Kentucky and the thoroughbred industries: prospects and challenges as gambling stagnates

ABSTRACT

Over the last 15 to 20 years or so horse racing has seen declines in wagering and fan attendance throughout the US. Because of this, the number of races, horses per race, the number of thoroughbred farms, and new thoroughbreds bred and born each year for about the last 10 to 12 years have also declined. The decline in wagering has occurred despite simulcasting of races, online betting, and gambling machines which employ films of past races (historical horse racing machines). Those racetracks doing well are usually part of larger casino and entertainment complexes (racinos). Kentucky, which has one of the greatest number of horses and horse farms per capita in the United States, and which is also home to one of the world’s premier racetracks and horse races, Churchill Downs and the Kentucky Derby, has seen declining inflation adjusted horse industry tax revenues since the 1990s. These losses, although a small share of the state’s overall tax revenues, somewhat exacerbate a budget which has already seen substantial declines in or an almost complete loss of tax revenues from two other major industries of the state, coal and tobacco. This research note explores why the Thoroughbred industries are declining and how this is impacting some Kentucky state tax revenues, especially revenues which support equine industries. Policy decisions will have to be made regarding future state support.

KEYWORDS:

• Gambling
• horse racing
• parimutuel wagering
• tax revenues
• thoroughbred industries

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Interestingly, when looking for a best fitting trend line for the data shown in Figure 1, the best fitting one (r-square = 0.9814) is a cubic one where ŷ = −0.0027x³ + 0.2707x^{2 –} 4.2012x + 30.369. Such cubic polynomial functions have often been claimed to model the product life cycle concept where many products and services go through different stages of market share and sales volumes such as introduction, slow growth, rapid growth, peak, and then possible decline. Moss et al. (2003) use polynomial regression to analyse Mississippi gaming revenues.

2. Although they did well when originally started decades ago, off track and simulcasting betting revenues have declined over the last 10 years or so in Kentucky and throughout the US (Kentucky Horse Racing Commission Biennial Reports 2002–2003 to 2017–2018, Office of the New York State Comptroller 2015).

3. For Casinos, only data from 2013 to 2019 for casino hotels can be found.

4. In using the natural log of real disposable personal income to predict the natural log of real gambling expenditures using data from 1959 to 2019 in a regression equation, a coefficient of 2.31 is found for the log of real DPI. That is, a 1% increase/decrease in real DPI is associated with a 2.31% increase/decrease in real gambling expenditures. A coefficient greater than one indicates that gambling is a luxury good, and its demand fluctuates greatly with economic times.

5. At the micro level in individual regional markets, there is evidence that the different gambling forms compete against each other, and as one form of gambling gains revenues, its competitors usually lose business due to high degrees of substitution made by gamblers among the different types (Gulley and Scott 1989 and Gulley, et al., 1993, Thalheimer and Ali 1992, 1995, 2003,, 2008, Philander 2011, Marionneau and Nikkinen 2018). Parimutuel wagering is especially vulnerable to competition from casinos, lotteries, and professional sports gambling according to Thalheimer and Ali (2008).

6. As of the time of the writing of this paper it is too soon to assess the impact of sports wagering on parimutuel wagering since the US Supreme Court has only allowed states the right to allow sports gaming since 2018. Before then, legal sports gaming in the states had been banned except in Nevada (Martin 2018). Lambert (2019) finds that in New Jersey, the first state to allow sports gambling and home to Monmouth Park race track, the state’s largest track, sports gambling at the track and through the track’s online app have done really, yet online and on track gambling continue to be lower than before 2015.

7. In 2019, historical horse racing revenues counted as around 77% of the total handle or revenues for all parimutuel wagering at Kentucky horse racing tracks.

8. The greatest share of parimutuel wagering in the US is for Thoroughbred racing. Standardbred racing, or harness racing as it is often called, makes up less than 10% of parimutuel wagering in Kentucky (Kentucky Horse Racing Commission 2002 to 2018 reports). Fixed odds wagering is not common in tracks in the US although it is popular in other nations. Having more fixed odds wagering at US tracks has been proposed as a remedy for horse racing’s decline for the last several years. Many believe that it could revive interest in the sport (Cherwa 2019).

9. Some of the top stallions bred with over 200 mares in a single breeding season.

10. Unlike with Standardbred horses and other breeds of horses, artificial insemination is prohibited for Thoroughbreds in the US thanks to the efforts of the US Jockey Club which tries to promote the interests of breeders (Coelho and McClure 1987, Losey and Lambert 2020a). If artificial insemination would be permitted, most breeders would fear a significant drop in the price of stud services. Using an index measuring common ancestry with a scale of 0 to 32 and going back five generations for each stallion/sire, Losey and Lambert (2020b) find a statistically significant increase from 2000 to 2020 in the amount of inbreeding among horses offered for stud services (Bloodhorse 2000, 2020), and these are the scores displayed in Table 3. Their results parallel the findings of horse veterinarians and others who have noted higher levels of inbreeding, although no definitive source could be found that states whether higher levels of inbreeding are causing any congenital health problems in Thoroughbreds.

11. The US is one of the few nations that has had jurisdictions within it that permitted race day usage of Lasix. Most other nations allow Lasix for horses for training purposes but not for race days.

12. Excise taxes and fees on horse sales, horse auctions, wagering (online and on-track), historical horse racing, simulcasting etc. The nominal amount for 2018 was around $23 million and around $21 million for 2017, which are small amounts when compared to total Kentucky tax revenues of over $10 billion for each year (Office of the State Budget Director 2019). Taxes on cigarettes brought in almost $30 million, taxes on alcohol around $15 million, and state revenue from state lottery sales were $19 million (Office of the State Budget Director 2019).

13. A review of the financial statements of one of the worlds most successful race track’s (Churchill Downs Incorporated) Annual Reports indicates that around 75 to 80% of the track’s current revenues now comes from operations that are not on its race track or other tracks that it owns premises. These other operations include casinos, online betting, and other gambling venues (Churchill Downs Incorporated 2016-2019-2019, Barton 2017).