000 on each of 10 races, and loses $1,000 on the another 10. He has broken even and would be ready to come back, except for one thing--he’s broke. Uncle Sam has withheld all of his $2,000 “winnings.” Maybe he’ll return to the track after April 15 if he manages to get a refund. Had this innocuous-sounding proposal become law, every legal gambling establishment in the United States could have shut its doors.

Fortunately, this proposal met the fate it deserved, but now another bad idea for raising revenue from horseplayers is being considered by the Senate Finance Committee. It’s an old chestnut: increase the withholding tax from larger winners at the track from 20% to 28%.

The Washington-based American Horse Council had thought that it was making progress on this issue and was trying to persuade Congress to raise the threshold for withholding from $1,000 to a more reasonable $5,000. The 28% measure came from out of the blue, and Jay Hickey, the organization’s director of government relations, lamented, “Now we’re forced to play defense.”

Where did it come from? A spokesman for Committee Chairman Lloyd Bentsen explained that no member of the committee had recommended this change. He said the committee staff “comes up with a pool of revenue raisers” that might be inserted in the bill to make it revenue-neutral. In other words, any bad idea that has been discarded in the past is eligible to be pulled off the shelf and stuck in a new bill.

And this is a bad idea--one so blatantly unfair that it would set off howls of protest if it affected a segment of the population with more clout than the nation’s horseplayers. The withholding tax does not raise one cent in legitimate tax income that the government would not get otherwise. It confiscates money from people who don’t legitimately owe those taxes.

Anybody who wins a large payoff at the track must present identification and a Social Security number, and fill out an IRS form before he collects his money. These horseplayers are not going to escape a day of reckoning with the IRS. The racing industry complains, correctly, that withholding money takes it out of circulation, knocks customers out of action, reduces the track’s business--and thus reduces the revenue from wagering that goes to the state.

It would be obviously devastating to any business if the government decided to withhold a sizable chunk of its revenues without considering their expenses or losses. Horseplayers are no different. I asked a professional bettor at the end of last year how he has doing, and he said, “Good and bad. I’m a little ahead, but the IRS is holding $60,000 of my money.”

What is so unfair about this withholding is that gamblers owe taxes only on their net profits in a calendar year, and the number of horseplayers who show a profit is small. Certainly, an occasional $1,000 hit that triggers the IRS withholding is not going to put a typical bettor into the black.

But a small bettor who winds up a net loser may not be able to get his money back. The typical casual horseplayer doesn’t keep the kind of extensive records the IRS requires in such cases. Small-scale horseplayers are apt to take the standard deduction instead of itemizing--and if they don’t itemize they can’t get back the withheld money that is legitimately theirs.

The 28% withholding tax will raise more revenue by penalizing these people, not by taking money that is legitimately owed to the government. Horseplayers are typically cynical about politics anyway, and in this case they have good reason to be.