Is the Lottery a Tax?
Jacob Sullum | May 25, 2007, 2:41pm
This week the North Carolina Court of Appeals heard arguments against the state's lottery, which critics say amounts to an unconstitutional tax. In 2005, when North Carolina became the last state on the East Coat to establish a lottery, the state legislature allocated 35 percent of the revenue from ticket sales to education programs. The rest of the money covers administrative costs (8 percent), vendor payments (7 percent), and prizes (50 percent). The lottery's supporters call the 35 percent spent on education a "profit," while opponents say its purpose and the broad base from which it's raised indicate that it's akin to a sales tax. The distinction matters because the state constitution requires three different readings on three different days in each house of the legislature, with the votes on the second and third readings recorded, to create a new tax. The lottery bill, by contrast, was hurried through in shady circumstances that led to criminal convictions for several people involved, including the former House speaker, who pleaded guilty to corruption.
The Tax Foundation, which filed a friend-of-the-court brief in the case, argues that treating the lotteries like taxes would make the process of adopting them more transparent and stop politicians who support them from claiming to be fiscally conservative friends of the taxpayer. During the appeals court arguments, the foundation reports, a judge posed a question that went to the heart of the state's argument for continuing this pretense: "If the state took over all the gasoline stations in the state and operated them, would that convert the existing excise tax on gasoline into something else, 'not a tax'?" In both cases, the state is creating a legally enforced monopoly, such that anyone who wants to buy the product has no choice but to pay the extra charge, which makes the price higher than it would be in a competitive market (especially if you consider the lottery's egregiously low payout percentage). While it's true that no one is compelled to buy a lottery ticket, a fact the lottery's supporters cite in arguing that it's not a tax, the same could be said of numerous purchases subject to sales or excise taxes. The purchase may be voluntary, but payment of the tax is not, once the purchase occurs. The tax on gum or cigarettes is still a tax, even though people can live without gum and cigarettes.
Brian Courts | May 26, 2007, 4:20pm | #
Talk about a failure to read! Where can we go to opt-out of paying the gas taxes?
Uh, no Guy, I think it is your failure to understand the argument, not my failure to read.
Let's try again. You can avoid paying the gas tax by not buying gas. If you choose to buy gas you must pay a certain percentage (or per gallon, whatever) to the state. You can avoid the lottery "tax" by not buying lottery tickets. If you choose to buy a lottery ticket you must pay (built in to the price as I explained) the lottery ticket tax. Part of your purchase price is the legitimate cost of the service. The part that goes to fund other stuff the government wants to fund is a tax in every way but nominally.
As in the example I gave, if the "market" price (i.e. the price that would prevail if the lottery were open to competition) is below the price charged by the state then the additional part is the same as the additional part you must pay to buy a gallon of gas, or a bottle of booze, or anything else to which the state attaches its appetite for cash.
Maybe I didn't really explain it well enough but then again before you accuse someone of not reading you might want to make more of an effort to understand what I was saying. Anyway, the point is bascially this: there is a legitimate price for any service (presumably even the legitimate price is too high for any number of reasons when there is a monopoly but that is a secondary issue) that covers the cost of providing that service and perhaps a reasonable return in the case of a regulated private monopoly (e.g. utilities, cable companies, etc.). If the price of a service is above that legitimate price and that extra is used to fund the government, it is a tax. It can be explicitly so, as in the gas tax, or sales tax, or it can be implicit as in the case of the state run liquor stores or the lottery. Either way the effect is the same - a surcharge above and beyond the "market" or "legitimate" or whatever you want to call it, price that is used to fund government activities not related to the provision of the service or product in question.
Once again, when the state, as it does here in Oregon, runs a monopoly liquor store and charges prices high enough to fund state and local governments to the tune of $120 million a year, is that not exactly the same as a tax on liquor? Let's say the state liquor store changes it's pricing policy to price the booze at the same price the market would support and then makes up the difference with an explicit tax on the sale of each bottle. Nothing changes
at all except that part of the price you pay is now explicitly labeled a tax. Would you argue that simply calling it a tax or not makes any real distinction? Of course not (I hope) yet this is precisely the same situation as the lottery ticket sales. If the state lowered the price to 67 cents and charged a 50 % tax to get a dollar a ticket either way, it is no different than what goes on now.
Either way, with appologies to Warren, if it looks like a tax and walks like a tax and quacks like a tax, chances are, it's a tax.
