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For 120 years, the Hong Kong Jockey Club has been at the center of the city's social life. The club's private boxes and formal restaurants, scattered throughout the organization's two first-class horse-racing stadiums, are among the top local spots to be seen in, cozy venues where élite HKJC members schmooze over racks of lamb and roasted guinea fowl. Meanwhile, in the stands below, million-dollar thoroughbreds saunter around the paddock under the watchful gaze of the masses, who habitually turn up for meets in hopes of winning enough on a long shot to qualify to join the club themselves.

Yet all is not well in the members-only aeries these days. During a recent race at the Sha Tin racetrack one sunny Saturday afternoon, HKJC CEO Lawrence Wong warned that horse racing in Hong Kong is facing "irreparable damage" from illegal bookmakers and hefty taxes. Horse-race-gambling revenue taken in by the club—which is less a sanctuary for the moneyed classes than it is a government-sanctioned monopoly gaming enterprise—has fallen in six of the past seven years. Last season's take was 30% lower than in 1997. Says Wong in an e-mail to TIME: "The situation [has] caused real concerns over the long-term ability of the club to sustain its racing operations."

Although some might view the demise of racetrack betting as a victory for virtue, in Hong Kong the decline of an institution as influential as the HKJC would be a financial blow felt by the entire city. It's no secret that Hong Kong, a city of 6.8 million, is full of avid gamblers. The $8.3 billion they bet on the ponies last year was only slightly less than the horse-racing wagers of France. A gambling tax in Hong Kong contributes significantly to government coffers. The HKJC is the city's largest single taxpayer, accounting for 11.5% of total tax revenue last year. A nonprofit that gives away its surplus as charity, the club has been one of Hong Kong's most munificent benefactors, with its donations funding schools, hospitals and construction of such landmarks as Victoria Park, the Hong Kong Academy of Performing Arts and Hong Kong Stadium. Last year, after the SARS epidemic ravaged the territory, the HKJC contributed $64 million to open a center for infectious-disease control.

Although overall the club does not appear to be in any immediate financial distress, Wong, 65, says that if racing revenues fall to $6.4 billion—not unrealistic at the current rate of descent—charitable contributions will have to stop. To keep that from happening, the club is calling on the government to—of course!—reduce the gambling tax. On average, 13.5% of every bet is skimmed off by the taxman. Wong, a Michigan State University engineering graduate who worked for 30 years at Ford Motor Co. before becoming jockey-club CEO in 1996, says that rate is among the highest on horse racing in the world—so high, Wong maintains, that it encourages competition in the form of unlicensed bookies who can offer better odds because they tithe nothing. The situation "sets up Hong Kong as a paradise for illegal bookmaking," says Wong, who estimates that as much as $6 billion is bet illegally every year. "People wonder how we're still in business," he says.

As a solution, Wong has proposed taxing the club's gross profit instead of its revenue, which would allow him to increase the payout on winning tickets and lure back punters who are patronizing illegal offtrack shops. As proof, Wong points to the United Kingdom, which made a similar change three years ago and saw annual betting income surge 82%. Indeed, there are echoes of the Laffer curve in Wong's proposal: allowing individuals to keep more of their winnings may actually maximize overall revenues. "I'll bet more if there's more money to win," says Lam Siu-kit, a 54-year-old security guard who goes to the track every week.

But the tax-relief suggestion comes at a time when the government is trying to rein in a budget deficit that amounted to 3.3% of GDP last year. Although the fiscal outlook has improved lately due to a pickup in the local economy, many officials and politicians say a sweeping overhaul of Hong Kong's tax system, such as introduction of a sales tax, is needed—making it harder to sell a reform that looks like tax relief for gamblers. In September, Financial Secretary Henry Tang said he might consider the reduction if it could be clearly demonstrated that tax revenues would not significantly suffer. He noted, pointedly, that a high gambling tax "is not the only reason behind the drop in revenue" at the club.

It certainly isn't. Hong Kong's economy, though recently more vibrant, has for more than five years left locals with less cash to risk on the ponies. Wong's main customer base is aging, and the club has struggled to attract young replacements. Chan Man-kam, a 29-year-old computer-software salesman, was once a racetrack regular. But lately, he says he prefers meeting with friends at a bar where he can watch his beloved Manchester United football club on a big-screen TV. "Horse racing is boring for our generation," he says.

The government has already tried other means to bolster the club. When football gambling was legalized last year, the HKJC was awarded the exclusive right to run betting pools, producing $2.1 billion in new income. Meanwhile, Wong has cut costs by reducing staff to levels not seen since the early 1990s and by slashing senior managers' pay, including his own, by 10%. Money is being invested in upgraded facilities, such as the construction of a $51 million parade ring with a retractable roof, which opened in November, and a giant outdoor TV screen at the Sha Tin track. And the racing has never been better. In the mid-1990s, Hong Kong-trained horses were barely recognized in international competitions; last season, Hong Kong's own Silent Witness was the world's top-rated sprinter.

Most important, perhaps, are efforts to attract new blood. Wong in September opened a special box at Sha Tin featuring Mandarin-speaking announcers and staff to woo the millions of mainland-Chinese tourists flooding the territory. The club employs "ambassadors" at the tracks to instruct newcomers on the betting process. Next up: Wong is considering a year-round racing schedule. "If we want to stay alive, we have to invent," he says.

There are indications of a turnaround. Although revenues from horse racing dropped 9% last season, the club's total sales rose 13.5%, to $11.3 billion—the first increase since 2000. Yet even as the club struggles to overcome illegal bookies, powerful new competitors are springing up. In nearby Macau, a welter of Las Vegas-style casinos are scheduled to open in the next few years, giving Hong Kongers more ways to imperil their paychecks. The number of tourists visiting Macau jumped 53% in the first half of the year. It's enough to make a punter long for the good old days, when the sport of Kings was the only game around.

• Michael Schuman | Hong Kong
• The Hong Kong Jockey Club was once a sure bet, but its horse-racing franchise is facing stiffer odds