Amendment In Pipeline for Costly Kentucky Tax Law

[Wandering Eyes]

A Kentucky state senator with professional ties to the racing industry is endeavoring to change a recently-enacted state tax that he believes unintentionally penalizes racetrack bettors by taking away their ability to offset gambling winnings with losses when calculating income.

“There was never any specific intent to target horseplayers,” Damon Thayer, the Republican Majority Floor Leader, told TDN via phone on Monday. “I’m trying to get some language in [a new bill] to fix the problem.”

Although the tax changes brought about by HB 487, Kentucky’s sweeping tax reform bill, were first enacted on Apr. 27, 2018, many horseplayers and tax professionals are just now becoming aware of the potentially costly gambling-related consequences as they prepare their 2018 tax returns.

Frank Angst of Blood-Horse first broke the story Sunday, detailing complaints from bettors who could face thousands of dollars in new taxes because they can no longer mirror federal income-calculating guidelines that pertain to gambling winnings when filing their 2018 Kentucky state income tax returns.

A closer look at HB 487, which passed the House (51-38) and the Senate (24-14) before becoming law without the governor’s signature last year, shows that only a single line of text within the bill without any reference at all to “gambling,” “winnings” or “losses” is what has triggered the potentially onerous tax liability for bettors.

The clause within the 417-page bill was inserted on page 166, where in a section detailing how the calculation of income should follow federal standards, one of ten exceptions to following the federal code states that “Any deduction allowed by 26 U.S.C. sec. 165 for losses” is no longer permitted.

Section 165 of the federal code reads, in part, “Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions [and] the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.”

This means Kentucky residents are still able to deduct losses to the extent of winnings on their federal returns, but not on their state returns for 2018.

Thayer, upon first hearing word Monday about how this clause will negatively affect Kentucky taxpayers, said, “It was news to me, because I was in the room with [Speaker of the House] David Osborne, who is also a horse racing industry participant like me, and there was never any mention of pari-mutuel wagering, losses, deductions, anything. So I think it’s a misapplication of the law by the finance cabinet.”

Thayer explained how in the wake of passage of any wide-ranging state tax reform, lawmakers typically have to come back and put together a “cleanup bill” as constituents come forward with complaints. That process, he said, already began months ago in Kentucky, and is not limited to Thayer’s efforts to change the way gambling winnings are reported.

“Any time you do a major tax overhaul like we did last year, there are always unintended consequences that you have to do a cleanup bill [for],” Thayer said. “It just passed the House last week. We just got it. It’s in the possession of our Appropriations and Revenue Committee, and I’m already working with Senator Chris McDaniel, the chairman of the committee, to see if we can insert some language. He’s working on an amendment to the House bill, and I’m going to try to get some language in there to fix it. We’ve only got 12 days left in our legislative session, so time is of the essence.”

But Thayer said it is unlikely that the changes will help horseplayers on their 2018 returns.

“It’s difficult to do those things retroactively,” Thayer said.

So is 2019 the target date for rolling back the tax change?

“That’s to be determined, but I would say that’s a likely application,” Thayer said.

TDN attempted to contact Republican Phillip Pratt of Georgetown, who sponsored last year’s sweeping tax bill, to ask why HB 487 stripped out the ability to deduct losses from winnings in the first place. But a message left with a staffer did not yield a return call prior to deadline for this story.

Jeff Platt, the president of the Horseplayers Association of North America, told TDN via phone that one “silver lining” for Kentuckians is that because of tax-friendly code changes initiated at the federal level in 2017 (in which a bettor’s entire-pool investment, as opposed to only the amount wagered on the correct result, determines the amount reported or withheld for tax purposes), the number of “signers” is down significantly. Thus, for Kentucky residents, there are fewer documented winnings that need to be reported at the state level.

“Me personally, I’m against these kinds of tax code changes,” Platt said of the new Kentucky law. “Give the taxpayer the option of either using a short form or a really extensive long form to deduct stuff like this.

“The thing is, so few people actually win on horse races,” Platt continued. “Even those who might hit lots of signers during the year, they tend to churn most of it back. The number of people who win in this industry is maybe 1% or 2%, something like that. The maddening thing is that this type of statute discourages someone from even going to a horse track.”

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