More Gambling for the Children?

March 1, 2005

Would you teach your children that gambling is the best way to raise money in a pinch? That they should spend their allowance on video games and slot machines rather than on books? Probably not, but some Texas state legislators are about to. They think Texas needs video lottery terminals (VLTs) to raise more money, supposedly for education. They say want to help the kids, but all they’re really doing is making a bad tax worse.

Many people don’t even realize the lottery is a tax because a tax is mandatory and playing the lottery is voluntary. But they’re confusing the purchase with the payment. It’s like buying alcohol or cigarettes: the state levies excise taxes on alcohol and tobacco and, although the purchase of these products is voluntary, the taxes are mandatory. With lotteries, the state goes even further by prohibiting the private sale of the product, creating a monopoly for itself, and taxing the product.

State governments kept almost $14 billion of the nearly $45 billion spent on lotteries in Fiscal Year 2003. They did not consider this money to be tax revenue, but they should have. The money left over after lottery agencies pay winners and operating costs (the “profit”) is actually an implicit tax, and a high one. In the 39 states that operated lotteries in 2003, the average tax rate was 45 percent.

The lottery is a bad tax for several reasons. First, high taxes on specific products violate the principal tenet of sound tax policy, what economists call “neutrality.” By singling out certain goods or industries for higher rates, lawmakers distort consumer spending and ultimately damage a state’s economy.

Second, many studies have shown lotteries 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?

Finally, good tax policy requires taxes that are easily understood. Taxpayers should know if a product is taxed and how much. Lottery retailers do not give customers receipts itemizing the tax, and states routinely mislead taxpayers about what a terrible deal the players are getting.

The above concerns apply to traditional lotteries, but VLTs are even worse. VLTs are games of chance–or a combination of chance and skill–such as poker, blackjack or slots, played on computer screens. The bill under consideration would allow VLTs at racetracks, creating what other states call “racinos.” Players can bet repeatedly in a short period of time and experience the instant thrill of casino-style games. VLTs usually resemble casino games to such an extent that players may not realize the games are overseen by the State Lottery Commission. 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 or video poker at the track. The similarity of VLTs to casino games makes the lottery tax even harder for consumers to understand.

Who would be the winners and losers if VLTs flood the state? Taxpayers would be the big losers because they’d be forking over millions more to the state. Racetracks and companies who manufacture gaming devices both stand to profit, and so do politicians because they’d supposedly be “helping the children” without raising the most unpopular taxes – sales, property and business taxes.

But what about the children? Won’t they benefit? Probably not. In other states, legislators have routinely spent big after installing or expanding a lottery, but not on education. Knowing that lottery funds will make up the difference, they actually end up splurging on other things. Also, the children would learn a dangerous lesson 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 what this says about adults’ priorities, and they can understand the hypocrisy of funding education with casino-style gambling.

Only six states currently have VLTS but others have considered them. People get hooked on them quickly, often pumping four times as much money into them as they spend on regular lottery tickets. This delights tax-raisers, who can wallow in the money but deny they raised taxes.

It’s easy for politicians to say, “Let’s do this for the children,” but what would we really be teaching the children if this bill passed?

Alicia Hansen is staff writer at the Tax Foundation and author of “Lotteries and State Fiscal Policy”.


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