Pennsylvania Takeout: The Garbage

Most sports industries have to battle conflicting interests of the parties involved.

Ownership and management, the athletes, the league and spectators all have a stake in a sport such as, say, the National Football League. Operating a sports franchise and a league of franchises is a delicate balancing act of trying to run a well-organized operation that pleases fans well enough to rake in the cash for owners and athletes.

A post on Monday at the Horseplayers Association of North America blog illustrates that it's possible that nobody does it worse than horse racing.

HANA points out that an Allentown Morning Call story credits slots at Pennsylvania tracks with saving the state's horse racing industry. It's a fair claim. Once struggling to stay in business, Pennsylvania tracks have not only stabilized, but flourished and, with the addition of Presque Isle Downs, expanded in number. Purses have ballooned by roughly 400 percent and rival any state's racing programs.

All of this is excellent news for the tracks, for the state which collects considerable revenues for its budget, and for horsemen, who can come a lot closer to making a good living (or at least breaking even) in a business where losing money on a horse is a very real prospect every time you breed or buy one to race.

But HANA notes that Pennsylvania is screwing over its horseplayers (my term, not theirs), and horseplayers are letting them know it by withholding their wagering dollars.

HANA notes that total handle in Pennsylvania has declined by 15.3 percent between 2006 and 2008. That's because the takeout is so high -- 35 percent, HANA reports as an example, on tri- and superfecta wagers on harness racing at Pocono Downs. Which, HANA says, swallows up more of the financial pie, leaving less for the gamblers, than even the Massachusetts state lottery.

As a result, on HANA's 2009 rankings of 72 North American thoroughbred racetracks for their friendliness to horseplayers, Penn National ranks 43rd, Philly Park finishes in 63rd, and Presque Isle is 68th.

Now, losing $100 million in handle between 2006 and 2008 would more than alarm everyone involved if it weren't for all the money from slots to make up for it. So while it can be argued that slots at the racetrack are beneficial, they also can mask very real inadequacies or inefficiencies in the overall operation.

No reasonable business owner would sit idle while revenues shrank so dramatically in so short a time. He would determine what was necessary to bring his customers back through the doors and spending at least the kind of money they used to spend, if not more.

Now, it might be a stretch to expect politicians to be reasonable. And I suspect that track management is just so happy to be back on the positive side of the ledger that its executives aren't losing sleep over shrinking handle. Yet.

But anyone who stops for even a moment to consider these numbers can see that the takeout is killing handle. More and more over time. And anyone with business sense ought to reach the conclusion that a reduced takeout (easily made possible by those same slot revenues that provide so much revenue) would allow handle to grow again.

Talk about your diminishing returns: Pennsylvania is taking so much out of horse racing wagers that horseplayers have reduced their wagering, resulting in less revenue realized for the state than if Pennsylvania were to take out a more reasonable share.

If I were a politician in Pennsylvania, I'd much rather see the state take out half as much from a handle that is twice as much. The net revenues to the state would be the same, while the horse racing business within the state would be thriving more than ever, increasing revenues collected by the state in the form of sales tax at the track, property tax from increased investment and value in horse farms and racetracks, and income tax from all of the industry's employees and principals. That includes horseplayers, who would bet more, win more, and pay more tax on those winnings.

But the current takeout in Pennsylvania, as HANA shows, is garbage.