The following testimony was provided to the House Gaming Oversight Committee on May 14, 2015 by Salvatore M. DeBunda, on behalf of the Pennsylvania Equine Coalition.

Improving the Competitiveness of the Pennsylvania Racing Industry

Thank you Chairman Payne and members of the committee for holding this important hearing and inviting representatives of Pennsylvania’s race horse owners and breeders an opportunity to testify. I also want to thank the Chairman for recognizing in his legislation, HB 649, the important contributions Act 71 has had on the Pennsylvania racing industry and providing year round, family sustaining employment.

My name is Salvatore DeBunda and I am President of the Pennsylvania Thoroughbred Horsemen’s Association, a non-profit, trade association of owners and trainers of thoroughbred horses racing at Parx Racing in Bensalem, Pennsylvania. I am testifying today on behalf of our members, as well as the Pennsylvania Equine Coalition, a statewide organization that represents more than 10,000 owners, trainers, drivers, and breeders in Pennsylvania’s horse racing and breeding industry.

Our member organizations include the Pennsylvania Harness Horsemen’s Association, the Pennsylvania Thoroughbred Horsemen’s Association, the Standardbred Breeders Association of Pennsylvania, the Pennsylvania Horse Breeders Association, the Meadows Standardbred Owners Association, and the Pennsylvania Horsemen’s Benevolent and Protective Association.

There are a number of topics I would like to touch upon today, so I will keep my comments on each topic somewhat limited in the hope that we can delve into more detail on specific topics during the question and answer session. These topics include internet and online gaming, the Governor’s sales tax proposal, the pari-mutuel tax, marketing, and Senate Bill 352, which would update the state Racing Act.

Internet Gaming
While we can envision how HB 349 will help protect our state’s current gaming operators from other on-line gaming operators, we believe the legislation, as drafted, would put our state and our state’s racing industry at great risk. While that proposed 14 percent tax rate is equivalent to the on-site tax rate for table games, it is significantly below the current tax rate for on-site slots play. As is human nature, any business owner would take steps to direct and encourage options where they retain more of the revenue. This is evidenced by the increasing revenue from table games, which corresponds to decreasing slots play.

We experienced the same impact when the legislature first authorized slot machines. To a great extent, racetrack operators no longer promote and encourage patrons to bet on horse racing, where the operators retain about 16% of the bets. Operators reduced their marketing of racing almost immediately and redirected their advertising dollars to encourage slot machine play.

In our opinion, that is one reason our para-mutual wagering has dropped dramatically with the advent of slots and table games. We forecast the same thing happening when on-line gaming is authorized if the current assessments are not maintained.

If you recall the argument put forth by gaming operators when the tax rate was established for table games was that they would incur much higher operational costs, therefore they could only do it if the tax rate was dramatically lower than for slots. Once on-line gaming is established their on-going operational costs will not be close to what they incur with either table games or slots play on site.  If you incentivize them to move frequent players from on-site to on-line by providing them a tax incentive to do so, they will. That will result in lost jobs at our brick and mortar casinos. In addition, it will result in lost tax revenues for the Commonwealth and reduced funding for the Race Horse Development Fund. The state’s horsemen and breeders – and the Commonwealth’s revenue collections — will be the big losers.

We also question the unlimited promotional play you provide to the gaming operators in HB 649, prior to the assessment on their gross interactive gaming revenue.  There is no such waiver for promotional play against the pari-mutuel tax, once again providing no incentive for gaming operators to promote live racing. In fact the only incentive for gaming operators to maintain live racing is they are required to do so in order to maintain their gaming license in Act 71, which is known as the Race Horse Development and Gaming Act. We have learned that some gaming operators are looking to reduce the number of live race days by half or more and fear they will seek to amend your language to do so. We urge you as strongly as possible to oppose any such effort by gaming operators.

On the topic of reducing live racing days, I would also note that this would have a detrimental impact on both operators and the state. As the Pennsylvania Gaming Control Board noted in a report released last month, betting at Pennsylvania race track casinos increases 15 percent on live race days. That means increased revenues for both the operator and increased tax revenues for the Commonwealth in the form of additional taxes. Any reduction in live racing would hurt both state revenues and operators.

The Race Horse Development Fund
As for what the legislature can do to further build our industry, the critical thing the legislature can do is stop diverting money from the Race Horse Development Fund. Nearly $300 million has been diverted from the Fund over the past six years. When you look at the business cycle investment our industry requires, that diversion has had a very chilling impact on investments that were primed for the Commonwealth. It has instilled a high level of uncertainty and limited confidence by those involved in our sport on the national level. The diversion of monies from our fund is definitely something owners and breeders consider when deciding whether or not to open a business here and invest in Pennsylvania. Like any business, they do a cost-benefit analysis that takes into account the future size of purses and breeders incentives. When those purses and incentives are at constant risk because of the diversion of funds to other purposes, those business owners are less likely to take a chance on coming to Pennsylvania or purchasing a Pennsylvania standardbred or thoroughbred horse or farm.

