The New York lottery has recently changed the way it reports video lottery terminal (VLT) sales data. States whose lotteries offer VLTs do not all report sales data consistently: some report total revenue (cash in) while others report revenue minus prizes (cash in less cash out). This causes problems for 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. payers, lawmakers and researchers trying to compare lottery data across states.
The New York Lottery is for the first time reporting the amount of money gambled on its video games after The Journal News revealed that billions of dollars in wagers were being kept off the books.
Earlier this year, The Journal News reported that the Lottery’s annual reports and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. ed financial statements detailed only a fraction of the billions of dollars bet on its video games because the Lottery did not disclose the portion of wagers returned to gamblers as prizes.
In response to the newspaper’s findings, government watchdogs and state lawmakers from both parties urged reform of the Lottery’s accounting methods, and Gov. Eliot Spitzer pledged to review its operations.
The lottery should be applauded for improving its reporting methods. However, if the state wants to make an even bigger improvement, it can simply do away with the lottery entirely or sell it to a private company and open up the lottery market to competition. State-run lotteries are poor tax policy for a number of reasons, including lack of transparency.
Transparency, a principle of sound tax policy, requires taxes that are clear to taxpayers; taxpayers should always understand what the tax rates are and what goods and services are taxed. But because legislators refuse to accurately label lottery profits tax revenue, the implicit lottery tax remains hidden. Lack of transparency is an even bigger problem with VLTs, which are often located at racetracks and tend to resemble casino games so closely that players may not even realize the games are operated and taxed by the state lottery agency. When we think of playing the lottery, we think of buying a ticket and checking the winning numbers, not playing slots at the track.
The Journal News article does mention transparency, but not the type of transparency described above:
“Now they’re being more transparent, so that’s great,” said Assemblywoman Aileen Gunther, D-Forestburgh. “It’s important to make sure there’s accurate reporting so we get our fair share.”
Of course this type of transparency—accurate reporting of government revenue—is extremely important. But if the New York Lottery really wanted to address transparency problems, it would go a step further and label lottery profits a tax—or simply get out of the lottery business entirely.
For more information on the tax policy problems of state-run lotteries, see our recent Background Paper on the topic.
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