February 25, 2005

As tax method, lottery’s a poor choice for Mississippi

(The article originally appeared in the February 25, 2005 edition of the The Clarion-Ledger)

Sometimes hesitation, procrastination and indecision lead to better public policy. Case in point: the lottery bill that died in the state Legislature earlier this month.

Thirteen years ago Mississippians voted to remove the state’s constitutional ban on lotteries. The margin of victory was small — 53 percent to 47 percent — but with the ban removed, legislators (and lottery equipment vendors) turned their attention to the creation of a lottery. For 13 years they have bickered over various proposals but have not yet created a lottery.

Hesitation is important Why the hesitation? There are several possible reasons: religious opposition, public apathy, a likely veto by former Gov. Kirk Fordice, moral concern over the prevalence of casino gambling, and opposition from the casino industry — not to mention that the money raised by a lottery would be small potatoes compared to the tax revenue already generated by the booming casino industry: $329 million in FY 2003.

There are other, more compelling reasons to oppose a lottery. To understand these reasons lawmakers must turn their attention to tax policy.

Many people don’t realize that lottery tickets are heavily taxed. State governments kept almost $14 billion, or 31 percent, of the nearly $45 billion spent on lotteries in FY 2003. State revenue departments don’t consider this money to be tax revenue, but they should. 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 sold lottery tickets in 2003, the average tax rate on tickets was 45-percent.

Lottery promoters often say the lottery can’t be a tax because playing the lottery is voluntary and taxes are mandatory. But they’re confusing the purchase with the payment. Buying a lottery ticket is like buying alcohol in a state-run liquor store. Although the purchase of alcohol is voluntary, the state excise taxes that inflate the price 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.

Hidden, regressive taxes Does it really matter whether the lottery is a tax? Isn’t it better to raise lottery taxes than income or sales taxes?

No. Lotteries are one of the worst taxes, for several reasons.

First, high taxes on specific products violate the principal tenet of sound tax policy, what economists call “neutrality.”

Second, good tax policy requires taxes that easily understood. Taxpayers should know if a product is taxed and how much. Lotteries allow politicians to mislead taxpayers about the amount of tax they’re paying.

Third, many studies have shown lotteries to be regressive, meaning low-income people spend more on lotteries as a percentage of their income.

Finally, lottery revenue is not always spent on education, as promoters inevitably promise. Instead, experience in other states proves that money raised for worthy causes ends up spent on other things.

Southern states have been the most reluctant to enact lotteries, but concerns about “losing” money to neighboring states have prompted some of them to cave in.

Mississippi could soon have a lottery despite the demise of this year’s legislation. However, if residents’ and legislators’ support for the idea remains lukewarm, the state might hold out for a while. Let’s hope they keep procrastinating.

Alicia Hansen is a policy analyst at the Tax Foundation and author of “Lotteries and State Fiscal Policy.”