Racing must get states to reduce takeout to encourage growth

Takeout is both the lifeblood and bane of Thoroughbred racing. Without it, there would be no sport. Because of it, the sport drains money from the very customers it needs to survive.

Takeout-the money that comes out of every bet to pay for purses, to operate the racetrack, and to pay the state taxes-has been a part of racing since the inception of pari-mutuel wagering. While it cannot be eliminated, the question of how high the takeout should be is important to the racing industry. It should be a priority of racing to get states to lower takeout to encourage betting. As discussed in "Business of Horses" (page 66), numerous studies have indicated that the higher the takeout, the lower the betting handle. That is because when more money is taken out of circulation fewer dollars are distributed to the winning bettors. Think of it this way: If all of the bettors came to the track one day and there was an unlimited number of races (kind of like simulcasting) and nobody left to go to the bank, they would all be penniless eventually.

Takeout varies by state and by type of bet. A single proposition wager-win, place, and show-typically has a takeout of between 15% and 18%. A gimmick wager-exacta, trifecta, or daily double-will have a takeout rate in the low 20s. The real exotic wagers-such as the pick six or superfecta-often have takeouts of 25% or more.

Usually, the higher the potential payoff, the higher the takeout. The states and tracks must think that the person is so happy to collect on a longshot proposition bet that they do not really notice all the money being siphoned off. But they do. The big bettors and the smart bettors are very cognizant of takeout. The handicappers who make a living betting on horses live by percentages. A good bettor may come out ahead by just 3% of his total wagers for the year. That is a thin margin for a lot of risk. That is why rebating is so prevalent across the country today.

A number of times in the 1970s and '80s, New York decreased the takeout on bets to encourage growth in handle. Each time, the handle rose in response to the decreased takeout. But the reduction in takeout was usually only experimental, and it always went back to its previous levels at the end of the mandated time. Handle also returned to previous levels.

In the mid-'90s, however, an advisory committee to the governor in New York finally came up with enough evidence to persuade the state to reduce takeout, which it did in 1995. Takeout was reduced from 17% to 15% on straight bets, and breakage was also changed, to five cents on the dollar. Handle has never been better in New York. Average daily handle at New York Racing Association tracks in 1999 increased 15% over 1998.

Getting more states to lower takeout is a key to helping the sport compete with other forms of gambling.

However, as economist Richard Thalheimer points out in his study discussed in "Business of Horses," the crux of the problem is that states take a fixed percentage, caring little whether the surcharge is helping or hurting commerce. According to his models, if a track wanted to lower the takeout to encourage greater handle, it would actually lose revenues while the state would continue to get its piece of the pie.

Thalheimer has proposed a different method of calculating handle, one based on indexing, a practice used by states to collect other gambling revenues, such as from slot machines.

He makes a sound argument for this approach, and it would help eliminate the friction between the racing industry and state governments and make them partners in the growth and success of racing.

This is an issue the National Thoroughbred Racing Association (NTRA) should champion. In July, the NTRA established a legislative task force, headed by owner-breeder Robert McNair, to examine ownership licensing in different states, regulation of simulcasting, and taxation of pari-mutuel wagering. One can easily make an argument that states should receive little or no money from taxation of handle but instead should collect their tax dollars on racing-related payrolls and on business taxes levied on racetracks, their suppliers, and the agricultural enterprises that support the racing business.

States may not go that far, but they should be responsible for creating growth, not stifling it.