November 17, 2004

Don’t bet N.C. tax system on the lottery

This article originally appeared in the November 17, 2004 issue of the Charlotte Observer.

On Election Day one issue was conspicuously absent from the state ballot: a lottery referendum. Which means we’ll be seeing more of Bubba.

Remember Bubba? He was the fictional Georgia store clerk who appeared in TV ads, happily selling lottery tickets to South Carolinians and thanking them for boosting Georgia’s education budget. The ads worked, and South Carolina caved in to the lottery. Suddenly Bubba was reborn as a South Carolina clerk with the same act, but this time the taunting pro-lottery message was directed at North Carolina. Will it work again?

The commercial was created by a group called the North Carolina Lottery for Education Coalition, which supposedly wants a lottery to raise money for public education and to keep North Carolinians’ money in state. North Carolinians have been purchasing S.C. lottery tickets, despite an archaic — but recently enforced — state law prohibiting the possession of gambling paraphernalia, including other states’ lottery tickets.

The S.C. lottery brought over $200 million into state coffers in Fiscal Year 2003, and in Fiscal Year 2002 the average American spent more on lotteries than on reading materials or attending movies. Considering these figures, it’s no wonder Gov. Mike Easley and other North Carolinians want a lottery of their own so badly. And why not? After all, enacting a lottery is better than raising taxes, right?

Wrong. The lottery is a tax.

State governments kept almost $14 billion, or 31 percent, of the nearly $45 billion spent on lotteries in Fiscal Year 2003. They did not consider this money to be tax revenue, but they should have. The money left over after lottery agencies pay winners and operating costs (the “profit”) is actually an implicit tax.

Many people believe the lottery can’t be a tax because a tax is mandatory and playing the lottery is voluntary. But they’re confusing the purchase with the payment. The ticket purchase is voluntary, but the payment of the tax is mandatory. It’s like buying alcohol in a state-run liquor store. The state levies excise taxes on alcohol and, although the purchase of alcohol is voluntary, those taxes are mandatory. With both alcohol and lotteries, the state prohibits the private sale of a product, creates a monopoly for itself and taxes the product.

Does it really matter whether the lottery is a tax? Absolutely. Lotteries are simply poor tax policy, for several reasons.

First, high taxes on specific products violate the principal tenet of sound tax policy, what economists call neutrality. By singling out certain goods or industries for higher rates, lawmakers distort consumer spending and ultimately damage a state’s economy.

Second, good tax policy requires taxes that are transparent, or clear to taxpayers. Taxpayers should understand what is being taxed and at what rate. 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 implicit tax rate.

Third, many studies have shown lotteries to be regressive, meaning 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?

Finally, lottery revenue is not always used as promised. The N.C. lottery would raise money for public education. But money ostensibly raised for education can be spent on other things — even in states where there is a “lockbox” protecting lottery revenue. Legislators can shuffle funds and allocate less money to education than they otherwise would, knowing lottery funds will make up the difference.

Southern states have been the most reluctant to enact them, but concerns about “losing” money to neighboring states have prompted some of them to give in. South Carolina and Tennessee recently joined the ranks of lottery states, leaving North Carolina completely surrounded by lotteries.

Oklahomans voted Nov. 2 to adopt a lottery, and as the dominos fall, North Carolina could very well be next. The governor and legislature have been fervently debating the idea of a lottery referendum for several years, and it will probably be just a matter of time before North Carolinians have to decide the issue at the ballot box.

Voters might oppose the idea of a lottery for a number of reasons, including concerns that a lottery is an inefficient way to raise government revenue, worries about gambling addiction and moral qualms about state-sponsored gambling. They should add tax policy concerns to that list. A lottery would make their tax system more regressive, less neutral and less transparent — in general, less principled.

And let’s not forget that it would upset Bubba.

Alicia Hansen is a staff writer at the Tax Foundation and author of the report “Lotteries and State Fiscal Policy.”