See how rise in Texas racing sets example for other states

A guy walked into a feed store in Texas after he already had gone out and bought a bridle and some reins for his horse. Now he was ready to order a load of hay.

It looks like the beginning of a joke, but there is no punch line. This is actually the beginning of a success story in Texas.

It is already evident at places like Sam Houston Race Park, where racing this winter is enjoying a renaissance. It is a byproduct of optimism that has taken root in the state’s horse industry.

When that guy paid for the bridle and the reins and the hay, some of his money went right back into the racehorse industry. Like a freeway toll that helps pay for road maintenance, the state government of Texas in 2019 began to rebate part of the 6 1/4 percent sales tax from feed, tack and other equine products to generate added revenue for racing. It adds up $25 million a year that is split evenly between Thoroughbreds and quarter horses, and it is expected to grow.

“I think it’s very important for this model to be supported,” said Hall of Fame trainer Steve Asmussen, who loyally continues to run horses in Texas, his family’s home state.

Photo: Eclipse Sportswire

So far, so good. Purses are on the rise. Field sizes have grown. Takeout remains low. Handle is going up. Gradually, horseplayers around the country are gravitating back to Texas. So are horsemen and women, including some who left when there was no optimism about the future.

It all starts with the guy in the feed store – and others like him.

“It’s important for money to be raised by money that we are going to spend on horses and be put back into the sport as opposed to a welfare system,” Asmussen said.

The “welfare system,” as he put it, is the reliance in other states on slot machines, casinos and sports gambling to keep racing solvent. Not that horsemen and women in Texas have not tried to convince the state legislature that it was a good idea.

“With politics and religion,” trainer Mike Stidham said, “there is the belief that people there just don’t support gambling.”

That obstacle, though, actually helped Texas racing see the proverbial light bulb flash over its collective heads.

“Texas politics is very conservative,” said Corey Johnsen, an influential executive and Thoroughbred owner who was the first person in charge of Lone Star Park. “But the legislative leadership could see that we were at a distinct, competitive disadvantage. With everybody working together we came up with the concept.”

It was a creative solution born in a sometimes hostile environment. It is a way of life that has been more than a century in the making.

The politics of Texas

Funny how a state whose name is built into a popular form of poker has some of the most restrictive gambling laws in the country. It is a reflection of a culture that was galvanized in 1903, when Texas formally banned all forms of vice.

That included horse racing, which had flourished without much regulation in the 19th century. In a desperate act to find revenue in the throes of the Great Depression, the state legislature reluctantly approved pari-mutuel wagering in 1933. New tracks around the state sprouted, and so did their shady bosses. By 1937 suspicious lawmakers had enough of the corruption. With little resistance they banned pari-mutuel betting across the nation’s biggest state.

It would be another half-century before horse racing would be made legal again in Texas.

The state government finally relented in 1987 and gave the sport another chance. That led to a track construction boom in the ’90s and the opening of Sam Houston Race Park in Houston, Retama Park near San Antonio and Lone Star Park between Fort Worth and Dallas.

“I was one of the first trainers who went to Sam Houston,” Stidham said. “As a matter of fact I won with Two Altazano the first $100,000 stakes race (1994 Sam Houston Oaks) that was run there that year. I trained for Bob and Janice McNair. That was the big draw for me to be there, because they had Texas spreads, and I had several Texas clients. I’ve always been a believer and liked Texas racing.”

Texas was not immune to the decline of racing. The wariness about gambling and its ilk persisted among lawmakers and their constituents. The sport was left to rot without any help from the state capital in Austin. Trainers like Stidham left.

“For a number of years I hadn’t gone back because the purses had dropped off, and the quality of racing had dropped down,” Stidham said. “They just didn’t fit my stable anymore.”

It was as if the ghost of Gov. James Allred could still be heard under the Capitol dome repeating his mantra from the 1930s, when he referred to those “flagrant evils outlawed by patriots in the legislature.”

