Misguided Court Rules That N.C. Lottery Is Not a Tax

April 3, 2006

On March 30, North Carolina launched a state lottery, joining 41 other states and the District of Columbia. Lottery supporters fought for two decades to bring the lottery to North Carolina, and finally forced a lottery bill through the legislature last August. However, several clouds hang over their celebration, even amid the new lottery’s jubilant customers and employees.

First, there are accusations that the bill was passed as a result of underhanded maneuvering. Then there are the suspicions that funds raised by the North Carolina Education Lottery will partially supplant rather than supplement the education budget.

Finally, there is the lawsuit. A group represented by the North Carolina Institute for Constitutional Law filed suit against the state in December, arguing that the lottery is a tax, and the legislature breached the state’s constitutional requirement that revenue bills be passed in both houses on three separate days. On Match 21, a judge ruled that the lottery is not a tax, and therefore the bill was passed constitutionally, and the lottery can proceed with ticket sales. The judge wrote, “A tax is a forced contribution to government which has no necessary immediate relationship to a benefit conferred.”

As a matter of tax policy and common sense, the judge’s reasoning is badly flawed. The purchase of any product—such as a lottery ticket—is voluntary, but the tax portion of the ticket price is not, just as a sales or excise tax is compulsory on a voluntary purchase of alcohol, clothing or books. Even income taxes would be “voluntary” by the judge’s reasoning; no one forces the taxpayer to take a job and earn income.

As for the second part of the judge’s argument—“A tax … has no necessary immediate relationship to a benefit conferred”—the chance to win a cash prize is not a benefit conferred by the lottery; it is a good purchased by a consumer. After prizes have been distributed and administrative costs have been covered, the money that is left from ticket sales is used to confer benefits—such as aid to public education—that are unrelated to the purchase of lottery tickets.

As we have written before (here, here and here), lottery “profits” are tax revenue, and should be recognized as such.


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