Joel Rosario rides Orb to victory during the 139th Kentucky Derby. The Kentucky Derby tax break

Racehorse owners at the Kentucky Derby can be thankful for more than prime track views and potential pots of cash as they sip mint juleps this weekend.

A gift from Congress is expected later this year: renewal of a multimillion dollar tax break for thoroughbreds.


It’s a nice little perk for racehorse investors, considering some of these prized animals go for hundreds of thousands, sometimes, millions of dollars.

“Oh, the poor impoverished owners of racehorses,” said tea party favorite Rep. Tim Huelskamp (R-Kan.). “I don’t know how you can defend that … I’m sure it’s so critical that we borrow money from the Chinese to spend” on this.

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Lawmakers are expected to extend the “temporary” provision that allows the owners of big-name racehorses like “California Chrome” and “Wicked Strong,” to write the purchase price off their tax bills. It’s part of a package of so-called tax extenders that routinely get approved as a package every few years, with little debate.

The racehorse industry, backed by powerful Senate Minority Leader Mitch McConnell (R-Ky.), say it’s an easy sound bite to attack the break. The provision is a matter of fairness, they argue, and the deduction also protects the horses.

”This is not a tax break, it’s a modification of tax code to reflect the economic reality [of horse racing]… the actual useful life of the property,” said Alex Waldrop, president and CEO of the National Thoroughbred Racing Association, which spent $280,000 lobbying Congress last year; $80,000 so far this year.

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And it’s not just a tax break for the rich, he added: “This ‘sport of kings’ description for horse-racing sometimes is a millstone around our neck because it unfairly characterizes the people who are involved in the industry who are just working to make a living.”

The Senate Finance Committee last month approved an $85 billion package renewing most tax extenders for two years, including the racehorse provision, which will cost about $97 million in fiscal 2014 and 2015 — a small fraction of the overall tax package cost.

The industry is confident the House’s top tax-writer Dave Camp (R-Mich.) will follow suit — particularly since Camp in his recent tax reform draft proposed making it permanent.

A Ways and Means spokesperson would not comment on whether they intend to advance the break again.

So it is fair, or a boondoggle?

The tax code allows businesses to minimize tax bills by writing off expenses — wages, computers, equipment — over time, something tax wonks know as “depreciation.” The shorter the depreciation schedule, the better for the investor; they get their money back faster.

Some animals are treated similarly. Cattle, sheep and goat owners are permitted to write off their livestock in five years; hogs owners, three.

Standard breeding horses under 12 years old get a seven-year tax write-off.

Then, there are racehorses, which get only a three-year depreciation schedule if they’re more than 2 years old. If the racehorse is purchased under the age of 2, however, the owner has to wait seven years to write off the entire bill.

With McConnell’s help, the industry won a provision in the 2008 farm bill that extended the shorter, three-year depreciation life to all racehorses — not just those over 2.

Animal rights groups balked, saying the industry didn’t deserve the break since around the same time, runner-up Kentucky Derby contender Eight Belles had to be euthanized right after she crossed the finish line and injured herself.

Waldrop says a shorter depreciation life makes economic sense since the “useful life” and “economic benefit” of a racehorse is only three or four years.

Most racehorses can’t physically stand to race longer than that because the intensity of the training wears on their bodies.

“Some race a full seven years, but it’s a rarity for a horse to last that long, so to impose a seven-year depreciation schedule on racehorses, it can be punitive to owners,” Waldrop said.

Critics call the race owners’ arguments arbitrary and say the break is a waste of money.

“The idea that a racehorse is only three-year property doesn’t seem to make a lot of sense and it just kind gets to the bigger picture: why are we singling out racehorses and not, say, dog racing?” said Steve Ellis, vice president of Taxpayers for Common Sense.

They industry also says the provision protects the horses by not forcing them to be raced longer than they are able.

“We’re under increasing pressure by animal rights groups to make sure we’re not over-racing these horses — that we’re retiring them sound and safe for second careers, and it’s really difficult to encourage owners to do what’s right by their horse when they’re looking at a tax law that pressures them to keep this horse in competition for seven years,” Waldrop said.

The Humane Society argues that “healthy racehorses end up in the slaughter pipeline when their owners abandon them because they are injured or aren’t turning a big enough profit.”

They cite Kentucky Derby winner Ferdinand, who was sold and then slaughtered in Japan in 2002.

Over a decade, the racehorse tax provision would cost about $500 million, according to a February Congressional Budget Office report.

While critics admit that’s fairly cheap compared to other, much more costly tax breaks, they say it’s the principle of the matter that gets under their skin.

“To me, the horse-thing is just one example of this bigger problem,” said Steve Wamhoff, policy analyst at the left-leaning Citizens for Tax Justice. He is steaming about “the fact that Congress can find time and money for this but not unemployment” insurance.

But the break brings lawmakers together — at least in Kentucky, where horse racing is huge.

McConnell, for example, is joined by Kentucky Democrat John Yarmuth, who says the deduction is needed to keep the industry alive and well: “The horse racing industry is facing its challenges … You’ve got to keep owners interested.”

The criticism is also bipartisan.

Conservative Club for Growth president Chris Chocola in a Wall Street Journal editorial called the break “government spending disguised as tax breaks.” From the left, Wamhoff called the break “stupid.”

Such attacks are why some think Camp did not include the racehorse extender in a recent group of “extenders” the panel approved a few weeks ago.

“It always seems to be a lightning rod for someone who doesn’t like it and [Camp] probably wanted smooth-sailing,” one lobbyist on the issue said.

Regardless of the opposition, the industry knows how to work the Hill, hiring former congressional staffers-turned-lobbyist Bob Brooks, former chief of staff for top Ways and Means Republican Jim McCrery (R-La.), and James Gregory Means, top aide for former Rep. Dennis E. Eckart (D-Ohio).

Also in their corner: Tad Davis, a former IRS official who has represented the industry since the 1970s and is well known on the Hill.

And even if such lobbyists are unable to win support on the merits of the provision, opponents of the break believe it is safe because of the lawmakers like McConnell that protect it: “People recognize this is important to the Minority Leader… so it may be more about politics than it is about good policy,” said Ellis.

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