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Budget and Taxation
The State Lottery

The idea of creating a state-run lottery in North Carolina has been a perennial issue in state politics for decades. While some say that the issue involves the personal freedom to gamble or the need to keep dollars circulating within the state, the real question is whether state officials should set up a gambling monopoly likely to attract players disproportionately from lower-income households and then impose punitive taxes on them to expand the size and budget of state government. The answer is clearly “no.”

Running The Lottery Numbers

North Carolina is the largest state in the U.S. without a state-run lottery, and is bordered by four states — Virginia, Georgia, South Carolina, and now Tennessee — that operate games and confiscate approximately one-third of the gross sales as state revenues. While lottery advocates often state that “hundreds of millions of our dollars” are flowing to these neighboring state lotteries, they are either misinformed or trying to misinform North Carolinians.

As the table on page 13 demonstrates, the real “revenue loss” to our neighbors is approximately $81 million, not enough by itself to justify the annual cost of running the games. What accounts for the difference between the political assertions and the reality is that lottery proponents fail to account adequately for the cross-border flow of funds associated with most state-run lotteries. While North Carolinians spend roughly a quarter of a billion dollars each year purchasing lottery tickets in other states, they collectively receive more than half of those dollars back in the form of prizes (and the prize money is taxed in North Carolina as personal income). In fact, state lotteries don’t typically know for sure how many out-of-state players they have; what they do know for sure is the mailing addresses of those to whom they must pay prizes.

So the widely cited figures of how much North Carolina “loses” to other state lotteries are actually estimates based on the amount that North Carolinians win.

Consequences Of A State-Run Lottery

If the experience of other state lotteries is any guide, a North Carolina lottery would generate several adverse consequences. Gamblers are not evenly distributed across a society; they are often concentrated in low-income and minority communities, where studies show that lottery sales are disproportionate. Furthermore, the propensity to purchase lottery tickets — or any other low-cost consumer good — declines as income rises, which guarantees that a lottery would impose a regressive tax burden (it is not likely that politicians and other wealthy North Carolinians would spend the thousands of dollars annually on lottery tickets it would take to equal the share of household income lower-income players would spend). Advocates who say that “people at every income level play the lottery” don’t seem to understand what “regressive” means. It’s about proportionality.

Another legitimate objection to a North Carolina lottery is that it would place the state in the position of endorsing and promoting an activity that many of its citizens believe is immoral. One need not oppose legalized gambling to oppose a lottery. At least privately operated casinos, horse tracks, or friendly poker games do not implicate government officials in swindling anyone and have the virtue, unlike a government-monopoly lottery, of offering choice and competition to improve the odds of winning. Moreover, at least with horseracing there is the potential for rural communities in North Carolina to expand their horse breeding and training industries. In short, if North Carolina policymakers believe that — for reasons of economic development, personal freedom, or a search for new revenue — legal gambling ought to be expanded in the state, setting up a state-run lottery monopoly is the least-attractive option.

Another concern has to do with children and families. Necessarily, a state lottery would have to advertise aggressively on television, radio, and billboards in order to reach the sales figures estimated by North Carolina advocates and based on experience in states such as Georgia. But these activities would constitute a massive effort to communicate what would appear to be a government-approved message to young people that the way to get ahead in life is not to study and work hard but to gamble. For the vast majority of people, this message offers a false hope and if heeded could result in significant harm. It also clashes in a fundamental way with what most North Carolina parents seek to teach their children.

It also clashes with the message most state officials and educators say they want to communicate to young people about the value of education. The irony is that many supporters advocate an “education lottery” on the grounds that it could increase funding for public education or enhance the college-going rate for highschool graduates by offering generous scholarships. Evidence from other states suggests that this is another false hope — lottery revenues often displace other public funds that would have gone to education, thus failing to increase overall support, and lottery-funded scholarships primarily go to students who would have attended colleges anyway. Careful studies of real (rather than apparent) tuition charges, available federal and state aid, and other factors have documented that for most college-bound students, the cost of higher education is already affordable; it may result in debt, but if the education truly has value in the marketplace, it is a debt payable from the higher earnings that graduates will receive. For poorer families, there are better and more appropriate ways of improving their access to higher education than relying on lottery revenues disproportionately collected from lower-income North Carolinians in the first place.

Recommendation

North Carolina’s state government should not enter the gambling business in any form. If desired, policymakers can remove current barriers to legal gambling for private individuals and enterprises, and then impose normal, nondiscriminatory taxes on the business activity thus generated.

To view higher quality graphs, download Agenda 2004 [560KB Acrobat].