All The Pretty Tax Breaks: Millions in tax dollars prop up Maryland's beloved but failing horse industry

City Paper

In Maryland, horses are sacred and horse owners enjoy enviable layers of public subsidy. In alliance with the environmental movement, some of the wealthiest people on planet Earth enjoy sporting lives amid rolling hills, fueled by tax breaks on the local, state and national level, topped off by revenue from gambling done by mostly poor people.

Consider this: If you are a millionaire in the market for a fine home, a well-appointed 2,400-square-foot condominium on Boston Street featuring water views is priced at $775,000, and will cost $350 each month in maintenance fees, plus—if it sells for its listing price—$18,300 in annual property taxes after its next reassessment.

Meanwhile, a 390-acre horse property in Harford County, Bonita Farm, features six homes “totaling 21 bedrooms, 15 bathrooms and 14 fireplaces on the farm,” according to the listing. There is a pond and a vineyard. The estate is priced at $12 million. The property taxes there: $15,877.

The sprawling country estate will actually save you about $2,500 a year in property tax. And it gets better.

Unlike the next owner of the Boston Street condo, Bonita Farm’s next owner can expect her property tax assessment to stay the roughly same no matter what the purchase price. Indeed, the assessed value of Bonita Farm has recently decreased.

Why are the property taxes on a 390-acre country estate with six houses on it lower than those on a single 2,400-square-foot condo?

You might blame Baltimore City’s infamously confiscatory property tax rate, which is fully double that of most other Maryland counties. But what keeps Bonita Farm’s property tax lower than a Canton condominium is an environmental policy Maryland pioneered nearly six decades ago. The magic boils down to two words: horse farm.

Although horse partisans say Maryland fell behind others in supporting their industry, Maryland arguably leads the nation in horse subsidies. The first step was taken 60 years ago, in an effort to save the family farm.

In 1956, Maryland became the first state in the union to begin taxing farms at their value-in-use—the value of the land as farmed—instead of the market value of the land. To preserve farmland from suburban development, such “use-value assessment” (UVA) policies were copied across the country, and are today widely considered to be one of the most successful conservation policies ever.

“I was here in 1955, when we put planning and zoning in Harford,” says former U.S. Sen. Joseph D. Tydings (son of Sen. Millard Tydings), who at the time was a state delegate from Harford County. “Of course the farmers wanted to shoot us. They wanted to sell out and make millions.

“The horse industry probably does more to keep the land out of development than any other,” says Tydings, who at age 87 still maintains an office in Washington, D.C. and describes himself as “one of the more active lobbyists in Annapolis.”

Not everyone agrees. “The original intent of the law was to protect family farmers from escalating property tax bills so that they could remain in business,” says Richard W. England in an email to City Paper. “Do tax breaks for horse farms satisfy this legislative purpose? Doubtful.”

England is a professor of economics and natural resources at the University of New Hampshire who co-authored a book last year about UVA, “Use-Value Assessment of Rural Land in the United States.” After studying the policy in many states, he and his co-author concluded that UVA probably does not save much land from development, and doesn’t often subsidize real farms. What it does instead, they say, is allow individuals and families to hold developable land at low cost until it’s time to sell out and make millions.

With horses, selling out is but one option. Consider Sagamore Farm, the 426-acre Baltimore County estate that Under Armour CEO Kevin Plank bought in 2007. The previous owner wanted to develop it as a subdivision, but failed. Plank’s pledge to create a Triple Crown Winner there will likely afford the region’s most prominent billionaire enviable tax breaks on his other income for years to come. In the meantime, his property tax bill should be less than $20,000 per year.

The UVA tax break often surpasses 90 percent of what would be owed if the land were not considered a farm. And because land gets more expensive near urban areas, the closer a farm is to a major city, the larger the effective tax break for that farmer. A 2008 report by the Environmental Law Institute found that in Baltimore and Harford counties, the UVA tax break was about 96 percent. Anne Arundel was 97 percent. And Howard County farmers enjoyed a property tax break of 98.6 percent. They paid just 1.4 percent of the property tax bill they would face without their farm designation.

The study noted in passing that Maryland granted UVA tax treatment to 2,962,000 acres—nearly 50 percent more land than the USDA census counted as farms.

The study’s authors estimated that the total UVA tax expenditure, as of 2002, for all counties and the state ranged between $112 and $118 million annually.

It is unclear how much of that benefit accrues to horse owners, but the Maryland Horse Breeders Association says “horse people” own 587,000 acres of the two million under alleged cultivation. If horse land is like other farmland, then horse people reaped about a $32 million tax benefit as of 2002.

