A recent letter to the editor of The Washington Post took exception to the idea that horseplayers deserved some relief in the Senate's tax bill.
"I seem to be missing the point," wrote Russell Prickett of Washington. "When I earn $1,000, the Internal Revenue Service withholds nearly 25 percent of it. What's wrong with withholding a mere 20 percent of $1,000 that a horseplayer makes sitting at the track -- at odds of 300 to 1?"
Yes, Mr. Prickett, you missed the point. And so, too, did Sen. Bill Bradley (D-N.J.), who was responsible for killing an amendment that would have reduced the withholding to 15 percent.
People who don't understand the nature of this withholding tax might think the proposed change was going to be a great financial break for gamblers. Not at all -- the reduction would only relieve a little of the sting of a law that must be one of the most unfair, unrealistic parts of the whole U.S. tax system.
The IRS persuaded Congress in 1976 to pass the withholding-tax measure, arguing that too many gamblers were not paying taxes on their winnings. "This is a compliance issue," an IRS official testified. Until then, a bettor who hit a big payoff had only to fill out an IRS information form before collecting his winnings.
But how big was the problem of noncompliance? It couldn't have been very big, because the only people who legitimately owe taxes on gambling income are ones who show a net profit from gambling for the entire year.
"They were looking for taxes on income from a group of people who were showing a net loss," said Tom Aronson, director of legislation for the American Horse Council. "How many individuals win money during the course of a year at the races?"
A bettor who hits a $100,000 Pick Six most likely will show a profit for the year. A bettor who collects a $20,000 trifecta payoff may well be a net winner, too. It is just as logical to withhold taxes from such winnings as from Mr. Prickett's paycheck.
But the withholding tax affects payoffs of $1,000 or more, and it is safe to say most people aren't going to be net winners for the year because they have collected $1,000. Plenty of them aren't even going to be a winner for the day. In an era when syndicates routinely invest thousands of dollars into exotic wagers, the $1,000 threshold for withholding makes no sense.
The government withholds money from some 175,000 parimutuel transactions a year, and most of these "winners" are not going to be winners at the end of the year. Therefore, they are entitled to get their money back. But they can't collect their refunds quite as easily as other taxpayers.
If a horseplayer happens to be part of the majority of Americans who take the standard deduction on their tax form, he can't get his money back. The only way to get back the withholding tax is to itemize and claim gambling losses to offset winnings.
If a horseplayer does itemize and claim losses, he probably will be asked by the IRS to verify these losses. Unfortunately, the record-keeping of most bettors won't satisfy the government.
A bettor who hits a $2,000 trifecta in October might be moved to keep records of his losses for the rest of the year, but even that wouldn't be enough for the IRS, which demands records for the entire calendar year in question.
In practice, taxpayers who are audited on this issue usually wind up bargaining with the IRS and hoping just to get back some of the money to which they are entitled. When the 20 percent was taken out of their payoff at the track, it wasn't being withheld; it was being confiscated.
"The withholding tax," Aronson said, "is aimed at a small amount of noncompliance. But this is an extreme procedure to get at a few million dollars. And what money the government does get comes at the direct expense of the states and the industry. The negative impact easily equals the gain for the federal government."
During the course of a year, Uncle Sam withholds about $75 million from parimutuel payoffs. Racing economists estimate that every dollar circulates through the mutuel windows 3 1/2 times, so that $75 million would produce more than $250 million in wagering.
The states and the industry receive roughly 20 percent of every dollar bet, so their share of this $250 million would be about $50 million. That is the calculable cost of the withholding tax, and Aronson figures there is a further hidden cost.
"A horseplayer knows that even if he gets lucky and hits one big payoff to get back to even, he is going to have to pay taxes," he said. "There's an aura of over-taxation that creates a sense of hopelessness about going to the track."
Horseplayers are not looking for any outlandish tax giveaways, just a system that is fair and sensible. A withholding tax of 15 percent (equal to the basic rate in the Senate bill) on payoffs of $5,000 or more -- the same threshold required for lottery winnings -- would make sense.
Surely even people who don't like gambling can understand the point that horseplayers dislike paying taxes when they don't owe any taxes.