Tax Foundation Urges North Carolina Supreme Court to Hold that Lottery Is a Tax

May 21, 2008

On Monday the Tax Foundation filed friend-of-the-court brief with the North Carolina Supreme Court in Heatherly v. State, urging the court to reverse a lower court ruling and hold that the North Carolina Education Lottery generates tax revenue, not “profits.”35 percent of lottery revenues is dedicated to general state spending, equivalent to a 35-percent tax on the sale of each lottery ticket. If that revenue is found to be a tax under the meaning of North Carolina law, then the lottery’s enactment in 2005 did not meet the basic state constitutional requirements for enacting tax law.

According to the Tax Foundation brief, the lottery revenue meets all three tests for defining a tax. Current U.S. Supreme Court Justice Stephen Breyer laid out the criteria for defining a tax when he decided the San Juan Cellular case for the First Circuit Court of Appeals in 1992. Breyer argued that a judge should consider who imposes the assessment, who pays the assessment, and what the revenue is spent on.

In this case, the assessment was imposed by the North Carolina state general assembly, not a narrowly focused regulatory body; the assessment is paid by a broad swath of the public, not by a narrow group that benefits from a particular government service; and the revenue is spent on public education, a broadly available benefit, not on a single industry or similarly narrow group. All these facts argue for defining the lottery’s net revenue as tax revenue, not as a fee or profit or other miscellaneous charge. Other tests developed by courts in California, Hawaii, and Louisiana reach similar conclusions.

The lower courts, including the Court of Appeals, focused on whether lottery tickets are “voluntarily” purchased. But, the brief points out, what matters is whether the charge is voluntary, not whether purchase of the service is voluntary.

“Government officials defending taxes like the voluntariness test, because any tax other than a head tax could be characterized as voluntary, since taxes on cigarettes, liquor, gasoline, and even income, payroll, property, and sales are the result of voluntary decisions,” Henchman said.

The Tax Foundation has long asserted that lottery revenue should be called tax revenue and that state lawmakers should never raise lottery revenue and simultaneously claim they “haven’t raised taxes.”

“Governor Easley did exactly that before the lottery’s enactment, saying the state needed ‘a tax or a lottery,'” said Tax Foundation policy analyst Alicia Hansen, author of “Lottery Taxes and State Fiscal Policy,” which lays out the Foundation’s general principles for defining a tax in this area.

Read the Tax Foundation brief here.

For more on the Heatherly case, click here.

Tax Foundation Press Release on the Court of Appeals decision.

More on lotteries and gambling taxes here.

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