We recently published a paper on state-run lotteries that explains why lottery revenue is actually a form of 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. revenue. However, many lottery supporters are having a hard time understanding how a so-called “voluntary” payment can be a tax.
A tax is compulsory payment to support government. Citizens have no option in contributing to state revenue with mandated levies and other tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s. In fact, they may go to jail if they don’t pay.
Playing the lottery is entirely voluntary. Whether as a regular purchase or as an occasional play, buying a lottery ticket is an individual choice. The only consequence to not playing lottery is missing some fun and possibly a prize.
Another example, from Boston Now:
The lottery is not like a tax, said state lottery spokeswoman Beth Bresnahan.
“If you don’t pay your taxes, you can go to jail,” she said. “You don’t suffer those consequences for choosing not to play the lottery.”
The problem with this reasoning is that Ms. Bresnahan is comparing apples and oranges; she’s comparing paying taxes on one type of good to purchasing another type of good. Choosing to buy an item is a separate issue from paying taxes on that item.
True, a person can go to jail for refusing to pay income taxes, and of course it’s also true that no one goes to jail for refusing to play the lottery. However, a person could face criminal charges for playing the lottery but refusing to pay the implicit lottery tax, just as a person could go to jail for buying a bottle of wine and refusing to pay the 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. or buying a book and refusing to pay the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. .
Imagine this: A woman walks into a bookstore and chooses (voluntarily, of course) several books that total $70. The cahier rings up the purchase and says, “That’ll be $73.50, please.” The extra $3.50 is for the state sales tax of 5 percent. The woman hands the cashier $70 and runs out of the store with books in hand. The cashier calls after her, “You still owe us $3.50!” A police officer happens to be in the store, and the cashier tells him that the woman who just left the store stole some books because she paid less than she owed. Will the police officer say, “Well, that’s okay—she just decided not to pay the tax, but that’s voluntary anyway”? Of course not!
The same logic applies to lottery tickets. In North Carolina, for example, when a person buys a $1.00 lottery ticket, the state keeps 35 cents. A person cannot walk into a convenience store, ask for a lottery ticket, hand the cashier 65 cents, and leave the store without paying the 35 cents that goes to the state—the implicit tax. Anyone who tried to do that would be accused—correctly—of stealing.
The real argument that lottery proponents seem to be trying to get at is a question of what the ideal tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. is—that is, whether taxes should be levied on “voluntary” luxuries and recreational activities and goods such as alcohol, cigarettes and lottery tickets, or on income, property, food, and other necessities. That, however, is a separate question from whether lottery revenue is tax revenue.
Regarding the real issue that seems to be bothering those who keep claiming that a “voluntary” payment cannot be a tax, applying a higher tax rate to some goods than to others is generally not good tax policy and tends to distort consumer spending and damage the economy. In addition, it is simply not fair to pay for general government services enjoyed by all citizens with a narrowly targeted tax that falls heavily on a small group of people, especially if that small group most heavily hit by the tax tends to be disproportionately low-income, as is the case with lotteries.
However, if state lawmakers are determined to apply a higher tax rate to recreational activities like lotteries, they should at least do so in an honest, transparent way. Lotteries could be allowed to exist in the private market, with companies competing, and the government could apply an explicit sales tax and/or excise tax to the tickets.
If lottery supporters love “voluntary” taxes so much, they should encourage people to make voluntary contributions to state governments or to the federal government. Anyone who wants to support the government can simply write a check to the U.S. treasury or certain states’ treasuries. It will be cashed. And anyone who wants to support the government through gambling can visit a casino, which is subject to various explicit taxes, and then donate their winnings, if any, to the government. That’s the only way gambling should ever be used to fill state coffers.Share