LOUISVILLE, Ky. (WDRB) – Sitting at one of the hundreds of betting machines at Derby City Gaming in Louisville – with names like Electric Nights and Vegas Fortune -- it’s hard to tell that you’re betting on an old horse race instead of playing a slot machine.
But whatever physical resemblance the machines bear to casino gambling, there is one respect in which they’re more like horse racing: taxes.
Kentucky now has nearly 3,000 slot-like “historical horse racing” machines at racetracks and track-owned facilities like Derby City Gaming, with more on the way. Spin by spin, the amount of money players put into them is on pace to reach $2 billion a year.
The slot-like machines have provided a financial shot in the arm for the state’s ailing horse industry -- but only a negligible amount of old-fashioned tax revenue that the state can use on pensions, Medicaid or other budgetary needs.
The casino-style gambling is flourishing at a time when government coffers in Louisville and across Kentucky face steep financial challenges. In fact, Louisville and other local governments receive no share of the money bettors are spending in the machines, at a time when Metro government is closing public pools and libraries to make ends meet.
And compared with neighboring states that have actual casinos, Kentucky is getting a paltry share of the revenue generated by historical racing, according to a WDRB News analysis. It’s a result of a tax rate that aligns more with traditional horse racing than casino gambling.
As Churchill Downs and Keeneland plan to open the fifth historical racing parlor in southern Kentucky next year, some question why the broader state shouldn’t get a bigger share of the gaming boom.
“As (historical horse racing) grows and proliferates, there isn’t any reason why it shouldn’t benefit the commonwealth with that growth,” said Pam Thomas, a senior fellow at the Kentucky Center for Economic Policy, a progressive group that argues for higher taxes on the slot-like machines.
The state horse racing commission, a group appointed by Kentucky’s governor, paved the way for historical horse racing in 2010 under former Democratic Gov. Steve Beshear and has overseen a significant expansion of it in recent years under Republican Gov. Matt Bevin.
Beshear couldn’t get Kentucky’s legislature to legalize casinos or put the question to voters, and Bevin doesn’t favor an expansion of gambling.
But since historical racing started at Kentucky Downs in 2011, customers at the four racetrack-owned gaming venues around the state have bet $5.3 billion in the slot-like machines though April, according to the latest figures from the racing commission.
It’s a fast-growing market, with the tracks taking in $1.6 billion in wagers in first ten months of the state’s fiscal year, up 77 percent from the same period a year earlier.
While they look and feel like slot machines, the math that determines winners is based on the results of old horse races. The tracks and the racing commission have so far prevailed in a legal battle over whether historical horse racing is a form of pari-mutuel wagering, or the type of betting used in horse racing.
There are a few reasons why historical horse racing, also called instant racing, hasn’t made a bigger dent in the state coffers. The main one is that most of the taxes generated by the slot-like machines go to horse industry funds and programs, such as supplementing purses at Kentucky tracks.
The $5.3 billion in wagers has produced about $80 million in taxes, of which about $51 million has gone to horse industry-related funds and programs, leaving only $29 million in general tax revenue for the state.
Horse industry officials say the money generated by the slot-like machines has helped revive the sport and even the playing field with states that use actual casinos to prop up their racing circuits.
“We have literally faced the situation where people that train their horses and stable them in Kentucky will drive right past some Kentucky tracks to go tracks in other states where the purses are higher,” said Lexington attorney Bill Lear, a trustee of Keeneland Association. “If one of the goals of the current racing commission, with which we whole-heartedly agree, is to really have a bona fide, year-round racing circuit in Kentucky, then historical horse racing is a big key to that.”
Another reason is that, in terms of dollars, casino gambling in neighboring states still dwarfs historical horse racing in Kentucky. In Indiana, which has a mature gambling industry, the state’s 13 casinos took in $22 billion in bets in the last fiscal year, more than 20 times the amount attracted by Kentucky’s slot-like machines.
But Kentucky also taxes historical horse racing at a lower effective rate than bordering states tax casino proceeds, according to a WDRB News analysis of publicly reported data.
Like most live horse racing, Kentucky levies a tax of 1.5 percent on the “handle,” or total amount bet, in the slot-like machines. After most of the handle is paid back to winning customers, the taxes represent about 18 percent of what’s left over.
By comparison, Indiana and Ohio tax 27 percent and 34 percent of their casinos’ gross revenues, according to WDRB’s analysis of figures compiled by the American Gaming Association.