Pari-mutuel tax
Another important issue to address is providing sufficient funding to ensure appropriate industry oversight by the state’s racing commissions. This will provide the betting public with increased confidence in the integrity of our racing program. To accomplish this, all racing stakeholders should be asked to do more. So far, it seems only the horsemen and breeders are being asked to step to the plate with additional funding. We believe track operators should also direct more funds towards the funding of the Racing Commissions and would urge you to support an increase in the para-mutual tax to 3.75 percent with all funds directed to the operations of the Racing Commissions.

Sales Tax
We have very serious concerns about Governor Tom Wolf’s proposal to expand the sales tax to the purchase of horses in Pennsylvania. Race horses have been exempt from the sales tax as part of an effort to encourage the purchase of Pennsylvania bred horses and grow our breeding industry. Each fall, the Farm Show complex is home to a major Standardbred Horse Sale which attracts buyers from around the world to Pennsylvania. If this sales tax is imposed, that horse sale and the economic impact it brings to the Harrisburg region could be lost to another state. The sales tax would also make the overall price of Pennsylvania horses less competitive when compared to other states, which would have a negative impact on both breeders and horse owners. In addition, I would note that horses are often claimed in races multiple times during their careers. If a horse is sold by a breeder and then claimed three times, the overall cost of that horse with a 6.6 percent sales tax would increase by 26.4 percent by the time it is claimed for its fourth time. That would have a severe and chilling effect on the industry.

Marketing
I noted earlier that the lack of marketing by operators – and their decision to encourage bettors to make their wagers on table games or slots as opposed to racing – has had a severe impact on pari-mutuel wagering in the state. The legislature should require race track operators to match a specific percentage of their promotional play for slot machines with marketing of their racing operations. We also support the creation of a specific marketing fund for racing. Elements of this concept are current in SB 352, which would update that state Racing Act.

Commission Structure
I also want to touch briefly on the topic of the racing commissions. The Pennsylvania legislature intentionally established two distinct racing commissions for standardbred and thoroughbred racing. This was because the legislature recognized the substantial distinctions in the two forms of racing and differences in the breeds. Having two distinct commissions – with separate regulations because of the variations in the breeds and forms of racing – has served Pennsylvania and the racing industry well for many decades. We believes that we should maintain these two distinct racing commissions.

Take Out Rates
Another reason pari-mutuel wagering in Pennsylvania has suffered is the high take out rates in Pennsylvania, which are among the highest in the country. For those unfamiliar with the term, the takeout rate is the percentage of a betting pool that a racetrack keeps to defray costs and benefit the owners. As the Tribune Review noted in an investigative report in 2011, Penn National had the highest trifecta and superfecta takeouts among 67 North American thoroughbred tracks at 31 and 30 percent. Parx Racing was right behind with a 30 percent takeout on both bets. According to the Horseplayers Association of North America, these high take out percentages are why major bettors “are avoiding Pennsylvania tracks like the plague.” If we want to help increase pari-mutuel wagering, then the high take out rates in Pennsylvania need to be addressed. The Pennsylvania Equine Coalition believes that a reduction in rates will more than pay for itself in the form of increased betting, particularly among major bettors. Those bettors, individuals who bet $25,000 or more a year on horse racing – pay close attention to those take out rates.

Expanding Opportunities to Wager on Pennsylvania Racing
If online gaming legislation does move forward – hopefully at a tax that would not result in the cannibalization of existing revenues – the Pennsylvania Equine Coalition would support an amendment that would require every on-line gaming site to have a prominent link to live racing and enable individuals to bet on racing, in addition to online slots and table games. In addition, the Pennsylvania Equine Coalition would support an expansion of existing slot machine play in Pennsylvania. We believe Off Track Betting (OTB) facilities should be authorized to install a limited number of slot machines at their facilities, provided the tax rates and allocations mirror the funding levels in current law. Such facilities should be required to continue to prominently feature racing as their primary service. We believe this expansion will attract more people to these facilities and encourage additional pari-mutuel wagering, provided the legislature takes steps to address issues such as marketing and take out rates.

Conclusion
Thank you for this opportunity to present comments on behalf of the Equine Coalition. Joining me here today are Todd Mostoller, Executive Director of the Pennsylvania Horsemen’s Benevolent and Protective Association, who already testified, as well as Joe Thompson, President of the Standardbred Breeders Association of Pennsylvania and Brian Sanfratello, Executive Director of the Pennsylvania Horse Breeders Association. We are all happy to respond to any questions you may have.