Horse Racing Tax Credit Backers Not Deterred by House Setback

In The NewsHorse Racing Tax Credit Backers Not Deterred by House Setback

In The News,  | Quick Take
Jul 1, 2019  | 6 min read | Print Article

This article by Kastuv Basu first appeared in Bloomberg Tax on July 1, 2019

The fight over a contentious tax benefit for racehorse owners is just getting started.

The tax benefit, which expired at the end of 2017, lets owners depreciate the cost of a racehorse 2 years old or younger over three years, compared to seven years for other types of horses. The perk, in its current form, was first enacted in the 2008 farm bill and has been extended three times.

But when Ways and Means Chairman Richard Neal (D-Mass.) rolled out a bill (H.R. 3301) in early June to revive a package of temporary tax breaks known as extenders, the racehorse depreciation perk wasn’t included.

There are questions whether the benefit is still necessary because of changes in the 2017 law, but those in the horseracing industry say that losing the perk would discourage investment and new owners. The National Thoroughbred Racing Association said that a three-year depreciation schedule is valuable to many racehorse owners because “it better aligns deductions with corresponding income opportunities in subsequent years.”

Just because Neal left the benefit out of his extenders bill, that doesn’t mean it’s going away. The racing association plans to push for the perk to be included in any tax package that Congress passes this year.

Senate Negotiations

The initial package of tax breaks is seen as nothing more than a negotiating tactic with the Republican-led Senate, where the horse racing provision has powerful supporters such as Majority Leader Mitch McConnell (R-Ky.).

“I certainly hope it will be taken care of in the Senate,” said Rep. Andy Barr (R-Ky.), a prominent backer of the provision.

The racehorse perk does have its opponents, who say that it benefits only the super wealthy.

“It just smacks of a giveaway to the wealthiest of Americans and not really something that makes any sense from an economic perspective,” said Steve Ellis, vice president of Taxpayers for Common Sense, a nonpartisan advocacy group.

Barr pushed back against the notion that the racehorse extender helps only the super-wealthy, saying that the provision would help employees and workers.

“Like any other industry, there are people who supply capital, but there are a lot of middle-income people who depend on the horse industry,” Barr said.

Tax Law Changes

While industry is fighting to keep its perk, the 2017 tax law is further complicating that situation.

The Joint Committee on Taxation pointed out in March that the law included a provision that allowed full write-off, also known as 100 percent bonus depreciation, of certain kinds of property—including racehorses.

A JCT estimate of the racehorse provision, viewed by Bloomberg Tax, showed that extending the expired provision would have zero revenue effect because of this. If the economics of extension were very favorable to the horse-racing industry, the estimate would have shown at least a “negligible revenue effect,” a Democratic aide said.

Alex Waldrop, president and CEO of the National Thoroughbred Racing Association, said that the 2017 tax law only lessened the need for the three-year expensing provision for some.

“This is because many owners are not eligible for Section 179 expensing due to the net income requirement and choose to elect out of the 100% bonus depreciation because doing so allows them to better match deductions with corresponding income in future years,” Waldrop said in an email.

The industry also might want the extender as a back-up because the full and immediate expensing provision is scheduled to be phased down every year after Dec. 31, 2022, until it disappears at the end of 2026, according to a a senior Republican congressman who spoke on the condition of anonymity.

A Larger Debate

In the meantime, the racehorse provision is caught up in a larger debate in Congress over whether temporary tax breaks that benefit specific industries—including biofuels, railroads, and coal—are still needed.

The Senate Finance panel has formed a task force to examine the utility of these tax breaks and some House Democrats are keen to reexamine them.

Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, said there are sensible reasons to ask whether these tax breaks are more generous than they should be. ITEP is among organizations that have criticized the practice of extending temporary tax break and asked Congress to do away with them.

“This sounds very much like what defenders of these tax breaks always say, which is that ‘we would benefit from extending them,’” Gardner said. “That’s a very different question from whether they are good tax policy.”

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