But horse land is not like other farmland. A look at the Horse Breeders Association map of Maryland horse properties shows a thick belt of horse  farms right through the state’s most populated—and expensive—counties.

Horses are not like other farm animals. Maryland’s property tax laws favor horse people like few other states. For example, while Virginia and Pennsylvania lavish the UVA only on breeding operations, Maryland joins Kentucky in favoring all horse activity, including boarding and “recreational” use, with the property tax break. New Jersey is similarly generous, but other northeastern states are not.

This is as it should be, Maryland’s horse industry says. Maryland Horse Breeders Association’s brochure claims an “economic impact” to the state of $1.6 billion, with 14,000 jobs provided, $72 million in taxes paid annually, and $23.6 million in annual sales by the thoroughbred industry.

It sounds impressive, but in a state with a gross economic product surpassing $300 billion, it really isn’t. The state’s entire farm production is not very significant, when measured against its total output. In 2010, Maryland’s total farm production revenue exceeded $1.86 billion. That is slightly more than one-half of 1 percent of the state’s total economic output.

So if total farm output was about half of 1 percent of the state product, and if horse breeding was still worth 2 percent of that 0.5 percent—or even if it tripled, which it certainly did not—then Maryland’s entire horse industry could be wiped out overnight without the state’s economic production losing anything to the left of the fourth decimal place.

Clearly, the economic impact of the horse business—as a business—does not explain the favor with which it is treated. So what does?


 

Horses are different from cows, chickens, sheep, corn, wheat, apples, and other farm crops. First, horses are not part of a balanced diet. Though still classified as livestock, they have not been an essential part of our system of food or fiber production for almost 100 years. But the horse, unlike the cow, pig, and chicken, is the beloved and charismatic centerpiece of America’s origin story. From the colonial baron to the cowboy to Teddy Roosevelt charging recklessly up San Juan Hill, the horse—unlike any other animal—viscerally connects Americans to our nation’s story.

“George Washington raced down West Street in White Hall,” says Ross Peddicord, executive director of the Maryland Horse Industry Board, a public-private partnership with offices in the Maryland Department of Agriculture. “It was a racetrack. The first race was in 1721.”

Peddicord is a former Baltimore Sun reporter—he covered horse racing for 18 years—now paid by horse owners to promote all things horse related in Maryland. On a sunny April 30 he is at the Graham Equestrian Center in Glen Arm, mostly explaining how thoroughbred breeding and racing is just a small part of the state’s horse picture.

“We could have gone to Sagamore today,” Peddicord says, speaking of Plank’s Sagamore Farm. “But that’s an anomaly. That’s a billionaire. This is more typical of the future of the Maryland horse industry, because this is where people come to learn.”

The story goes that The Graham Center was deeded by Dr. Albert Graham to the city for recreational and equine use only. The city sold it to the state, and since it butted up to the park they combined it in a way—or attached it, Peddicord says. So now you come here and get riding lessons, a good place to board your horse, or a horse to ride in the Big Gunpowder Falls State Park. The nonprofit center is currently trying to raise money to build an indoor training ring.

There are still 35 trail riding barns in the state, Peddicord says, which you can walk up to. He’s made a map of all the places a beginner can go to get into the horse hobby, and developed a system of “horse discovery centers” for newbies. He says there is a huge untapped market for horse enthusiasts in the state, citing a poll the Maryland Center for Public Policy did that found 45 percent of Marylanders had an interest in horses, but only 15 percent had actually been to any horse-related events.

“That’s 30 percent of the people who don’t know where to go,” Peddicord says, speaking like an evangelist who is concerned that the devil may be winning.

He comes by it honestly. Throughout the 1970s and ’80s Peddicord says he had about 15 horses in his stable and bred thoroughbreds on his wife’s 25 acres in Frederick County. “Back then it was a typical setup,” he says. “There was a fair circuit, and eight or 10 racetracks all over the state.” A guy like Peddicord could breed horses cheaply and race them for purses of a few thousand bucks. “You used to be able to buy a horse for $2,500 and race with it—and win,” he says.

The Maryland thoroughbred industry peaked in the late 1980s with about 2,000 foals a year, according to the Jockey Club. It bottomed out last year, Peddicord says: “I think it was 350.”

What Peddicord does not say is this: The horse heyday of the 1970s and early ’80s was a classic bubble. Reviving his favorite sport to those halcyon heights will require vast pots of money—taxpayers’ money—which have, quietly, begun to appear.

 

An old black labrador named Jake greets you just outside the office at Country Life Farm, followed by Michael Pons, the co-proprietor, who is himself built more like a draft horse than a thoroughbred. It is an overcast day but a sunny season. “This has been an unbelievable year,” Pons says. “We’ll probably foal 65. We haven’t done that in 30 years.”

