Background Paper No. 54
Most Americans don’t think of lotteries in terms of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy. The lottery conjures up images of smiling Powerball winners displaying $10 million checks for the TV camera or perhaps stories of lottery players suffering financial ruin or gambling addiction. But in between these two extremes is the less glamorous but equally important issue of the lottery’s effect on state tax policy.
In fiscal year 2005, total consumer spending on lotteries surpassed $50 billion, and the average American spent $177 playing the lottery. Over $15 billion of this revenue was transferred to state coffers. The significant revenue raising potential of state lotteries raises serious tax policy concerns. Although no government agency is willing to call the lottery a tax, it is nonetheless a source of implicit tax revenue.
Lotteries are fundamentally different from other gambling in one important way: they are provided by the state, and only by the state. Therefore, they raise policy questions entirely separate from issues of morality and addiction. The lottery is more than a controversial way to add a little money to state coffers; it is a tax and should be evaluated as such.
When subjected to the tests of sound tax policy, it fails:
• Extensive evidence shows lotteries are regressive, meaning the poor shoulder a disproportionate share of the tax burden.
• The lottery is not economically neutral: it distorts consumer spending by applying an unusually high tax rate to a particular product.
• It is a hidden tax, lacking transparency.
• Lotteries unnecessarily complicate the tax system.
• Lottery revenues do not always benefit the programs for which they are earmarked, and voters may feel deceived when they approve lotteries for education only to find that legislators shuffle funds and their states’ public education systems do not benefit significantly.
• Finally, the use of state-operated gambling monopolies to raise tax revenue poses serious policy questions about government accountability.