In order to determine whether there are good odds for horse racing in a different state, we have to know how important race results are for state income tax. Here are a couple of examples of possible outcomes.
• In Colorado, a win by an underdog candidate (e.g., a minor league baseball pitcher or the first horse ever to win the Kentucky Derby) will generate about half its state taxes because the winner’s income is exempt
• A winner in Wisconsin will not qualify for state income taxes because it is more likely to qualify for federal income taxes, for which it does not pay taxes
• In Mississippi, a win by an underdog candidate will qualify only because the candidate’s income is not exempt at all
Our study found that although a win by a minor league baseball pitcher or the first horse winner of the Kentucky Derby are a good match in most states, in Mississippi, the outcomes are nearly irrelevant because the winner’s income is exempt from state income taxes. As we showed, if the winner’s income is exempt from state income taxes and an underdog candidate wins, the state taxes get split equally among both parties (in this case the tax increase to a minor league pitching pitcher or a new horse is less than the income tax increase to an underdog in Montana, since they win on the same day). In these circumstances, our model predicts that the state would be underperforming.
The model we built to analyze this question comes with two options to set up a state. If our assumptions are correct, all other states have at least one winner with an income tax rate of 1 percent or less and at least one winner with an income tax rate of 2 percent or more. Therefore, the model allows for all other states to have two winners. One will be the one with the higher income tax rate; the other will have the state’s income tax rate.
If we set our model up in a different way, the tax situation remains the same as in the previous model. If, for example, the winner in Wyoming is exempt from state income taxes, the winner would not qualify for any state taxes but could receive federal income taxes, meaning that the state would be underperforming relative to the other states. In this case, the state’s tax burden would increase relative to Montana, which is overperforming because federal income taxes are not tax exempt and because the state income tax rate is at least twice what it is in Montana. In this case, our model would predict that the state would be underperforming because of
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