A third-generation horse breeder, Pons owns 293 acres in two locations. If you want to know about thoroughbreds in Maryland, he’s a good man to talk to—generous with his time and open about the costs and rewards of his profession.

He will talk for several hours and never mention property taxes until you ask. As he breaks down the history, the trials, and the rewards of the horse-breeder’s life, you begin to see the outlines of something perfectly American: an industry dependent on public subsidy and arcane tax breaks for the wealthy, a sort of financial ratchet system that socializes risk while privatizing and insulating the immense profits that accrue to winners of Preaknesses and Triple Crowns.

Pons is but a cog in this ratchet wheel.

The rest of us are the grease. We get to cheer at the track, pull the handles of one-armed bandits in strobe-lit quonset huts, marvel at the acres of bucolic, white-fenced splendor we motor past.

Country Life, a 113-acre spread in Fallston, is undeniably gorgeous. Three days before American Pharoah will become the first horse in 37 years to win the Triple Crown, Pons leads a tour of Country Life and Merryland, his 180-acre farm 15 minutes’ drive north, in Hydes, which he paid $1.3 million for in 2001 with the help of a Small Business Administration loan. Everywhere you look are supermodel horses and spindly-legged foals, standing by their mares, frolicking in the muddy fields. Seeing it makes you glad to be alive. It smells like spring and wealth and work.

Pons emphasizes the work, which is constant and ongoing. He cheers as a Hispanic man rides past on a big mower, explaining that the machine broke down two weeks ago and he had been waiting for the part to repair it. He estimates that the two farms cost about a million dollars a year to maintain.

Much of the wealth comes these days from a 7 percent rake off the state’s slot machines: a projected $41 million dedicated to the purses at racetracks this year.

“For the bread-and-butter folks like myself, and several other families, this has been a terrific opportunity,” Pons says.

The slots money comes through the Maryland Bred Fund, a 53-year-old set-aside for Maryland-based breeders. At Maryland tracks, Maryland-bred horses are eligible for bonus winnings of up to 30 percent on top of the usual purse, which is also inflated by slots revenue.

Unheard-of 30 years ago, when the prospect of public school subsidies animated legalized gambling’s advocates, horse subsidies are now the dominant arrangement in states with horse racing. Next door in Pennsylvania, slot machine revenue—money lost by legions of nickel and quarter pumpers, many of them retired and living on Social Security and small pensions—has contributed more than $1.5 billion to that state’s horse industry over the last decade, the Philadelphia Inquirer calculated. The idea was to revive the thoroughbred industry into an environmentally responsible engine of economic growth.

But that hasn’t exactly happened. Job counts tripled, but only to about 34,000 (this in a state with more than 5.7 million job-holders). The number of foals produced annually increased at first, then dropped below pre-slots production in 2012. “Meanwhile,” the newspaper noted, “purses pocketed by horse owners have risen stratospherically.”

Pons says Maryland “lost billions” by not subsidizing its racehorse industry sooner, “but we’re catching up now.”

Pons is certainly mistaken about those “billions.” But he is nothing if not patient and hopeful. Maybe that is how you get when you owe your family’s fortune to a racehorse.

Pons’ grandfather Adolphe worked for August Belmont Jr., a founder of the Maryland Jockey Club. “He raised up a horse called Discovery,” Pons says, which he sold to Alfred Vanderbilt II, the owner of Sagamore Farm in Baltimore County, which he’d just received as his 21st birthday gift. Pons says the sale gave his grandfather a big enough stake, in 1933, to buy this farm, which has been in the Pons family ever since.

Pons is too modest to mention this, but Discovery became a legend, dubbed by spectators the “Iron Horse” for his ability to carry heavy jockeys to victory. In 1935 Discovery was named Horse of the Year—beating out Omaha, who won that year’s Triple Crown.

Vanderbilt, meanwhile, bought two other horses from Texas and was, as they say, off to the races. Sagamore Farm has ever since been associated with the finest racehorses in the world.

As Pons tells it, after World War II, American horse people bought up the best breeding stock in Europe and elsewhere, and the progeny of those horses improved the racing phenomenally. “That was the peak of the American bloodstock,” he says.

Then, in the early 1970s, newly mega-rich Arab sheikhs got into the American thoroughbred game and bid up the prices of horses accordingly. As the ’80s dawned, the horse business boomed. “Nationwide there were about 45,000 [thoroughbred] foals a year,” Pons says.

