HORSE RACING : Many More Revenue-Raising Taxing Proposals for Bettors

A hypothetical high-rolling horseplayer has a bankroll of $100,000. During the course of a year he collects $400,000 in payoffs, but at the end of the year he has lost everything. He’s flat broke, tapioca, tap city.

Question: What are his tax obligations?

The answer ought to be obvious. Nobody who loses money should owe anything to the Internal Revenue Service.

Yet now that we have entered the Clinton era of tax “fairness,” this flat-broke horseplayer could conceivably owe taxes on $80,000 in “winnings,” under a proposal that will be considered this month by a subcommittee of the the House Ways and Means Committee.

A list of possible revenue-raising measures before the Select Revenue Measures subcommittee includes this item: “To limit the deduction for wagering to 80% of the amount otherwise deductible.” At first glance this looks fairly innocuous--like limiting the deduction for business meals to 80% of the amount actually spent.

Under the present laws, however, gambling losses aren’t really a deduction in the common sense of the world. The tax code doesn’t give any breaks to gamblers. Losses may be subtracted from total winnings to produce a figure that constitutes a gambler’s net profit. But the amount listed for losses can’t exceed winnings; even a bona-fide professional bettor can’t declare a net loss and receive any sympathetic tax treatment.

The aforementioned hypothetical gambler cannot show on his tax return that he lost $100,000. All he can do is list $400,000 in winnings and $400,000 in offsetting losses for a net of 0. If the new proposal went into effect, however, he could subtract only 80% of the offsetting losses, or $320,000, leaving the broke taxpayer with $80,000 in nonexistent “profits.”

This is absurd, of course--but there are probably only a handful of members of Congress who would recognize the absurdity. The racing industry needs to lobby forcefully on the issue, but in the past it has often been disjointed and ineffective in fighting measures that hurt it severely. Witness the devastating 20% federal withholding tax on certain gambling winnings, which was boosted last fall to 28%.

Now there is a proposal before Congress to boost the withholding tax to 36%; it too will be considered by the Select Revenue Measures subcommittee. And it too doesn’t make much sense.

Such an increase would not raise any more money for the government. It would merely shift revenue to the current year from April 15 of the next year, and it is considered a revenue-raiser only because of the convoluted bookkeeping methods that Congress employs. But it would have a very real, harmful effect on bettors and the whole racing industry--just as it would have on any business.

Imagine that the government withheld 28 or 36% from the revenues of an automobile dealer every time he sold a car--even if he were making only a small margin of profit. He couldn’t stay in business because the IRS would soon be holding all of his working capital. Gamblers are in the same position. Those who play the pick six and other high-risk, high-payoff bets typically make a lot of losing wagers in the hope of collecting a few.

But with 28 or 36% withheld from the successful wagers, even a “winner” will run out of cash. If bettors don’t have money with which to bet, the whole industry suffers.

These proposals have arisen--and will continue to arise--because Congress is continually searching for revenue to pay for expenditures that members propose in other bills. When Congress looks for money, lamented Jay Hickey, president of the Washington-based American Horse Council, “They like to go after sin taxes.”

Said Hickey: “Most of these proposals have been around and on the shelf for years, but I’ve never heard the one about eliminating 20% of the deduction for gambling losses, and I don’t know where it came from. They won’t tell you which member or staff person proposed it, because they don’t want that member to get beaten up by various constituencies.”

So racing industry lobbyists don’t know exactly whom to tell that these tax proposals are dumb ideas.

Nor is there much reason to believe that the dumbness of the ideas would deter Congress from passing them anyway.