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Saturday, February 20, 2010

New York Racing - A National Perspective

Alex Waldrop

Last week, I was invited to speak to a panel of New York state lawmakers. The hearing was called for the purpose of investigating the viability of thoroughbred racing in New York State and to compare it to the performance of racing enterprises in other states. My role was to offer a national perspective on the challenges facing New York racing. Of course, New York is not the only state facing challenges, but due to its size and scale, New York's challenges are, to a large extent, the industry's challenges.

First, I explained that the quality of New York racing is as good as any racing in the United States. New York leads the nation in Grade I Thoroughbred races (38), and it is second to California in total number of graded stakes (133 to 109). In fact, New York accounts for 23% of all Thoroughbred graded stakes in the U.S.

Legislators seemed surprised to learn that the New York racing industry supports 17,000 jobs and generates a $1.4 billion economic impact. They clearly did not understand that New York bettors account for almost 20% of total nationwide handle or that New York Thoroughbred racing ranks second nationally with total purses paid of $133 million. Even I was surprised when my research uncovered the fact that if NYRA and its three tracks were an MLB franchise, its annual purse distribution of $113 million would put it ahead of all but six MLB franchises in terms of "payroll" paid to its "players."

So much for the good news.

I then addressed the business environment for the gambling industry in general in New York. I explained to the assembly that the great recession has hit the gambling industry hard. In Atlantic City, revenues are down 25 percent since 2006. National racing handle was down nearly 10 percent in 2009 to $12.3 billion, its lowest level in 12 years. New York racing also competes in the Northeastern United States which is saturated with other forms of gambling. Foxwoods and Mohegan Sun, both located in Connecticut within easy driving distance of the NYRA tracks, are two of the largest and most successful Native American casinos in the world. Pennsylvania now boasts 25,000 slot machines in multiple facilities statewide. Then there are the four in-state Native American casinos against which New York racing competes. And New York also has eight racinos located across the state at all but NYRA's tracks. Undeniably, the days of NYRA receiving a state-sanctioned monopoly on gambling are long, long gone.

The tax environment for New York racing is worse. In 2007, New York racing paid more than $112 million in excise taxes to state and local governments. That is 35% of ALL the revenue paid to ALL the governments in all 38 racing jurisdictions combined. New York racing's effective pari-mutuel excise tax rate is an eye-popping 3.89%. Assuming a blended New York state takeout rate of 20% (set by state law), this excise tax rate is the equivalent of a 19% sales tax on every dollar wagered on New York racing. It is even worse at New York State OTBs where they charge an additional 5% surcharge on winning bets. That puts the “sales tax” rate at nearly 25 cents on the dollar for OTB patrons.

What's worse if you are a bettor is that these excise taxes get passed along to you in the form of higher takeout—which depresses wagering on New York racing even further. At a time when racetracks need to be lowering takeout, New York racing and its horseplayers are crippled by a punishing state tax burden.

As if all of this wasn't enough, racing in New York must compete with the New York OTB system, the nation's largest off-track betting operation. This antiquated dichotomy pits producer against distributor and leads to an acrimonious atmosphere that is toxic to racing and to the way it is viewed by the larger public. New York is the only state where such direct competition for patrons exists. It is inefficient at best and generally siphons off much-needed revenues from racing (locally and nationally). It also leaves producers like NYRA unable to control the way its racing is presented in its local market. For this reason among others, the New York model is widely viewed as an industry "worst practice." It is no accident that no state has copied the New York model since it was instituted in the early 1970s.

But wait, it gets worse. New York also presents a daunting legislative and regulatory environment. A recent report of the Task Force on the Future of Off-Track Betting in New York State recommends a variety of legislative changes, including changes that would effectively set prices for the simulcasting importers/exporters and the ADW providers operating in New York. This is an area that should be left alone. The horse industry looks to state government to strongly and efficiently regulate safety and integrity matters like pre-race examinations of horses and post race drug testing. When governments veer into economic regulation of our business, negative consequences for racing usually occur. NYRA and the state's horsemen are better situated than government to determine the optimal economic conditions for the industry. New York racing needs market-determined prices, not government imposed tariffs.

My recommendations for New York racing were the following:

Lower excise tax rate on pari-mutuel wagering;
Reorganize OTBs and tracks to minimize inefficiency and destructive competition and put the producers (horsemen and tracks) in control of distribution in-state;
Move forward with the Aqueduct racino as soon as possible;
Incentivize capital investment at the racetracks;
Aggressively regulate safety and integrity; and
Stop regulating racing's economics including takeout – that is not a proper role for government.
Those were my recommendations. What did I omit? Let me hear from you.

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