Thursday, December 21, 2017

The GOP Tax Bill, Horses, and the Rest of Us

Someday soon, the ignorant, incurious, lazy, lying, racist, sexist, narcissistic, sociopathic, kleptocratic dotard who, incredibly, is President of the United States will sign the Republican tax bill, making it, at least until the 2018 election, the law of the land.

For those still reading, I don't intend to rehash here the many odious features of the bill. They have been analyzed well by experts here, here and here, among many other places. A complete summary of the bill, by the usually reliable lawyers at my former firm, is here. In this piece, I just want to consider (1) what the bill does for (mostly rich) thoroughbred breeders and owners; (2) what it does for, or perhaps to, gamblers; and (3) what those of us in New York, California and other Blue states targeted by the GOP with its limit on state and local tax deductions can do to sabotage the bastards.

I. Impact on Breeders and Owners

Like every one of the 535 members of Congress, I have not read every word in the new tax bill. I have, however, read the horse-relevant sections, and my conclusions are much the same as those of the National Thoroughbred Racing Association, which lobbied hard for the provisions and whose analysis can be found here.

First, the bill accelerates what was already a favorable depreciation regime for owners and breeders. Under the new legislation, the maximum "Section 179 deduction," which permits immediate deduction of capital expenses -- rather than having to depreciate them over a period of years -- is increased from $500,000 to $1 million, and eligibility for the deduction is extended to businesses with up to $2.5 million in income, increased from current-law $2 million.

Second, for operations that are too big to benefit from Section 179, the bill expands "bonus depreciation," which allows 100% expensing of both new and used property in the first year it is placed in service -- including yearlings, breeding stock and farm equipment.

Third, the bill shortens the depreciable life for farm machinery and equipment from seven to five years and allows farms to use a faster depreciation schedule that front-loads the tax deductions in the first couple of years. Race horses already benefit from an accelerated three-year depreciation schedule.

Taken together, all these provisions significantly increase the ability of breeders, and to some extent owners, to write off their capital expenses faster, thereby reducing their tax bills in the short term. And in the long term, as economist John Maynard Keynes said, we're all dead.

Fourth, the bill reduces the nominal corporate tax rate from 35% to 21%. For those breeding operations organized as corporations, that means an immediate cash windfall. Trump and his sycophants say that will lead to increases in jobs and wages. More likely, it means that the farm owner or corporate CEO will be driving that new Maserati SUV.

Fifth, for the majority of breeders and racing stables that are organized as partnerships, limited liability companies and "S" corporations, the bill exempts roughly a quarter of income from tax, under the "pass-through" provisions that have been in the news. Coupled with the reduction in the top personal income tax rate, that means a successful breeder or owner would pay tax at less than a 30% rate, compared to nearly 40% under current law.

Sixth, the bill doubles the estate tax exemption from $11 million to $22 million, resulting in a windfall of more than $4 million (at the 40% estate tax rate) for the heirs of those who are smart enough to die before the Democrats retake Congress and return (I hope) to a sensible, progressive estate tax that makes deserving heirs like Paris Hilton or Donald Trump Jr. actually work for a living.

All of this, I guess, is good news for the country-club set and other richies, a few of whom do in fact participate in racing. And, while their new-gotten gains are unlikely to be translated into wage increases for their employees, they may be tempted to spend more for high-end race horses. Whether that does any good for the rest of the industry is quite another question.

II. Effect on Gamblers

As we all know, the tax treatment of gambling on horse racing has been unfair for years. The NTRA scored a major victory earlier this year, when the Treasury Department revised regulations to reduce withholding and the issuance of W-2G income-reporting forms with respect to exotic bet payoffs. There's already some, as yet inconclusive, evidence that the change has increased "churn," the amount that horseplayers put back into the mutuel pools.

The new tax bill leaves intact another unfair piece of tax law affecting gamblers, by requiring that gambling losses be used to offset gambling winnings only by way of an itemized deduction. With the elimination of the personal exemption and the doubling of the standard deduction to $24,000, fewer taxpayers will itemize deductions and, therefore, fewer will be in a position to offset their gambling winnings. Balancing that, perhaps, is the fact that, as a result of the regulations change, fewer taxpayers will receive W2-G forms at the end of the year and therefore feel that they have to report gambling winnings at all. So in this, as in many of its provisions, the new bill actively encourages tax cheating. Good work GOP.

In addition, for the relatively small number of people who can convince the IRS that they are in the "trade or business" of gambling, the bill effectively eliminates the possibility that they could have a loss in one year carried forward or back to reduce taxes in other, profitable years. It does so by lumping in such a gambler's ordinary expenses, like travel and lodging, along with winnings in the amount that can be offset by losing tickets, so that those additional expenses cannot be used to create a tax loss in any year. Nobody's going to win an election campaign by promising to make things better for professional gamblers, but, still, it ain't fair. If you trade in pork bellies or Bitcoin futures, you can deduct those expenses, but not if you trade in the chances of number 6 in the feature.

III. The Bill's "Fuck You" to Blue States

As we all know by now, the bill limits the deductibility of state and local taxes (SALT) to $10,000, with no doubling for a married couple's joint return. This is just pure vengeful payback aimed at states like New York and California that have (a) lots of Democratic voters, (b) relatively high property values and, hence, property taxes; and (c) high state and local income taxes that support decent public services. For ordinary middle-class taxpayers in these states, the bill will mean a significant loss of itemized deductions and, therefore, a significant increase in the amount of federal tax that they'll owe. Every taxpayer's situation is different, but broadly, taxpayers with household income of between $75,000 and $600,000 in New York City, where I live, are virtually certain to face federal tax increases because of this one provision.

