March 25, 2005

More gambling for the children in Maryland

(This article originally appeared in the March 25, 2005 edition of the Washington D.C. Examiner)

Would you teach your children that gambling is the best way to raise money in a pinch? That they should spend their allowance on slots rather than books? Probably not, but Gov. Robert L. Ehrlich Jr. and Senate leader Mike Miller, D, would like to.

Supposedly championing “education,” the Senate has passed a bill allowing 15,500 slot machines, called video lottery terminals, at racetracks and other locations. In the House, slots opponent Michael Busch, D, reluctantly permitted passage of a bill allowing 9,500 machines. The houses will now wrangle over the details although Busch says he won’t change his bill. They all say they want to help children’s education, but what they’re really doing is making a bad tax worse.

Ehrlich and Miller are unwilling to acknowledge that people pay a heavy tax on lottery tickets, whether they’re printed and sold at convenience stores or generated electronically and sold through a VLT. 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 from a store or a VLT. But if you buy them, it’s like buying a car or carryout food—sales and excise taxes are not optional.

But there are important ways that the lottery tax is worse than other taxes. First, since tax monies fund general public services, taxes should fall equally on many people, not heavily on a few customers of a particular product or service.

Second, low-income people spend more of their income on lotteries. Should the government be in the business of selling, advertising and taxing a product on which the poor spend more?

Finally, good tax policy requires honesty: Taxpayers should know if a product is taxed and how much. The lottery ticket tax is the opposite—a hidden tax. The state creates a monopoly for itself and builds the tax into the price, advertising the lottery as a recreational activity. Lottery retailers give no itemized receipt, and so consumers are unaware of the heavy built-in tax.

These concerns apply to traditional lotteries, but VLTs are worse. They usually resemble casino games so closely that players may not realize the games are run by the state lottery agency. When we think of “playing the lottery,” we think of purchasing a ticket and waiting days to find out whether we won, not playing slots at the track.

Who will be the winners and losers if VLTs flood the state? Taxpayers will be the big losers because their tax system will be debased. Companies who manufacture gaming devices stand to profit and the racing industry will benefit.

Other states have made no bones about their desire to use VLTs to help racetracks: The legislation that brought VLTs to Delaware was named the Horse Racing Rejuvenation Act. But of course, funding schools sounds better than promoting racetracks. Advocating VLTs for education lets Ehrlich and Miller boast of helping the children without taking blame for raising the unpopular taxes.

But what about the children? Won’t they benefit? Probably not. Lottery revenue raised in the name of children’s education is often spent on other things—even in states where a “lockbox” supposedly protects lottery tax revenue. Legislators know lottery funds will make up the difference, so they simply spend less on education than they otherwise would.

Children are learning a dangerous lesson about raising and spending money. In 2002 the average American spent more money on lotteries than reading material. Children may not understand tax policy, but they understand what this says about adults’ priorities.

Luckily, the governor, Senate and House are temporarily deadlocked over the plan’s details. Will they compromise? Or will the slots proposal once again die? Hopefully they will dig in their heels and pass nothing—for the children’s sake.

Alicia Hansen, policy analyst at the Tax Foundation, is the author of “Lotteries and State Fiscal Policy.”