The Lottery: Government Activity or Business?

July 14, 2006

The Indiana Lottery has been dealing with an expensive argument over a lottery ticket which could cost the state’s taxpayers a considerable amount of money.

From CNN:

Tom H. Smith, of Indianapolis, Indiana, bought an instant-win, scratch-off lottery ticket in 1996, which awarded him a $5 prize.

Smith didn’t redeem his ticket until several months later when, he was told, it was too late to collect the prize. Smith appealed to the Indiana State Lottery Commission, insisting that he had no way of knowing when the game ended.

When his claim was rejected, he sued the agency for damages. His suit eventually became a class-action suit that brought in other ticket holders.

Hoosier Lottery Executive Director Esther Schneider told CNN the agency has spent almost $500,000 in legal fees on the case since 1997. A proposed settlement will create a $600,000 fund to resolve this and other disputes with lottery claimants, she added.

“This was probably mishandled from the beginning,” Schneider said. “In nine years there weren’t any any [sic] attempts made to come to a reasonable settlement … [because] the previous administration’s policy was not to settle.”

This is the perfect example of why the lottery is not an appropriate activity for state government. The above description of the lawsuit reads more like a description of a consumer suing a large corporation than a citizen suing his state government.

Many people forget that a lottery is, after all, run by the government as a form of implicit taxation. Many states, however, allow their lottery agencies greater leeway and autonomy than they allow other state agencies so that the lottery can function like a business and raise as much revenue for state coffers as possible. In some states that means paying lottery executives exorbitant salaries and bonuses—half a million dollars for the Tennessee Lottery’s CEO.

Indiana would be better off relying on explicit taxation—such as sales, income, or property taxes—to raise revenue, and leaving the gambling lawsuits to private companies.

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