WASHINGTON — — The battle over the federal budget has been playing out slowly in Congress for weeks, but it came galloping toward Maryland's thoroughbred farms recently in the form of a proposed tax increase.
After threatening to trim the nation's ballooning budget deficits in part by ending tax breaks on corporate jets, high-priced yachts and hedge funds, Senate Democrats also proposed eliminating a $126 million tax carve-out for the nation's horse racing industry.
The idea has prompted an outcry from Maryland's already struggling horse breeders.
"It's a fallacy that only millionaires and billionaires own racehorses," Cynthia McGinnes, a breeder and owner of the Thornmar Farm in Chestertown on the Eastern Shore, said of the justification offered for eliminating the break. "I think it would finish the breeding industry."
The special tax treatment for racehorses was raised on the Senate floor last week in a speech designed to tweak Republicans who have opposed using tax increases to balance the government's books. But reaction to the idea underscores why finding a compromise on the looming debt crisis has proved so elusive: One person's wasteful spending is another's critical, job-producing investment.
Maryland's thoroughbred breeders, who have fallen on tough times despite efforts by state government to prop up the industry, point to a March census by the Department of Agriculture that identified 6,310 equine-related jobs in the state. The number does not include racetrack employees at Pimlico Race Course and Laurel Park or support workers such as veterinarians, farriers and hay suppliers.
"The horse industry is very labor-intensive," McGinnes said.
Discussion of ending the thoroughbred tax break comes as Congress and the White House are entering crunch-time negotiations to raise the nation's $14.3 trillion debt limit. President Barack Obama hosted congressional leaders at the White House on Sunday for the second high-stakes meeting on the debt limit in the past week.
The bipartisan group will meet at the White House again on Monday.
Treasury Secretary Timothy F. Geithner has said Washington must lift the ceiling by Aug. 2 or default on U.S. obligations for the first time in the nation's history.
As part of the effort to broker an agreement, lawmakers in both parties are attempting to cut trillions of dollars in spending. Republicans, who were swept into power in the House of Representatives in last year's election, have resisted tax increases but some have left open the possibly of ending tax "loopholes."
Last month, for instance, 33 Senate Republicans joined 38 Democrats — including Maryland Sens. Barbara A. Mikulski and Benjamin L. Cardin — to support a repeal of ethanol subsidies for large oil companies. Republicans backed the move despite pressure from conservatives, such as anti-tax crusader Grover Norquist, who viewed the move as a tax increase.
The tax break for racehorses began in 2009 and lets thoroughbred owners depreciate the value of their animals over three years instead of seven -- an important timetable since many horses race only for three or four years. Unless extended by Congress, the tax provision automatically expires in 2013.
Different types of property can be depreciated at different rates for tax purposes. Computers, cars and dairy cattle depreciate over five years, for instance. Barges and fruit trees depreciate over a decade. According to the IRS, property that is not designated in a particular class can be depreciated over seven years.
On its own, the thoroughbred tax break represents less than a hundredth of 1 percent of the $4 trillion deal the White House had hoped to broker. But along with similar tax treatment for owners of private jets and hedge fund managers, the issue emerged as a Democratic talking point. If safety net programs for the poor are to be cut, their argument goes, wealthy Americans should chip in more, too.
An IRS spokesman said the agency does not track the state-by-state cost of the thoroughbred tax break.
Democratic Sen. Blanche Lincoln of Arkansas, who lost re-election last year, and Senate Republican leader Mitch McConnell of Kentucky sponsored the measure in 2007. The language of their legislation was attached to a much larger law that funds farm subsidies and food programs.
Without directly mentioning McConnell's involvement, Oregon Sen. Jeff Merkley, a Democrat, recently attacked Republicans on the floor for backing the break. Referring to the thoroughbred provision as the "bluegrass boondoggle," Merkley suggested it is hypocritical for GOP lawmakers to insist on deficit reduction on the one hand while supporting tax breaks targeted at specific industries on the other.
"Horse racing may have been called the sport of kings, but that doesn't mean owners of horses — those millionaires and billionaires supporting those horses — need royal tax treatment," Merkley said. "As long as these tax subsidies are preserved, the richest and best off will remain in the winner's circle, while working families don't even get a chance to compete."
Those involved with the thoroughbred industry in Maryland don't deny that the pricey animals attract well-off buyers. But they argue that doing away with the tax break could also have an impact on everyone else, from breeders to stable hands.
"They typically paint the thoroughbred industry as just a bunch of rich people but there a lot of people making their living off it," said Ross Peddicord, executive director of the state's Horse Industry Board, which promotes the state's equine industry. "We're in serious enough trouble in Maryland already."
McGinnes bought Thornmar Farm in 1971, when corn was growing on the fields. In the late 1980s, with Maryland breeding at a peak, more than 100 foals would be born on the farm every year. Now, it's closer to 20 a year. That's caused her to cut back on employees, from 14 to around 4.
McGinnes is concerned about the decline, noting that the Kent County area is home to several large horse farms and is rich with equine history.
"This is where George Washington used to come to get his best horses," she said. "It'd be a shame to lose it now."
Since 1997, Maryland lawmakers have spent $38.5 million to increase purses for races in hopes of spurring the racing industry. Lawmakers have also shifted $6.3 million from the state's slot-machine gambling program to track owners for facilities improvements and day-to-day operations.
But breeding has continued to decline. There were 586 foals born in Maryland in 2009, down from 1,212 in 2000 and 1,709 in 1991, according to statistics from the Maryland Jockey Club. The state's national share of foals also dropped to 1.7 percent in 2009, from 3.3 percent in 2000.
It's not clear whether national advocacy groups are taking the threat to do away with the tax credit seriously. Representatives from the American Horse Council and the National Thoroughbred Racing Association either declined to comment or did not return phone calls seeking comment.
But in Maryland any change in the tax law could have an impact, said Cricket Goodall, executive director of the Maryland Horse Breeders Association.
"It's sort of that precarious," she said.
Mikulski did not say whether she supports the thoroughbred tax break specifically but noted that she and other Democrats are "willing to have all things on the table and look at the revenue," including tax loopholes, as part of negotiations to reach a deal on the deficit. Mikulski argued Congress should start with the bigger breaks, such as those for ethanol.
But, she said, the parties have failed to find agreement on even the broad brushstrokes of a deal.
"They want to get rid of teachers," Mikulski said of Republicans. "I want to get rid of sacred cows."