Rage against the machines

Every attempt to borrow ideas from other states and help fund Texas horse racing was shot down. Slot-machine proposals came and went with seemingly every legislative session. Even then, they still would have required a vote of the people on a ballot measure. Fat chance.

Historic horse-racing machines? They sounded like a good way to do a pick-and-roll around the state’s aversion to slots. But that plan died six years ago when some of the loudest voices against them were people who run legal bingo halls in Texas. They said their money would be siphoned away. That was enough for a legislature that was still hearing the usual old voices of dissent.

Those same voices were influential in the 2011 ban of advance-deposit wagering, which was previously unregulated in Texas. The ADW question is not on the table in the current legislative session, and it is not expected to be brought up for government review before 2023.

All this conspired to erode the state’s Thoroughbred and quarter-horse industries. In 2003 all-sources handle for horse racing in Texas peaked at $1.05 billion. By 2019 it had bottomed out at $233 million, a drop of nearly 80 percent.

“I have always been shocked that Texas hasn’t taken off better than it has as far as racing and keeping the purses up,” said Stidham, who had left 13 years ago. “It seemed like Texas would have been a state that would have been able to survive on its own just with all the people that they have there and the surrounding states that would come in for it.”

Jobs were lost, not to mention the incentive to race and even breed horses. The state’s government knew it. The state’s horsemen and women did something about it.

Taking back the tack tax

If the racing industry could not convince the state government to create a sin tax via other forms of gambling, how about going after money that was already being collected?

“There is $53 million in sales tax each year that comes from equine products, supplies, those kind of things,” Johnsen said. “The thought was that we would get a rebate back of $25 million on that $53 million. The goal is to someday have that $53 million grow to be $78 million. There’s really no net loss to the state general fund.”

It is the classic concept of spending money to make money. Invest a tax rebate in order to attract more horses to the sport. More horses need more feed and tack. That means more tax money, some of which would cycle back into the sport. Theoretically the industry and the state government both win.

“I found it to be a very interesting and an ingenious way of trying to help the industry here,” said Frank Hopf, the senior director of racing operations who has worked nearly 19 years at Sam Houston. “It allows the industry to keep itself viable as well.”

The concept was framed in Bill 2463, a bipartisan proposal co-sponsored in the Texas House of Representatives by Republican Lois Kolkhorst and Democrat Tracy King. It also had the support of Dan Patrick, the Republican lieutenant governor whose blessing is needed for anything to get passed in Austin. It got a lobbying push from Johnsen in his role as a board member of the Texas Thoroughbred Association.

“This was a horsemen-driven bill,” Johnsen said. “All the money goes to purses and breeders awards, so it was not a track-driven bill. In my opinion that was critical to its success, because we’re talking jobs and spurring on economic development in agriculture. That’s how we sold it.”

A 91-38 vote in the House and a 25-6 victory in the Senate put the bill on the desk of Republican Gov. Greg Abbott. His signature in June 2019 “gave us a chance,” Johnsen said. “Now it was our job as leaders of the Thoroughbred industry and quarter-horse industry to spend this money in the right way to attract more horses to Texas and increase the horse industry in the state.”

Sign of the better times

Even with the interruption of the pandemic, it did not take long for the new law to have a positive impact. In its first full season after House Bill 2463 took effect, Lone Star Park enjoyed a 34 percent purse increase in 2020, fields that were 20 percent larger and an all-sources handle that more than doubled from 2019.

Overnight purses at Sam Houston this winter soared 80 percent from last year. Fields are fuller, and bettors are noticing. Through the first 27 days of the current meet, total handle passed $60 million. The average of $2.2 million per day was 29 percent higher than last year. The Houston Racing Festival on Jan. 31 brought in $5.3 million from all sources, breaking the track’s single-day record set more than 17 years ago.

“We’ve been able to have 14 more days of racing because of help from the tax bill,” Hopf said. “We’ve been able to take advantage of marketing the product more so than in the past, especially to the horseplayer. It’s certainly been like a ripple effect. It’s been a big positive, and hopefully we can keep improving it and making the product better.”

