Amid all the tax measures that were proposed on Capitol Hill, there was one that almost perfectly embodied the political and economic philosophy of the Reagan administration. It is not part of the $750 million tax bill being readied for the president to sign.
Bill S1369 would have restrained some federal meddling that is swamping private enterprise with paper work and costing it money. By reducing taxes, it would have encouraged citizens to invest money in ways that would have benefited and stimulated the private sector. The bill would have offered across-the-board relief and eliminated inequities that unfairly penalize lower-income taxpayers.
Yet the chief opposition to this measure was a Treasury Department less concerned with the virtues of supply-side economics and stimulative tax cuts than it is with an older policy: squeeze every possible dollar out of the nation's horseplayers.
In 1976 the Internal Revenue Service began withholding 20 percent from exactas, triples and other gimmick bets that pay more than $1,000 for $2. Race track officials and horseplayers hated the idea then and -- after five years of painful experience -- they hate it even more now. Sen. Walter D. Huddleton (D-Ky). introduced S1369, which would have repealed the law that permitted withholding. At a hearing before a Senate subcommittee, he and officials of the racing industry listed many reasons why the tax is both costly and unfair:
It discriminates against the pari-mutuel industry. Big winners in casinos don't have a cent withheld from their profits. The withholding tax on lottery winnings starts at $5,000.
Most of the money is withheld from persons who don't show a profit at the end of the year and thus don't have a tax liability anyway. "The bettor," Huddleston said, "suffers from the inappropriate presumption in the withholding law that his winnings from a particular race, not his net winnings, are the measure of his taxable income."
The persons most hurt by the withholding taxare lower-income taxpayers. Those who itemize their deductions can try to get their withheld money back (although, in actual practice, they may have a though time with the IRS auditors). But citizens who claim the standard deduction must forfeit their money.
The withholding tax takes money out of circulation that horseplayers otherwise would be betting. "It is crucial to recognize that payoffs of $1,000 are part of the normal ebb and flow of the wagering process," Don drew, vice president of the New York Racing Association, told the Senate subcommittee. "It deprives horseplayers of their rightful capital and triggers serious repercussions for the industry at large."
This argument against the withholding tax is pure supply-side economics. Forget for a moment that most of the money involved is not a legitimate tax liability anyway, but money that the IRS simply has confiscated. The government gets about $71 million a year by withholding money at the race track. According to an IRS study released earlier this year, withholding has increased taxpayer compliance by 19 percent. So the government is getting some $13.5 million that it wouldn't have collected otherwise. (And it returns an unknown sum of this money to horseplayers who claim losses and file for a refund.)
When the IRS withholds winnings, it removes money that otherwise would be circulating at the track. People who collect a $1,000 exacta have been known to visit the pari-mutuel windows for subsequent races rather than heading directly to the nearest thrift institution. The American Horse Council estimates that the average dollar at the race track "churns" 3 1/2 times. So $71 million would generate $248 million in betting.
Since the "take" from wagering at most tracks is 19 percent, that $248 million in bets would yield about $7 million in revenue for the states, purses for horsemen and income for the tracks.
The cost of the withholding tax probably is much greater than that. At Charles Town Race Track, whose major attraction always has been high-paying gimmick bets, the tax drove away large numbers of serious betters, who found themselves turning over all their profits to the government. Charles Town may not survive, and cost of such a business failure to the community and the state would be enormous.
Who possibly could argue that the government should stifle productive economic activity in order to collect a relatively paltry sum in tax revenue? Certainly no horseplayer would argue that. And no good Republican should, either.