Thayer: Tax Law Fix on Gambling Winnings a "Heavy Lift"

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In a change that never should have occurred in the first place, Kentucky lawmakers eliminated the ability of gamblers to claim losses up to the amount of their winnings for tax year 2018 as part of a major tax reform that aimed to simplify the code by eliminating many deductions.

While one certainly can question why Kentucky lawmakers would have stopped allowing gambling losses to be claimed against winnings--a bettor who wins $100 on one race but loses $200 on the day at Keeneland or Churchill Downs certainly didn't win--there's no question that Sen. Damon Thayer (Republican, Georgetown) immediately understood the problem and quickly took action to change the rule going forward.

Thayer recently provided a behind-the-scenes replay of efforts to return the ability of Kentucky bettors to claim their losses against any gambling winnings. Thayer saw an opportunity to add wording to a Senate bill that aimed to clean up unintended consequences of the tax reform bill passed in 2018.

The House bill addressing such unintended consequences had already been approved and the Senate bill already was before the Senate Appropriations and Revenue Committee, chaired by Christian McDaniel. Thayer said most of the issues that had been addressed in each version of the bill had already been discussed for months whereas there had been no discussion of the problematic change ending the ability to claim gambling losses against winnings.

Kentucky Horseplayers Concerned About Tax Change 

"Most of the issues that are addressed in there we knew about for a long time but until your article, no one knew about or had discussed this issue," Thayer said. "So on these other issues, you had a year's worth of public comment, social media postings, and lobbying behind putting these issues in the bill.

"But for this issue, we only had a few weeks to explain the issue and convince lawmakers that this was an unintended consequence."

While efforts led by the NTRA at the federal level have greatly reduced the number reported winnings, they do still occur and previously players could keep track of their losses to claim against these big wins. Also, regular players in Kentucky have made a habit of filing reports on their winnings and losses to determine if they finished up for the year, which until tax year 2018 would be the amount they traditionally would have paid taxes on. The new rule put in place for 2018 would only view the winnings side of that ledger for such Kentucky players. Thayer said the impact had not fully been considered by lawmakers last year.

"Whenever you do comprehensive tax reform, there are going to be some mistakes and oversights," Thayer said, noting that lawmakers had not considered the impact on the horse industry and horseplayers.  

Thayer said he thought the addition to the unintended consequences tax reform bill was a good fit because he believes lawmakers never intended for this to be the standard. But with that standard in place, Thayer not only faced the challenge of educating lawmakers on the importance of pari-mutuel wagering for the horse industry but also saw some opposition from anti-gambling lawmakers. The ending of the ability to claim losses against winnings put Kentucky at a disadvantage with other states, and it risked losing big bettors, a trend that would negatively impact pari-mutuel handle and, in turn, purses. But explaining this to other lawmakers, already well into the current session, would prove a challenge. 

"There is still some strong anti-gambling sentiment, especially in Kentucky's rural areas so we ran into some of that," Thayer said. "We had to explain to lawmakers that pari-mutuel wagering and these bettors are the financial model that racing is based on.

"It was a heavy lift in a short period of time," Thayer said. "It is a major victory. It would have put Kentucky in an uncompetitive position."

Thayer said the legislation applies to tax year 2019 going forward. Efforts to make it retroactive to the 2018 tax year came up short. He noted that it's a very high bar to clear when it comes to changing tax laws currently in place.

Thayer thanked McDaniel, a Senator from Northern Kentucky near Turfway Park who had some understanding of the issue and quickly supported it--adding the change at the committee level. It would be debated again after advancing from the committee.

"He helped me explain it to others, I'm eternally grateful to Sen. McDaniel," Thayer said. Thayer also recognized Rep. David Osborne, an Oldham County-based Thoroughbred owner and Speaker of the House; and Rep. Adam Koenig, who introduced sports wagering legislation currently under consideration and also is from Northern Kentucky, for helping pass the legislation through the House.

On March 13, a free conference committee working on versions of the clean-up bill approved by the Kentucky House and Senate was approved, with the gambling losses deduction included, by an 87-8 vote. The bill will go to Gov. Matt Bevin for his signature.

As for this year, the problematic law is in place. As one Kentucky bettor previously told BloodHorse, he was surprised that there wasn't more awareness of why gambling losses need to be tied to winnings, in a state where horse racing is so vital.

"I don't want to bet right now," the player said. "If this had happened in Montana or somewhere that betting the races isn't as big, I could have seen that. But I can't believe this happened in Kentucky."

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