The newfound tax revenue is not just about pumping up overnight purses.

“Seventy percent has to go to purses,” Johnsen said. “Then 30 percent goes to a number of areas like big-event day purses or state-bred stakes races, breeders awards and marketing monies to support big events.”

Trainer Robertino Diodoro took notice. In recent winters he sent strings of horses to Turf Paradise in Arizona. Currently based at Oaklawn Park in Arkansas, he has shifted most of his secondary operation the past two years to Sam Houston.

“I think bigger things are to come in Texas,” Diodoro said. “The first thing that attracts any trainer or owner is you’ve got to have the purses. The deal that they’ve got with the taxes has definitely boosted the purse structure and made it solid.”

There is also the convenience of having viable tracks in breeders’ and owners’ back yards. And there are a lot of those yards in Texas.

“Some guys have horses that might be good enough to run at Oaklawn or Saratoga, but they live there,” Diodoro said. “They want to see their horses run. And then, of course, there are the Texas-breds. They should be staying there and running in Texas.”

“We’re hopeful to have four or five big days a year for Texas-breds,” Johnsen said. “You see other states do the same thing. It’s very effective. It gives that person who is willing to breed a good horse a goal where that horse can run for big money in Texas.”

To show how the new money has helped at a grassroots level, Johnsen pointed to the building four summers ago of a racehorse property in Sulphur Springs, about 75 miles northeast of Dallas.

“Larry Hirsch developed the Highlander Training Center,” Johnsen said. “He is the owner. He has now developed a rehab center there. It has an 18-stall barn with all the different rehab equipment that you’d find in Ocala, Fla., or Lexington, Ky., or other places. It’s first class. They’re going to have a lot of new employees. That would not have happened without House Bill 2463. I just don’t see how it could.”

Making good on old promise

From oil to agriculture to dot-coms, Texans know all about booms and busts. Racing is no exception.

After the sport was legalized again in 1987, the state sparkled with freshly unwrapped racecourses and a hope that blossomed from the Panhandle to the Rio Grande.

On the crest of that wave, the Breeders’ Cup was brought to Lone Star Park in 2004. It was an exclamation point on a brash statement that told the racing world that Texas was the sport’s new frontier.

“That was huge for Texas,” Stidham said. “But it just didn’t gain any traction from it.”

Johnsen was front and center for that 2004 Breeders’ Cup. He not only ran Lone Star Park, he had a role in trying to make the event a winner for both the track and the state.

“Texas has a history of tax rebates for big entertainment and sporting events,” Johnsen said. “This was how we structured what we called the Breeders’ Cup bill. We had to do an economic study of the Breeders’ Cup and its impact mostly on sales taxes by bringing in that event so we could get a rebate on the state’s share of the pari-mutuel tax. The state got $2 million additional in sales tax.”

Photo: Courtesy of Texas State Capitol

While that established a financial lure for other events like rodeos and horse shows and even auto races to come to Texas, there was only the one visit by the Breeders’ Cup.

For racing the wells ran dry. Even if it chose to do so, a place as big as Texas could not stanch the bleeding of dollars from racing to other forms of gambling. Without so much as a rainbow let alone a pot of gold, breeders and trainers gradually left the state.

“They scattered all over,” Johnsen said. “Louisiana has a strong program, so some guys went over there. A few went to Kentucky. But a lot of them are coming back.”

They included Stidham, who is based at Fair Grounds in New Orleans and had been spending his summers at Arlington Park before shifting last year to pivot out of Maryland. He returned with 12 horses this winter to Sam Houston.

Saying he is hopeful but also very skeptical, Stidham said, “I really don’t know what’s going to change dramatically that’s going to take Texas to that higher-tier level of racing.”

Stidham also admitted that he was still learning about the sales-tax rebates that Texas racing is receiving.

“I’m always for whatever is going to help and better racing,” he said. “If it takes us as far as owners and trainers contributing a little bit for the better of the whole industry, I’m always for that. I think it’s a great idea as long as it’s going to do what it’s supposed to do. This money is going to help. Is it enough? That’s the question. That’s what makes me skeptical.”

