KY Budget Woes Could Aid Racetrack VLTs

Racetrack gaming legislation in Kentucky seems to be picking up interest.

With the Kentucky General Assembly seemingly headed for a special session this spring or summer to address a substantial revenue deficit, a legislative committee March 12 heard testimony on a bill that would authorize video lottery terminals at racetracks in the state.

The hearing before the House Committee on Appropriations and Revenue was informational only. The legislation, sponsored by Democratic Speaker of the House Greg Stumbo, was voted out of the House Committee on Licensing and Occupations in February but won’t go any further during the session that ends in late March.

Democratic Rep. Rick Rand, who chairs the Appropriations and Revenue Committee, described the state’s budget woes as “serious,” and said recent tax increases on alcohol and tobacco were approved to get through the fiscal year that ends June 30.

“Our projections for the immediate future are not good,” Rand said. “We’re here today to discuss an alternative to these problems. There’s a strong probability (for a special session).”

Legislators said Democratic Gov. Steve Beshear will make that call. The governor has said he’s waiting on revenue estimates for the budget cycle that begins July 1.

Ellis Park owner Ron Geary revisited a presentation he made March 10 to the Kentucky Horse Racing Commission. Geary told lawmakers Ellis Park would not offer racing in 2010 without alternative gaming given projections that purses based on pari-mutuel handle will continue to decline.

Ellis Park expects to pay about $4.5 million in purses this summer, but that number would drop to $2.2 million by 2010 without additional revenue.

“There’s no reason to try to overcome such a differential in purse money,” Geary said. “Kentucky must put our racetracks in a competitive posture.”

Geary and the Kentucky Horsemen’s Benevolent and Protective Association are discussing a reduction in dates for the 2009 meet at Ellis Park. Geary said it’s possible the on-track horse population at the western Kentucky facility could drop 40%-60% from last year because of competition from two Indiana tracks with slot machines.

According to information provided by The Innovation Group, a consultant hired by the racing industry, Ellis Park, after one year with VLTs, could generate more than $10 million for purses, meaning its daily average—based on traditional racing dates—would be close to $250,000.

Overall after one year, all the tracks in Kentucky would generate about $937 million in gaming revenue, a number that would increase to $1.2 billion in the fifth year, according to the study. In the first year, the state would get $325 million in tax revenue, and purses and breed development would get about $147 million.

The Stumbo bill, already amended, calls for a state tax rate of 35%. The horse industry would get 15.65%, most of it for purses and breed development. The combined figure of about 51% is what analysts and casino companies refer to as the “effective tax rate”—the amount of gaming revenue the operator doesn’t receive.

Even in Pennsylvania, where slots legislation was called the “Race Horse Development and Gaming Act,” the amount that goes to horse racing and breeding (12%-18%) is considered a “tax” by casino operators.

Figures provided to lawmakers by The Innovation Group puts Kentucky’s proposed effective tax rate between Florida, at 50%, and New York, at 52%, the two highest in the United States for jurisdictions with gaming.

According to research by The Blood-Horse, however, Florida’s state tax rate is 50%. A recent filing by Gulfstream Park operator Magna Entertainment Corp. indicates that on top of the 50% to the state, 7.5%-12.6% goes to the Florida HBPA for purses, 0.75%-1.4% to the Florida Thoroughbred Breeders’ and Owners’ Association for breed development, and 3.2%-4.5% to the city of Hallandale Beach and Broward County.

That’s an effective tax rate of roughly 60%-65%.

In New York, when VLT legislation became law in 2001, operators only got about 20% of gross revenue, which left 80% for taxes. Under a convoluted system that that varies by racetrack and includes sliding scales, the effective tax rate in New York today is about 64%. Horsemen and breeders must negotiate their cut out of the tracks’ share.

Using just state tax rates, Kentucky’s proposed 35% is well below those of Florida and New York.

Pennsylvania, which arguably has the most successful racetrack slots program in the country, has a state tax rate of 34% on gaming revenue. The effective tax rate, which includes money for purses and breed development, local governments, and state economic development, is about 55%, higher than what is proposed in Kentucky.

Stumbo said lawmakers will have to address the issues of tax rates and licensing fees in the racetrack VLT bill. The highest licensing fee in the current bill is $125 million for Turfway Park, payable over five years; racetrack officials are negotiating with lawmakers to reduce the up-front payments, which The Innovation Group claims could stymie development of VLT parlors.

"In today's market, it could be very difficult for many of these properties to get opened up," said Steve Szapor of The Innovation Group. "Excessive tax rates can negatively affect goals set by states with regard to the development of a gaming industry."

“There are a lot of public policy questions that will be asked,” Stumbo said. “(This legislation) is just a starting point.”

A few legislators indicated the clock is ticking, on the state budget and the horse industry.

“I don’t believe we’ve begun to see the devastating effect on the breeding industry,” said Republican Rep. David Osborne, a Thoroughbred owner. “There’s still a degree of smugness about the breeding and sales industry, but I have friends and clients moving out of state all the time.”