Mississippi Lawmakers Consider Creation of State Lottery

January 10, 2018

Mississippi is one of six states to forgo a state lottery, along with Alabama, Alaska, Hawaii, Nevada, and Utah. Some Mississippi lawmakers would like to change that.

The state has intermittently relied on lotteries in the past, but not for over a century. The 1868 state constitution forbade lotteries, and while an existing lottery company continued to operate as if grandfathered in for many years, the courts wound it down in 1880. The state has not conducted or authorized a lottery since.

It’s not for lack of trying. In 1990, then-Governor Ray Mabus (D) embarked on a push to create a state lottery that fell just short—it won supermajority support in the House, but fell six votes short of the required two-thirds in the House—and may have cost him the next year’s election. In 1992, though, voters amended the constitution to allow a lottery. Yet, even though legislative majorities favored amending the constitution to permit a lottery as of 1990, nothing has come of it.

There is no one reason why Mississippi and the other five states continue to resist the implementation of a state lottery. Certainly moral and religious convictions have come into play, in Mississippi and elsewhere. Undeniably, concerns have been raised about the financial impact on lower-income residents. Another legislative event transpired which in 1990 likely had an impact too: the legalization of dockside gambling. There is no question that the existence of a large gaming industry is a major reason why Nevada lacks a lottery; it is not unreasonable to assume that, to a lesser degree, it has had an impact on Mississippi as well.

However, beyond any moral, ethical, or religious convictions regarding a state-run lottery, or concerns about whether it would cannibalize a profitable state industry, lawmakers considering a lottery should also consider the nature of the revenue structure itself, recognizing that—whatever it may be called—the lottery is an implicit tax.

At first glance, that may seem incorrect. Playing the lottery is, after all, entirely voluntary in a way that paying state income taxes certainly isn’t. But we are taxed on many voluntary activities; one can, after all, avoid paying sales tax by not buying anything. Or even if we set aside general taxes, it’s possible to avoid special excise taxes on gasoline, alcohol, and cigarettes by declining to purchase those products—but are they any less a tax because of the choice involved in the transaction?

The lottery is, first and foremost, a way for the state to generate revenue, and it won’t do to consider it a user fee, like tolls, inspection fees, or even a well-structured gas tax, because manifestly the purpose of lottery revenue isn’t merely to cover the costs of operating a lottery, but to fund other governmental operations. In some states, the implicit tax rate exceeds 50 percent.

Compared to more common forms of taxation, the lottery lacks transparency. Taxpayers should understand what is being taxed and at what rate, but as we’ve pointed out elsewhere, the implicit nature of the lottery tax makes transparency impossible. Lottery participants undoubtedly know that the state keeps a substantial share of ticket revenue, but rare is the ticket buyer who knows just how much.

Lotteries are also regressive. Lower-income individuals spend more on lotteries as a percentage of income. Lottery revenue is sometimes countercyclical, raising more in periods of economic distress, which might be welcome news to state officials—but has troubling implications. One study associated a modest increase in lottery ticket sales with an uptick in unemployment, and ticket sales have often—though not always—increased during recessions.

As Mississippi policymakers contemplate a lottery, it may be tempting to think of it as free money—new revenue raised without having to adopt a new tax. A better way of thinking about the issue, however, would recognize the lottery for what it is: a regressive form of high implicit taxation.

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