“Kentucky is allowing these historical racing parlors to be taxed at a 1.5 percent rate, and it ought to be much higher than that,” said state Rep. Jason Nemes, a Republican from eastern Jefferson County.
Nemes said he plans to propose a hike on historical racing taxes as part of a broader tax reform bill.
In an opinion affirming the legality of the slot-like machines in October, Franklin Circuit Judge Thomas Wingate questioned whether the state is being “shortchanged” on taxes, although tax policy was irrelevant to the legal issue he had to decide;.
Wingate’s decision is on appeal, part of a nine-year legal battle waged by the conservative Family Foundation of Kentucky, which contends the machines are not pari-mutuel wagering.
But others say it’s unsurprising that casinos generate higher taxes and unfair to hold historical horse racing to the same standard.
“It does bring in less revenue than casino gambling -- because it’s not casino gambling,” said state Sen. Damon Thayer of Georgetown, the floor leader for the Senate’s Republican majority. “It’s pari-mutuel wagering on horse racing, and it’s taxed at the same rate as live racing and as simulcasting.”
Thayer, a longtime proponent of historical racing, supported an unsuccessful effort in 2012 to allow Kentuckians to vote on whether to legalize casino gaming at up to five racetracks.
But historical racing is a “totally different business model” from casino gambling – one that is more profitable and thus able to be taxed at a higher rate, Thayer said.
Any effort to hike taxes on historical racing would be “dead on arrival” in the legislature, he said.
“Why would you take something that is a huge success story and try to diminish its economic returns and benefits to the people of Kentucky by taxing it more?” Thayer said. “The horse industry in Kentucky is doing better than ever, and it’s because of the purses derived from historical horse racing.”
Thayer noted that the tracks set aside a good chunk of the after-tax proceeds of historical racing to supplement racing purses. He also said it’s “short sighted” to look only at the direct taxes generated by the slot-like machines while ignoring the indirect revenues flowing from a revived racing industry.
Even operating within the constraints of horse racing, Churchill Downs’ Derby City Gaming has had “very encouraging” results since opening last September at an off-track facility on Poplar Level Road, Churchill Downs CEO Bill Carstanjen said in April.
Disclosing results to investors, the company touted Derby City Gaming’s “strong” 41% margin for adjusted earnings – a measure of profitability – in the first three months of the year). Derby City Gaming contributed $7.6 million in adjusted earnings on $18.7 million in net revenue during the three-month period, the company said.
“I think the Derby City return (on investment) is sort of best-in-class and we’re very pleased with what we’ve seen there,” Carstanjen said on the company’s earnings call.
The success of Derby City Gaming has Churchill Downs contemplating further expansion, including bringing the slot-like machines to the iconic Louisville racetrack on Central Avenue. The company is licensed for 2,000 machines in Louisville, but has deployed only 1,000 so far.
And, Churchill Downs is teaming with Keeneland to build a racetrack, historical racing parlor and hotel in Oak Grove, Ky., with a plan to capture customers from the Nashville market. The racetrack is set to open in the fall, with the gaming machines coming in 2020.
Customers at Derby City Gaming have placed nearly $490 million in bets since the facility opened last fall, generating about $3.6 million in general taxes to state government, according to horse racing commission reports.
When Mayor Greg Fischer unsuccessfully tried to sell the Metro Council on an insurance tax increase earlier this year, he and his aides said that residents often asked why the city wasn’t getting a big windfall from the new gaming operation in town. In fact, none of the tax revenue from historical racing flows directly to local governments like Louisville.
By contrast, in the 20 years that Horseshoe Southern Indiana has operated across from Louisville in Elizabeth, Ind., Harrison County has built sewer and water lines and paved gravel roads with local casino tax revenues that amounted to $26 million in the most recent year.
Lear, the Keeneland trustee, said it would be wrong to expect a similar impact from historical horse racing.
“It was never envisioned as a significant revenue generator. The primary driver of it was to bolster, protect and hopefully improve the thoroughbred racing industry in the state,” he said.
State Rep. Adam Koenig, the Republican chairman of the House committee that oversees horse racing, said he doesn’t think Kentucky is being “shortchanged” by instant racing. If anyone thinks otherwise, he said, there is an obvious solution.
“If people want to generate revenue as slot machines would generate revenue, then we need to legalize casino gaming,” said Koenig, a supporter of expanded gambling.
But Koenig said the racetracks seem content with the status quo: “Right now everything is going swimmingly well. They are not paying taxes like slot machines are, and the restrictions on them are quite minimal. What industry doesn’t want that?”
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