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Gamble Away Your State’s Fiscal Responsibility in Three Easy Steps

4 min readBy: Alicia Hansen

1. Start a state-run lottery. 2. Install slot machines at racetracks to raise money, supposedly for education and health care.3. Close budget gaps by borrowing against future lottery revenue.

Maine completed step one in 1974 when it became the tenth state to start a lottery. Then last year, legislators hungry for more revenue began eyeing the popular multi-state game Powerball, which Maine residents frequently played in New Hampshire. In a classic political flip-flop, Gov. Baldacci discarded his oft-stated opposition and supported the game so that he could raise spending.

Voters approved step two in 2003 and plans are underway to create “racinos” at state racetracks. The legislature—and apparently voters—saw the machines as a way to spend more taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payer money but without the political pain of “raising taxes.”

Now Baldacci and the legislature are contemplating step three. In his controversial budget, Baldacci outlined a plan to sell $250 million worth of bonds based on future lottery revenues to the Maine State Retirement System. The House, after much partisan wrangling, approved the proposal this week and now the Senate will engage in the same heated debate. Baldacci’s plan has been called shortsighted and irresponsible, but he and the 77 representatives—74 of them Democrats—who voted for the proposal seem determined to proceed. The reason? The same as for every state bond issue: spend now, pay later.

Like many people, Gov. Baldacci does not understand—or is unwilling to acknowledge—that lottery tickets are heavily taxed and that any plan to raise revenue through a state-run lottery is a tax hike. In 2003, the 39 lottery states sold $45 billion worth of tickets and kept $14 billion of it. They don’t call this money “taxes,” preferring the term “profit.” But it actually is a tax, and a high one—45 percent was the average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. on a lottery ticket in 2003.

Lottery promoters insist it’s not a tax because playing the lottery is voluntary. But it’s the purchase of the ticket that’s voluntary, not the tax. Of course, no one has to buy lottery tickets, but if you want one, it’s the same as purchasing a car or cigarettes or any other taxed item; sales and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es are not optional. The only difference is that the lottery tax is hidden better. The state creates a monopoly for itself and builds the tax into the price of the product. Buying a lottery ticket is like buying alcohol in a state-run liquor store; with both alcohol and lotteries, the state prohibits the private sale of a product, creates a monopoly for itself and taxes the product.

The lottery is a bad tax for several reasons. First, since tax revenue pays for general public services, it is important that taxes be levied as broadly as possible rather than on a subset of the population who happen to enjoy a particular product or service.

Second, many studies have shown that low-income people spend more on lotteries as a percentage of their income. Should the government be in the business of selling, advertising and taxing a product on which the poor spend more and bear a disproportionately large share of the tax burden?

Third, good tax policy requires taxes that are easily understood. Taxpayers should know if a product is taxed and how much. Lottery retailers do not give customers receipts itemizing the tax, and since states advertise the lottery as a recreational activity rather than as a revenue-raising activity, consumers may be unaware of the heavy built-in tax.

Finally, revenue earmarked for worthy causes is often spent elsewhere. A small portion of the money raised from slot machines will allegedly be used to lower prescription drug costs for the elderly and disabled and for college scholarships. Voters counted on this when they approved the 2003 slots initiative—it was written on the ballot. But in other states, lottery revenue allegedly raised for public education is often spent on other things, even in states where a “lockbox” protects lottery tax revenue. The same will be true of Maine’s state-regulated slot machines. Knowing that slots funds will make up the difference, legislators may spend less of the regular revenue on education and health care than they otherwise would.

Gov. Baldacci’s plan to sell bonds based on future lottery sales comes in the wake of a 2004 referendum requiring the state to fund 55 percent of local education. In a state with such high taxes already, his determination not to “raise taxes” is understandable, but expanding lottery sales and borrowing against future gambling is a tax hike and therefore no solution.

The average Maine resident already spends well over $100 a year on the lottery, and in 2002 the average American spent more money on lotteries than on reading materials. If the lottery borrowing scheme goes into effect, the Maine State Retirement System and the state will have a vested interest in residents’ gambling heavily. Should the state bet its financial future on people’s gambling habits? Raising revenue with a tax on state-run gambling is bad enough, but gambling on gambling is even worse.

Alicia Hansen is staff writer at the Tax Foundation in Washington, D.C. and author of “Lotteries and State Fiscal Policy.”