January 3, 2005

Lotteries are another state tax — but with better marketing

(This article originally appeared in the January 3, 2005 issue of Crain’s Chicago Business)

In 1986, the ILLINOIS LOTTERY placed a billboard in a poor Chicago neighborhood that read, “From Washington Street to Easy Street.” Even though similar billboards were placed around the city with different street names, angry Chicagoans boycotted the Lottery, claiming it was taking advantage of the poor. The billboards are gone, but the Lottery has persisted in its marketing to low-income people, and the poor are still buying a disproportionate share of the tickets.

Lottery supporters argue that many consumer goods cater to low-income people, so advertising the Lottery to the poor is not so deplorable. But a lottery ticket is not just any consumer good. It is one of the mostly highly taxed goods on the market.

Many people believe that because playing the lottery is voluntary, it isn’t a tax at all. But they’re confusing the purchase with the payment. It’s like buying alcohol or cigarettes or any consumer good that’s subject to sales and excise taxes. The purchase of these products is voluntary, but the taxes are mandatory.

With lotteries, states go even further by prohibiting the private sale of the product, creating a monopoly for themselves and then placing a punitive tax on the games.

State governments nationwide kept almost $14 billion of the nearly $45 billion spent on lotteries in fiscal 2003. They call that money “profit,” and the U.S. Census Bureau calls it “miscellaneous revenue,” but it’s a tax like many others. Because the tax on lottery tickets is built into the price, the rate is trickier to calculate and varies from year to year, but it’s always staggering: Compared with the Illinois sales tax of 6.25%, the tax rate on ILLINOIS LOTTERY tickets in 2003 was 51.7%.

And the heavy burden it puts on low-income people is not the only problem with this tax.

First, high taxes on specific products violate a principal tenet of sound tax policy, which economists call “neutrality.” By unfairly singling out certain goods for higher rates, lawmakers distort consumer spending and ultimately damage the economy.

Second, good tax policy requires taxes that are clear to taxpayers. States mislead consumers by advertising the lottery as a recreational activity rather than as a revenue-raising activity — a tax.

Finally, revenue from lotteries is not always used for the alleged purposes. The ILLINOIS LOTTERY maintains it raises money for public education, but legislators can shuffle funds so that Lottery revenue ends up replacing, rather than supplementing, education funds. Illinois’ education spending did not jump after it started the Lottery.

When people disapprove of lotteries, they often do so on moral grounds rather than due to tax policy concerns. But we should not forget that lotteries are a tax — and a bad one.

Alicia Hansen is with the Washington, D.C.-based Tax Foundation, a non-partisan fiscal policy watchdog group. She is the author of the foundation’s recent study, “Lotteries and State Fiscal Policy.”