By David Allen, Pari-Mutuel, Inc.
“What the government giveth, the government can taketh away.” The sport of horse racing relies upon four distinct groups to put on the show. First, there are the horsemen who breed and train the horses that are the stars of the sport. Next are the racetracks that host the races. Then there are the bettors who wager and generate the revenue that keep the tracks open. Finally, none of it is possible without the regulation and (in many places) the financial support of the government. In this blog, I’d like to talk about horse racing and the government, and how the government of Ontario managed to turn the racing industry upside-down earlier this year.
Before I begin, I’d like to talk about two businessmen and their widget partnership.
There were once two businessmen named Smith and Jones, and each of them owned their own companies. Mr. Smith’s company manufactured widgets, but it wasn’t very good at distributing them. Mr. Jones’s company, on the other hand, had experience selling and distributing parts similar to widgets. When the two men met, it seemed like a perfect match: Mr. Smith’s company would produce the widgets, while Mr. Jones’s company would distribute and sell them to the public. After a friendly business lunch, Smith and Jones agreed to a mutually-beneficial partnership. Since Mr. Smith provided the supply of widgets being sold, it was agreed that his company would get 75% of the partnership’s profits. For his efforts selling and distributing the widgets, Mr. Jones would earn 25% of the profits. The partnership of Smith and Jones became the leader of the widget market, and both men made a boatload of cash. And they all lived happily ever after.
Partnerships, like the one between Smith and Jones, are formed every day. Each company brings their knowledge and expertise to the partnership, and both sides earn a portion of the profits for the work that they do. In the above example, Mr. Smith earned his share by producing the supply of widgets that were in demand. Mr. Jones earned his share by distributing the supply of widgets to the people who needed them. You would never say that Mr. Smith is “subsidizing” Mr. Jones because Mr. Jones is getting 25% of the profits, right?
In 1998, the provincial government of Ontario, Canada, decided to raise money by offering slot machine gambling to its citizens. Rather than raising taxes on everybody, the Ontario government decided to generate revenue from gamblers who voluntarily played the machines. The slot machines were owned by the province and operated by the Ontario Lottery and Gaming Corporation (OLG). Since the government needed places to house the slot machines, it turned to the people who had the most experience managing and distributing a gambling product: the racetracks. The Ontario government created the “Slots at Racetracks” program, and a new partnership was born. The government of Ontario would supply the slot machines, while the racetracks would provide the location, the electricity, and the personnel for the slot machines. For providing the slot machines, the government got 75% of the profits. For providing the distribution locations, the racetracks and the horsemen got 20% of the profits. As a nod to the local governments where the slot parlors were located, 5% of the profits went to the municipal governments. For 14 years, the Slots at Racetracks program was highly successful, and like Smith and Jones, all parties made a boatload of money. And they all should have lived happily ever after.
Sadly, it all came to a screeching halt in March. Facing budget deficits, the politicians in Ontario decided that 75% of the slot revenue wasn’t enough. They wanted more. So it was announced that the government would end the Slots at Racetracks program, immediately close three slot parlors, and cease making payments to the tracks and horsemen on March 31, 2013. According to the Premier of Ontario, Dalton McGuinty, the province was done “subsidizing” the horse racing industry with “taxpayer dollars”. And with that, the fates of Woodbine, Fort Erie, and 17 harness racing tracks were thrown into jeopardy. Suddenly, all of the sires and dams of the Ontario breeding industry became practically worthless since the prized Ontario Sire Stakes program was going to disappear. Within weeks, hundreds of people were getting layoff notices, tracks began to talk of closure, and it was estimated that the 60,000 people who work in the racing and breeding industries would eventually lose their jobs.
Let’s get something very clear: the politicians in Ontario who claim that the government has been “subsidizing” the horse racing industry are being very dishonest. The definition of a “subsidy” is a “grant by a government to a private citizen or company to assist an enterprise deemed advantageous to the public”. The Slots at Racetracks program wasn’t a subsidy at all. It wasn’t as if all the revenue went to the government first and then was handed to the horse racing industry. The Slots at Racetracks program was a business partnership, similar to the partnership between Smith and Jones. While the province earned its share of the revenue for supplying the slot machines, the racetracks and horsemen earned their revenue for serving as the distributors of the slot machine gambling. It wasn’t free money for doing nothing. Just as you would never say that Smith was “subsidizing” Jones when Jones got his 25% of the profit of selling widgets, it is equally dishonest to claim that the government is “subsidizing” the tracks and horsemen for being the distributors of the supply. It was money that was rightfully earned by the racetracks and the horsemen, in accordance with the terms of the Slots at Racetracks contract.