March 27, 2005

Lottery supporters need education in tax policy

(This article originally appeared in the Sunday, March 27, 2005 edition of the Birmingham News.)

Thank goodness for Alabama’s constitutional ban on lotteries. Judging from the serious hearing the lottery is getting in the state Legislature, the constitutional ban is the only thing preventing Alabama from repeating the fiasco of Gov. Don Siegelman’s lottery campaign.

When Siegelman won the governorship of Alabama in 1998, he did so as the “education governor,” promising to improve the quality of the state’s public schools. His brilliant plan? Start a state lottery and use the proceeds for college scholarships and pre-K programs.

Siegelman established the noble-sounding but now infamous Alabama Education Lottery Foundation, which raised $5 million to promote a lottery referendum. So sure was he of quick voter approval and a surge of new revenue, he confidently promised not to “raise taxes.” Apparently, he didn’t understand that his proposed lottery would be exactly that – a new tax. To the dismay of politicians and “educators,” voters rejected the referendum, leaving the governor stranded with his no-new-taxes pledge.

Like many people, Siegelman did not understand – or was unwilling to acknowledge – 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 “taxes,” preferring the term “profit.” But it actually 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. Same as a car or carry-out food 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.

Taxpayers should know if a product is taxed and for how much. Lottery retailers do not give customers receipts itemizing the tax, and since states advertise the lottery as a recreational activity, consumers are usually unaware of the heavy built-in tax. Lotteries allow politicians to mislead taxpayers about the amount of tax they’re paying.

The lottery tax has been shown by many studies 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?

Probably the most infuriating thing about lottery taxes is that most of the money doesn’t end up being spent on education – even in states where a “lockbox” supposedly protects the money. When legislators see the new lottery cash come in, they spend less of the regular revenue on education than they used to, knowing that lottery funds will make up the difference.

Not only would schools get less than promised, but children would learn dangerous lessons about raising and spending money. In 2002, the average American spent more money on lotteries than on reading materials. Children may not understand the nuances of sound tax policy, but they can understand hypocrisy.

Siegelman’s ironically named Alabama Education Lottery Foundation also provided an abysmal example for the children: Allegations of questionable financial transactions conducted by the foundation were examined in a grand jury investigation of state government fraud.

Part of the Southern tradition has been resistance to lotteries, but concerns about “losing money” to neighboring states have prompted some to cave in. Lottery ads stress this theme, and alas, polls show the ads are working.

Alabama voters have lost some of the suspicions they had when they rejected Siegelman’s lottery in 1998. But border-crossing ticket buyers are not as numerous as the ads claim, and the amount spent out of state is nothing compared to the amounts people will waste if the tickets are for sale at every Alabama convenience store.

Any parent, teacher, legislator or voter who supports the “education” lottery proposal needs an education in tax policy.

Alicia Hansen is the author of a recent Tax Foundation study titled “Lotteries and State Fiscal Policy.” Contact her through the Tax Foundation at