Secretariat’s Kentucky Derby Record Is Safe, Thanks to the Taxman
The 1986 reform act did away with incentives to use breeding as a shelter. Result: slower horses.
Jockey Ron Turcotte rides Secretariat in the Kentucky Derby in Louisville, May 5, 1973. PHOTO: BOB DAUGHERTY/ASSOCIATED PRESS
It’s been 46 years since Secretariat ran the fastest race in the Kentucky Derby’s 144-year history, at 1:59.4 minutes. Since then, only one other horse has completed the course in under two minutes—and he missed Secretariat’s record by more than half a second. Odds are the record will survive this Saturday’s race. Despite better training, technology and breeding for speed, racehorses haven’t gotten faster since 1973.
There are several reasons: Tracks are sandier to lessen the risk of injury. Hormones were banned in 2008. And then there’s the Tax Reform Act of 1986.
Every tweak to the tax code produces unintended consequences. Before 1986, high earners faced very high marginal income-tax rates. They would seek deductions to lower their tax bills—and investing in horses, which often produce large losses, was a popular tax shelter. The 1986 reform lowered the highest income-tax rates and disallowed the deduction of losses from passive investments. With the tax shelter gone, many investors bailed on the racehorse market.
The breeders who were left standing had to bear more of the risk themselves, but the tax reform had also lowered the returns on their investments. It increased the maximum tax rate on long-term capital gains from 20% to 28% (though the lower rate was restored in 1998). Racehorses also became subject to lower rates of depreciation. The result was that fewer horses were bred. The foal crop peaked in 1986 with 51,296 horses; in 2018, only 19,925 were born.
Tax reform also changed the structure of the market. A breeder can make money two ways. One is by breeding a horse to race. This involves housing and training the animal from birth and then racing it when it is 2 to 4 years old. The payoffs are the race winnings, then breeding fees after the horse retires from racing. Earning back your investment is a long shot; about 70% of horses race, but only 8% run fast enough to earn significant money at the track. And only a fraction of the winners are desirable breeding material.
The other strategy is commercial breeding—producing a horse and selling it when it is a year old for the purpose of racing. This approach produces returns that are both faster and more certain. Commercial breeding started to become popular in the 1960s, but since the 1986 tax reform, most breeders sell some or all of their horses each year, rather than race them themselves. The expected returns from such a long-term investment are too low to justify the considerable risk.
But a yearling’s racing potential is still unknown. The only objective data is its lineage—famous well-bred parents fetch a higher price at auction. A mare typically bares one horse in a year, but a stud can sire many. So naturally, the shift to commercial breeding increased the demand for a small number of top stallions. A top stud may breed with three different mares a day and up to 245 times in a breeding season. Some command stud fees exceeding $250,000, even though paying for an expensive stud does not increase the odds his offspring will earn money from racing. The same traits that make a stud fast don’t always work in their offspring. Secretariat’s 21 pound heart—the average horse heart is 9 pounds—made him quick, but only because the rest of his body worked well with it. A foal with a similar heart but a different body would be akin to a Subaru with a Ferrari engine. For this reason, higher stud fees may even be negatively correlated with their progeny’s race earnings.
The premium on parentage results in a greater number of inbred horses. Take one of the most prolific horses of all time, Northern Dancer, who died in 1990. His breeding career occurred mostly before the change to the tax code, before commercial breeding was the norm. He sired only 36 horses a year at his peak and more than 600 over his lifetime. But he lives on and on—his offspring are so inbred, Northern Dancer appeared in the bloodlines of 96.25% of yearlings sold between 2012 and 2015, often multiple times, according to the work of David Dink, a Kentucky-based writer who has long studied thoroughbred bloodlines. Fifty-nine percent have Northern Dancer in two or three sides of their family; he was in four different bloodlines in 19% of the yearlings.
Most horse inbreeding occurs between third and fourth cousins, and the horses are rebred many times. Inbreeding among cousins once or twice may be harmless or even beneficial, but if you keep inbreeding, negative effects can emerge. Inbred horses are likelier to be barren and to have weaker bones, making them more prone to injury. A lack of genetic diversity could also be why horses aren’t running faster in stakes races. Because they’ve been inbred for speed, thoroughbreds have become increasingly genetically well suited for sprinting, and increasingly ill-suited for stakes races, which are usually longer but bring in the real money.
Slower horses are surely a price worth paying for an efficient tax code. But it’s a reminder that changes in policy inevitably have unpredictable effects.
Ms. Schrager is author of “An Economist Walks Into a Brothel,” from which this article is adapted.
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