For a few glorious years roughly corresponding to the disco-and-cocaine fad, inflation and the tax laws surrounding business asset depreciation and capital gains made horse breeding very popular. Breeders formed investment syndicates and partnerships to own horses, and more money flooded in. Because of the odds in the game, having a small piece of 20 horses was a much better bet than owning all of a single horse, though Pons says that back then there were also plenty of “whale” clients who owned many horses outright.

The atmosphere was heady enough that in 1981 a filly, born of Triple Crown winner Seattle Slew, was named “Tax Dodge.”

Pons says that when he started in 1984, you could write off 72 percent of your costs in the year the costs were incurred. Then everything changed.

The 1986 income tax reform “caused a recession” in the horse business, Pons says, forcing everyone to sell: “You gotta sell to get those losses and get out.”

Pons says his thoroughbred business has been a struggle ever since, though the struggle has not prevented his successful agglomeration of more than 100 acres of prime land in Harford County and about 175 in Baltimore County, and a going business that he says employs about 25 people.

Today, Pons says, the country produces about 24,000 thoroughbred foals each year—a bit more than half the 1980s peak.

But the money from slots parlors means things are looking up. “Now we’ve got a tailwind,” Pons says, “where before we had a headwind.”

 

Any kind of farm is a gamble. Weather, bugs, and a thousand other variables can turn a good year into bankruptcy overnight. Thoroughbred horse breeding is like any other farming that way, with the additional factor that gambling is what the game is all about. And wagering at the track—knowing whether this horse runs in mud or that one has an injury—is the smallest part of the game; the high-stakes gambles are in stud fees, yearling prices, and costs of training and maintaining the horses.

“We were lucky to have access to the best” studs, Pons says. Malibu Moon sired two horses that went to the Preakness and two that ran in the Kentucky Derby, and now Pons has one of Malibu Moon’s sons, Freedom Child. He retired from racing with a slight injury, and last year he bred 81 mares, producing about 50 foals. Pons’s group got stud fees for about 25 of these, he says, the other horses will be sold or syndicated.

Freedom Child’s stud fee is listed at $3,000.

Some of the yearlings sell for $40,000. And if some of the crop from last year start winning races, these foals’ value will jump two or three times.

If, if. The price of a racehorse is all but unpredictable. “To me, the pedigree is paramount,” Pons says, but people look for the way they run, the way they look, a thousand different little details.

As a horse breeder, seller, and syndicator, Pons must be a consummate salesman above all. He’s enough of an expert that anyone wanting to know about horses would be a fool not to listen to him, and his main job these days is keeping his investors happy—middle class people with a $5,000 or $10,000 stake in each of two or three or a dozen horses. He wines them and dines them, he takes them to Preakness. He puts them up at the beautiful house he restored at Merryland, and he teaches them the business that he’s in full buck and most of them are in for a lark. “I can’t promise they’ll make any money,” he says. “I just want them to have fun.”

But, Pons says, “It’s like ‘Star Search.’ I gotta get the right singer, who says what the folks like to hear.” He says he can easily spend $140,000 over a few years trying to make a stud that people will pay to breed their mares with.

“It’s almost like making wine,” he says. “It’s five years before we know if the stud is going to be good.”

A good stallion is profitable. A great one can change a family’s fortunes for generations to come. Fees for A.P. Indy, the now-retired paramount stallion, ranged up to $300,000. 

The pedigree can be expensive, but usually it’s worth the money, as breakout thoroughbreds are rare. “Every so often you can get a horse that can run, like a California Chrome, with a middle-class pedigree,” Pons says. And that is a good thing: “If it was just the ‘sport of kings,’ there would be no way for the paupers to participate.”

Pons considers himself to be among the paupers.

In the realm of kings, Kevin Plank has “done a wonderful job,” Pons says. “Maryland always had a captain of industry in the horse industry.”

Plank’s 426-acre estate at Sagamore Farm, owned by an LLC, costs him less than $20,000 a year in property taxes, City Paper calculates. In addition to his sportswear empire and horse racing business he is, of course, a budding real estate magnate whose development team this month floated an idea: remaking Pimlico within the bounds of his planned mega-development in Port Covington. (Plank reportedly kiboshed it.)

The horse connection to Plank’s 130-acre urban dream should be obvious enough; his company is called Sagamore Development. His brother’s development company is called War Horse. Naturally, Plank has already asked for taxpayer help on Port Covington. His people did not return City Paper’s emails and calls.

Other legendary industrial captains Pons cites include EP Taylor, the Canadian beer magnate who brought Northern Dancer here in 1968, four years after that horse won the Kentucky Derby. Northern Dancer became the most sought-after stud in racing history, operating from Maryland.