(The bill also reduces the amount of a mortgage that will qualify for the mortgage interest deduction from $1 million to $750,000. I'm less outraged by this, though it will affect some homeowners in New York and California; people with million-dollar homes aren't the most deserving objects of our concern.)

But, because the bill was rushed through Congress, there's a gigantic loophole that, with the cooperation of state and local governments, could completely eliminate the SALT limitation. The estimable Martin Sullivan, chief economist of Tax Analysts and a former Treasury and Joint Committee on Taxation staff member, laid out the strategy yesterday on Twitter. A state or local government sets up a charitable fund to carry out government functions, then gives a taxpayer a 100% credit against state taxes for "contributions" to that fund. The state gets just as much money, the taxpayer gets a reduced state or local tax bill and can come in under the Republicans' punitive $10,000 limitation. Such a system is already partially in place in Arizona and Maryland and has been endorsed by the IRS in its taxpayer publications and in an IRS chief counsel's memorandum and a Tax Court case, both dating to 2011. 

So now it's up to us to make sure that our state and local officials know about the loophole and that they promptly take steps, in the 2018 legislative sessions, to provide relief for their endangered taxpayers. Let's fight back against the rape of Blue states by the troglodytes in Washington.

Wednesday, December 6, 2017

What Do the NYTHA Election Results Mean?

The New York Thoroughbred Horsemen's Association (NYTHA) election results are in, and, in my view, it's a definitely mixed bag. With NYTHA President Rick Violette stepping down, after 25 years on the Board of Directors and nearly a decade as President, there was bound to be a change of direction, but the results overall, including the change in owner and trainer spots on the Board, raise some troubling questions.

Replacing Rick as President, having run unopposed, is Joe Appelbaum, who joined the NYTHA Board as an owner-director in 2014. Joe, who runs the Off the Hook pinhooking and racing operation, has lots of energy and has been a fast learner in his first term on the Board. He'll certainly do what he can, and he's been working hard to find solutions for the outrageously expensive workers compensation premiums that make New York the highest-cost state in the country for owners and trainers. But there will inevitably be a steep learning curve.

In the five trainer slots, Pat Kelly and Jimmy Ferraro were voted out, to be replaced by John Kimmel and George Weaver. Linda Rice, Rick Schosberg and Leah Gyarmati were re-elected. Kimmel, with his veterinary background, will be a great addition to the Board. But Pat Kelly's absence will be felt, especially because of his deep web of connections on the backstretch. Pat has been the guy to go to to solve small problems involving backstretch workers, toiling away in obscurity on the Backstretch Violations Panel, staying in touch with the stewards and the NYRA folks who had direct responsibility for what happens on the backstretch. The voters, collectively, made a mistake by not retaining his expertise.

As for the owner slots on the NYTHA Board, again, there was a loss of expertise. Mike Shanley, a former legislative staffer in Albany with a wide range of government contacts, was voted out, and the new Board includes West Point Thoroughbreds' Terry Finley and two of his co-owners, Bob Masiello and former race-caller Tom Durkin. Tina Bond and Jack Brothers were the two incumbent owner-directors to be re-elected.

I often disagreed with Mike Shanley, and thought he was frequently too cautious in confronting NYRA, but his departure, combined with that of Rick Violette, means that NYTHA has lost some 50 years worth of experience on dealing with Albany. Remember that, unlike the situation in all other states, NYTHA has no statutory right to negotiate a contract with NYRA. Elsewhere, horsemen can cut off a track's simulcast signal if they fail to reach agreement with track management on the number of racing days, contributions to the purse account from handle and other relevant issues. In New York, thanks to the lobbying efforts of the Jockey Club grandees some 30 years ago, that right doesn't exist. As a result, issues that would be decided in contract negotiations in other states are, in New York, settled by legislation in Albany. Under Rick's leadership, NYTHA achieved a lot of success there, especially in locking in a significant portion of slot-machine revenues for purses and in getting NYTHA a seat on the "new NYRA" Board of Directors. Future battles in Albany will need to be waged without that accumulated expertise.

Moreover, the election of Terry Finley and his two co-owners (Masiello owns a number of horses in partnership with West Point, and Durkin owns a share of Kentucky Derby winner Always Dreaming) worries me. In Terry's last stint on the NYTHA Board, as an owner-director from 2011 through 2014, he talked a lot about getting more involvement in NYTHA from owners, but produced few results; tellingly, he refused even to provide the names and addresses of his own West Point partners to NYTHA so they could be added to the organization's email list. And then, when he narrowly lost the presidency to Rick in the 2014 election, he first verbally assured Rick that he wouldn't challenge the results, but later reneged on that commitment and embarked on a legal challenge, ultimately dismissed in the courts, that cost the organization more than $200,000. I just can't get over seeing that as a commitment not to NYTHA as an organization, but to the cause of Terry Finley.

I don't know Bob Masiello. I do know Tom Durkin, and I admire his commitment to the welfare of backstretch workers, reflected in his longtime membership on the Board of the Backstretch Employee Service Team (BEST). But the interests of horsepeople often require a willingness to stand up and fight, especially to fight against the suits with little racing acumen who run NYRA these days. I'm just not sure that Terry and his co-owners are up to the task.

A final thought: when I joined the NYTHA Board back in 2002, Linda Rice was the only woman member. Now, there's a better gender balance, with three of the 10 Directors being female. But there's still a complete lack of black and Hispanic owners and trainers on the Board. It's not just window-dressing for its own sake. As we've seen in many other fields, inclusion of diverse life experiences and perspectives makes the entire organization stronger, fairer and better. It didn't happen this time around, but perhaps in the next election cycle, NYTHA should reach out to, for example, Rudy Rodriguez, Charlie Baker or Carlos Martin and get a bit more diversity on the ballot.