Tax Foundation Weighs in on North Carolina Lottery Lawsuit

May 23, 2007

Ever since it was first debated in the legislature, North Carolina’s lottery has been plagued by scandal, crime, accusations of underhanded machinations in the legislature, and a slew of other problems. But none of this compares to the lawsuit.

A group represented by the North Carolina Institute for Constitutional Law filed suit against the state in December 2005, asking a judge to block the lottery’s start and arguing that a lottery is in part a tax and the legislature breached the state’s constitutional requirement that tax legislation be passed in both the House and Senate on three separate days. In March 2006 a judge ruled that the lottery is not a tax and therefore the bill was passed constitutionally, and the lottery could proceed with ticket sales.

The case was appealed and arguments before the court of appeals started on May 21. One of the things the judges may take into consideration is an amicus curiae brief submitted by the Tax Foundation in January, arguing that lottery profits are tax revenue:

The 35 percent assessment collected from the sale of each lottery ticket is a tax, because it is a mandatory payment imposed by the General Assembly to raise revenue for the education of all schoolchildren in North Carolina. Because the Wake County Superior Court improperly focused on the issue of voluntariness and neglected to consider the primary purpose of the assessment, which is to raise revenue, it did not conduct a proper balancing analysis. A ruling that the lottery is in part a tax will uphold the meaning of Article II, Section 23 of the North Carolina Constitution by ensuring transparency in the state tax system.

If the court rules that the North Carolina lottery profits do constitute a tax, that does not necessarily spell the end of lotteries in North Carolina, but the lottery would have to make its way through the legislature again, this time explicitly as a tax bill.

Click here to read the full brief. Click here for more on implicit lottery taxes.

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