December 16, 2004

R.I. lottery is a tax that hurts citizens

This article originally appeared in the Thursday, December 16, 2004 issue of the Providence Journal.

WASHINGTON — The Rhode Island lottery outsells every other lottery in the country, with total sales per capita last year reaching an astounding $1,200. That’s more than four times what the average American spends on reading material or attending movies.

There are two explanations for Rhode Island’s extraordinarily high gambling rate. First, Rhode Island is one of only six states to offer video-gaming devices as part of the state lottery. Video lottery terminals are electronic games of chance played on computer terminals. They are fast-paced casino-style games, found in jai-alai and greyhound-racing facilities, that allow customers to bet a large amount of money in a short period of time. They have raised concerns about possible gambling addictions, but they’ve also brought in over 80 percent of Rhode Island’s lottery revenue.

The second contributing factor to the state’s high gambling rate is the large number of lottery retailers in Rhode Island: approximately one for every 950 residents. Only four states have a higher concentration of lottery retailers.

In fiscal year 2003, the state government’s percentage of the lottery take was 18.7 percent, bringing in over $241 million.

Although such widespread gambling may be of some concern, at least a lottery is better than taxes, right? Wrong — the lottery is a tax.

State governments kept almost $14 billion, or 31 percent, 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 an implicit tax.

Many people believe the lottery can’t be a tax, because a tax is mandatory and playing the lottery is voluntary. But they’re confusing the purchase with the payment. The ticket purchase is voluntary, but the payment of the tax is mandatory. It’s like buying alcohol in a state-run liquor store: The state levies excise taxes on alcohol, and although the purchase of alcohol is voluntary, those taxes are mandatory. With both alcohol and lotteries, the state prohibits the private sale of a product, creates a monopoly for itself, and taxes the product.

Does it really matter whether the lottery is a tax? Absolutely. Lotteries are simply poor tax policy, 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, good tax policy requires taxes that are transparent: clear to the taxpayers. The taxpayers should understand what is being taxed, and at what rate. Lottery retailers do not give customers receipts itemizing the tax, and since states advertise the lottery as a recreational activity rather than a revenue-raising activity, consumers may be unaware of the implicit tax rate.

Third, many studies have shown lotteries to be regressive, meaning that lower-income people spend more on lotteries as a percentage of their income than do higher-income people. Should the government be in the business of advertising, selling and taxing a product on which the poor spend more than other people and bear a disproportionately large share of the tax burden?

Finally, lottery revenue is not always used for the purposes that are claimed. The Rhode Island lottery raises money for its general fund, which means that legislators may allocate it any way they see fit. Some of the money is purportedly used for public education, and in many other states all or most of the government “profit” is used for public education. Sounds good, but money ostensibly raised for sympathetic-sounding purposes can be spent on other things — even in states where there is a “lockbox” protecting lottery tax revenue.

Rhode Island jumped on the lottery bandwagon relatively early, in 1974, making it the ninth state to start a lottery. Since then, 31 other states and the District of Columbia have followed suit, and Oklahoma will soon become the 42nd lottery jurisdiction. The Southern states have been the most reluctant to enact lotteries, but concerns about “losing” money to neighboring states have prompted some of them to give in.

There are a number of reasons why people should oppose the lottery, including concerns that a lottery is an inefficient way to raise government revenue, worries about gambling addiction, and moral qualms about state-sponsored gambling. Tax-policy concerns should be added to that list. A lottery makes a state tax system more regressive, less neutral, and less transparent — in general, less principled.

Alicia Hansen is author of “Lotteries and State Fiscal Policy,” a report by the Tax Foundation in Washington.