The Kentucky General Assembly plans to consider legislation in 2012 that would require Kentucky residents to pay a tax on bets they place with advance deposit wagering companies. The proceeds would benefit the Kentucky Thoroughbred Development Fund. Under existing law, a portion of Kentucky on-track bets go to the KTDF, whereas bets made via online wagering sites are not assessed. The size of the KTDF has been shrinking in conjunction with the decline in wagering at physical facilities.

(A competing bill, already filed, would allocate 85 percent of the additional revenue from the tax on ADW wagers to racetracks, with half going to purses.)

While this legislation is well intentioned, it is apt to have unintended consequences for Kentucky racing interests should it become law. National and state laws pertaining to intangibles like betting services can often be circumvented via the Internet.

Pari-mutuel wagering already extracts a takeout percentage higher than most betting and gaming alternatives. Adding even a small increment to the amount that Kentucky residents pay will either encourage some customers to curtail their betting on horse racing or find other places to do business.

Kentucky bettors will be incentivized to use ADW providers with no land-based facilities in Kentucky. Further, the proposed law might violate the U. S. Supreme Court ruling in 1992 that an online vendor is not obligated to collect state sales taxes on purchases if the vendor does not have a physical presence in the state in which a customer resides.

The magnitude of the takeout percentage matters most to the relatively small number of people who account for the lion’s share of all betting handle. Kentucky bettors in this category would be likely to bypass the proposed law by simply patronizing ADWs in another state or off-shore. Kentucky firms like Twin Spires and Keeneland Select would undoubtedly lose Kentucky customers and the KTDF would be no better off.

When elected officials carefully weigh the long-term costs and benefits of a tax on a major industry, they often come to the conclusion that it is not sound economic development policy to burden home-grown companies operating in a hyper-competitive global environment.

Recently, for example, the Moore County Council in Tennessee asked the state legislature to approve a referendum on the issue of whether the county’s largest employer, Jack Daniels, should pay a per-barrel whiskey tax that would have yielded about $5 million per year to county coffers. After further deliberation of the potential deleterious effects on Jack Daniels—and by extension, on the local community–the Council voted 10-5 to abandon the tax proposal.

In today’s integrated worldwide Internet-based economy, a state or local tax that is meant to help an indigenous industry can have precisely the opposite outcome.

Copyright © 2012 Horse Racing Business

Originally published in the Blood-Horse. Reproduced with permission.