He mentions Jerold Hoffberger, the brewing magnate (and former Orioles owner). “He was my father’s biggest client in the ’50s,” Pons says.

As Pons says these names you get the picture of why and how a millionaire who owns several homes and many acres considers himself, comparatively, a pauper.

If you ask Pons what the UVA tax break means for him and for the rest of us, he explains it without boast or drama like any farmer would. “Maryland has done a wonderful job of preserving farmland,” he says. But “the best preserver of farmland is a profitable farm.”

He says that along with all the capital invested, there is also a lot of labor in a horse farm—more than in a lot of other types of farming. “We have to have people touching them every day,” Pons says. “I can’t feed them with a machine.” Pons’s 25 employees spend their income, and of course he spends money on feed and the rest. A lot of the money circulates in the state, and the more favorable the state is for horse work, the more we’ll get.

Then there is this: Horse farms are not nearly as land intensive as crops. You don’t get the high fertilizer use with its attendant runoff. You don’t get the high water use, the other intensities, like manure lagoons that you get with some operations like hogs or chickens. He’s not knocking other farmers, of course.

What if Pons’s property taxes tripled?

“In reality that’s money I can’t spend on a horse, a tractor, or a new roof or my barn,” Pons says (the barn will need a new roof soon). “The investments I’ve been making—it’s like the ante that you need to get in the game.” Raise the ante, you’ll get fewer players, he says.

Even the threat of it could hurt investment, he says, before brushing the prospect aside. “We’ve had racing here since 1740,” Pons says. “It’s been very resilient since 1961, when we started.”

And the benefits to the rest of us, though largely intangible, are large indeed, Pons says. Even for the developers. Maybe, especially for the developers.

“I can’t tell you how many homes I’ve sold in Harford County because they say ‘we’re five miles from Country Life Farm,’” Pons says. He’s seen the realtors’ brochures, and he never gets a piece of that action.

 

The real estate tax break and the slots revenue are just two small parts of the subsidy infrastructure supporting the thoroughbred industry. Much of the rest is invisible to ordinary taxpayers—though well known to the IRS, tax accountants, and “wealth management” professionals.

The most significant break is the 15 percent capital gains rate—less than half the top income tax rate of 35 percent on regular income over $335,000 per year. In the 1986 tax reform, the capital gains rate increased from an effective 16.1 to 22.7 percent. It reached as high as 25.5 percent in 1996 before slowly coming back down to its current level, boosting the incomes of millions of 1 percenters.

Most “wealth management” strategies involve two things: deferring taxes indefinitely by stashing money offshore, and converting income so that it can be counted as capital gains instead of regular income. Horses can help.

“Unlike other assets, the holding period to obtain long-term capital gain treatment on sales of horses is two years,” the Thoroughbred Owners and Breeders Association advises on its website. “Legislation is now pending to change the holding period to one year.”

Racehorses, then, equal liquidity. Volatile liquidity. Think of them as 1,000-pound Bitcoins with hooves.

But the volatility is not all downside. Horses can also be quickly depreciated, leading to big tax write-offs for their owners. After the 1986 tax reform, congress ordered studies to see how it affected various industries. The investigators noted that racehorses were depreciated over just a few years even though their value as breeding stock often extended for a decade and far exceeded their value as a racing animal.

The 1990 “Report to Congress on the Depreciation of Horses” by the U.S. Treasury Department concluded that the cost of raising “unsuccessful” racehorses can be written off, while the benefits that accrue when one has a successful horse can be raked in. It was a classic “socialize the risk, privatize the gain” model, and recommended a depreciation schedule to 10 or 12 years.

The American Horse Council fought back and won. In 2009 the industry received a three-year depreciation schedule for racehorses, and that schedule was extended in December 2014.

Today, tax law does about as much as ever to support those who like to gamble (i.e. “invest”) in the ownership of horse flesh. The tax provision derided a few years ago as the “SUV Loophole” applies to thoroughbred “Yearlings that an owner purchases and puts into a training program.” It is called the “bonus depreciation,” and it lets them claim 50 percent of their cost in the first year.

It is probably impossible to calculate the amount of federal income tax that goes unpaid because of these tax rules, just as it is impossible to fault horses—or the people who own, breed, and love them—for the policies that subsidize their pastime and sport so much more luxuriantly than that of, say, dog lovers or race-car enthusiasts. For now, just revel in the splendor of an open countryside dotted with gorgeous creatures, pull the handle at your local slots parlor, pay your taxes in full, and enjoy the show. There are lots and lots of horse shows to enjoy. 

Copyright © 2018, Baltimore City Paper, a Baltimore Sun Media Group publication | Privacy Policy
30°