New Tax Foundation Study Indicts State Lotteries Tax, Warns Against Increasing Dependence on Lottery

WASHINGTON, July 3 /PRNewswire-USNewswire/ -- As state lottery agencies around the country tout Independence Day as a good day to gamble on special "Star Spangled" games they're promoting, a new study from the Tax Foundation finds lotteries to be among the most regressive, misguided policies in state government finance.

The study is No. 54 in the Tax Foundation Background Paper series, "Gambling with Tax Policy: States' Growing Reliance on Lottery Tax Revenue," by Alicia Hansen.

Lotteries Spread as Revenue Source

The defects of state-run lotteries have become more important as states increase their reliance on lottery revenue. North Carolina has become the 42nd state to start a lottery, although it did so in a cloud of scandal, lawsuits and prosecutions.

Many existing lotteries are expanding beyond printed tickets into video gaming devices. In Fiscal Year 2004, West Virginia raised over six percent of its own-source revenue selling paper and video lottery tickets, and the nationwide average in states with a lottery was 1.4 percent of own-source revenue (not counting money from the federal government).

In Fiscal Year 2005, total spending on lotteries was over $52 billion, or $236 for every adult in the United States. Roughly 30 percent of this, over $15 billion, went into state coffers.

"The average American spent more on lotteries in 2004 than on reading materials and movies combined despite the absence of lotteries in eight states," said Hansen.

A "Voluntary" Tax?

The study debunks a common fallacy used to promote lotteries: the idea that lottery revenue is not actually tax revenue since playing the lottery is voluntary.

"A mandatory tax on a voluntarily purchased lottery ticket is still a tax," said Hansen, "just as any retail sales tax is a mandatory tax on voluntarily purchased goods and services."

State lawmakers establish and expand lotteries without admitting that they are raising taxes. The Census Bureau assigns lottery revenue the innocuous designation "miscellaneous revenue" in its reports on state taxation.

"Perhaps either the Census Bureau or the Bureau of Economic Analysis in the Department of Commerce will have to take a bolder approach to defining state revenue sources," said Hansen. "Clearly politicians, some of whom have pledged not to 'raise taxes,' are pulling a fast one by calling their lottery tax revenue 'profits' as if they were private firms."

Some lotteries are already quasi-private and pay private-sector salaries like the Tennessee Lottery CEO's 2004 salary of $350,000 plus bonuses that brought her compensation to $700,000-more than the governor's.

Aggressive, expensive advertising campaigns for lotteries are unique in state government operations, and they grow despite the free advertising they get each day from TV stations and newspapers reporting winning numbers. That marks a dramatic change in a few decades: lotteries themselves were illegal until 1964, and advertising them was banned until 1975.

Who's Paying the Lottery Tax As It Grows?

"Lotteries are 'regressive,' as numerous studies have shown," said Hansen. "That means the poor bear a disproportionately heavy share of the tax burden."

For example, the National Gambling Impact Study Commission found that in 1997, although people of all incomes played the lottery, players with incomes under $10,000 spent almost three times as much as those with incomes over $50,000.

full study to be posted at 9:00 a.m., Tuesday, July 3 at http://www.taxfoundation.org/publications/show/22457.html

The nonpartisan, nonprofit Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day(R), the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.

Contact: Bill Ahern (202) 464-5101 Contact: Alicia Hansen (202) 464-5114 TF@TaxFoundation.org

CONTACT: Bill Ahern, +1-202-464-5101, or Alicia Hansen, +1-202-464-5114,
TF@TaxFoundation.org , both of the Tax Foundation

Web site: http://www.taxfoundation.org/