Based just on this winter at Sam Houston, Hopf is already a believer. As he put it, “It has certainly exceeded expectations early on in the program.”

Promise for the future

It is one thing to see the statistical evidence that racing is on the rebound in Texas. It is another, though, to see it play out first hand. It does not hurt that the biggest tracks are less than 30 years old. Compared with so much of the rest of the country’s facilities, they feel new.

“At Lone Star and Sam Houston you really can’t beat the facility,” Diodoro said. “Right from the grandstand to the surface on the track, the turf course and the barn area. Now they’ve got the purse structure to go with everything. It’s hard not to run there.”

Photo: Mary Cage

“The track surface at Sam Houston is excellent,” Stidham said. “The turf course is probably one of the best in the country.”

An important factor for horseplayers is the low takeout rate that Texas offers. The newfound sales-tax money helps track operators like Penn National Gaming at Sam Houston and Global Gaming Solutions at Lone Star Park hold the line. The blended rate at Sam Houston, for instance, is about 19 percent, according to Hopf.

“We lowered our multi-race wagers down to 12 percent about five or six years ago,” he said. “The last couple years we have certainly seen a very strong increase in attention and in handle for those wagers, particularly the Pick 5 and the Pick 4. This year with the Pick 6 we eliminated the jackpot payout option after the opening weekend, and it has certainly been well received by the players as well.”

Johnsen thinks the state’s tracks can do even better.

“I believe that the Texas takeout needs to be reduced,” he said. “We need to have a couple years of solid growth to have a sound foundation, and then I would recommend that the tracks and the horsemen look at strategic situations where they lower takeout.”

Call it a case of not being complacent with early success. It all goes back to the comparison with highway tolls being used to build better roads – and maintain them.

“We’re paying a toll,” Johnsen said. “We’re paying our tax, right? But they’re allowing us to keep part of it to grow our industry. So it’s really a good formula for economic development. Now our goal has to be to increase our sales-tax numbers in Texas. I think we’re going to get a real good deal for that.”

One size does not fit all

The early success of the sales-tax rebates for Texas racing might yet be considered a model for other states and their racetracks. But not right away, it seems, since most of those places embrace wagering far more than Texas.

“Most of them have gaming,” Johnsen said. “Most state legislators say, ‘No, no, no. You’re getting your money from gaming, so we’re not going to pass a bill like they have in Texas.’”

Asmussen, though, saw the stark image nationwide one year ago of an industry that was knocked to the canvas by COVID. Where the outbreak shut down all forms of gambling including slot machines at shuttered tracks, partners in racing took a double hit.

“This pandemic obviously showed how fragile horse racing’s revenue source is in some states,” Asmussen said. “We faced many racetrack closures. No money was being made there, yet we continued to feed the horses. I don’t think anything could prove the point any more of how important (a reliable revenue stream) is than what has already happened.”

The future is now

In the end it comes down to having more horses show up to race in Texas. Diodoro, for example, said he has about 30 now at Sam Houston and plans to raise that to 50 at Lone Star Park during the upcoming season from April to July.

In his racing office Hopf said the proof of the better product has come at the claim box, where shakes have become more commonplace.

“In 2019 the number of claims was relatively low,” he said. “Starting last year and then this year we’re having multiple claims on each race. We’ve been very busy there, so the quality has certainly improved, that’s for sure.”

More horses mean better races. Better races mean bigger handle.

“I saw the glimpse of the future last year when the quality of racing was really getting good at Sam Houston and at Lone Star,” Johnsen said. “If you present a quality product to the nation’s horseplayers, they’ll respond, and they’ll bet it.”

Johnsen was ever the optimist in his forecast of how far House Bill 2463 can take Texas racing.

“We’re just scratching the surface,” he said. “I think Lone Star Park’s season will even be better. And I think in 2022 we’re really going to take off.”

All it takes is a few more guys continuing to walk into feed stores.