Internet Lottery Sales: Click Here to Pay Higher Taxes

March 18, 2005

Earlier this month the Georgia House of Representatives passed a bill that would allow people to play the lottery on the internet. For a $3 fee anyone over 18 would be able to fill out an application at an existing lottery retailer and set up an online account where they could use a debit card or electronic funds transfer to purchase lottery tickets. You could program in your lucky numbers and play the lottery from the convenience of your living room, any time of day or night.

Everyone has an opinion on this legislation. The bill’s sponsors are fretting over a slight decrease in lottery sales in recent months and see internet accounts as the perfect way to boost sales and (allegedly) raise more money for college scholarships and elementary and secondary education. Lottery retailers opposed the bill at first, fearing a drop in their sales, until legislators promised them a cut. Lottery officials worry about running afoul of a federal law that prohibits state-sponsored online gambling. Still others fear the convenience of internet accounts would induce players to bet more than they can afford and would lead to increased gambling addiction and debt.

There is one very important point that all parties are missing: The lottery is a tax—a poorly designed, detrimental tax–and any expansion of such an ill-conceived tax would not be wise.

Many people do not understand that lottery tickets are heavily taxed. In 2003, the 39 lottery states sold $45 billion worth of tickets and kept $14 billion of it. They don’t call this money tax revenue, preferring the term “profit.” But it is a tax, and a high one: 45 percent was the average tax rate 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 that’s voluntary, not the tax. Of course, no one has to buy lottery tickets, but if you want one, the tax is not optional. It’s the same as a car or alcohol or cigarettes or anything else you buy. Sales and excise taxes are not optional. The only difference is that the lottery ticket tax is hidden better — the state creates a monopoly for itself and builds the tax into the price of the product.

The lottery is a bad tax for several reasons. First, since tax monies are presumably used to provide general public services, it is important that taxes be levied as broadly as possible rather than falling 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 mat be unaware of the heavy built-in tax.

Finally, lottery revenue is not always spent on education. Money raised in the name of the children is often spent on other things — even in states where a “lockbox” protects lottery tax revenue.Knowing that lottery funds will make up the difference, legislators can spend less of the regular revenue on education than they otherwise would.

The average Georgian already spends over $300 a year on lottery tickets, and in 2002 the average American spent more money on lotteries than on reading materials. But apparently that’s not enough for the 98 state representatives who voted for this bill. If this bill passes the Senate and becomes law, Georgia will have the dubious distinction of being the first state to sell lottery tickets on the internet. Many people find this idea unsettling, and for good reason. Moral and public health concerns aside, expanding the lottery is simply poor tax policy. We may be just a click away from making a bad tax even worse.

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


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