by Dr. Roy Cordato
Senior Economist, Emeritas
Gov. Mike Easley decided to use his State of the State address on February 19 as a launching pad for his proposal to enact a state-run lottery for North Carolina. The revenues would fund class-size reduction, among other programs. But the governor made significant errors in his presentation. He suggested that such a lottery would raise $400 to $500 million annually.1 He claimed that North Carolina’s neighbors were receiving “hundreds of millions of dollars” from N.C. citizens that they were using to “build new schools” and reduce their own class sizes.2 Finally he made a challenge to those who oppose the lottery: “if anyone has a better way to find the $400 to $500 million for education, I am open to it.”3
The governor’s numbers simply do not add up. First, the claim that a North Carolina lottery would raise as much as $500 million annually, or anything close to that amount, is unsupportable. Currently, our neighboring state of Virginia has an average of about $300 million in net lottery revenues after prizes and expenses. Even this number is a bit of an overstatement because it does not include lost sales and other tax revenues.
Based on sales and personal income data from eight Southern and border states with lotteries, we project that a North Carolina lottery would result in about $933 million in gross sales. About 50 percent would be paid out in prizes, reducing the state’s take to $467 million. Furthermore, the lottery bill currently being proposed by Reps. Bill Owens and Joe Tolson sets aside 16 percent of the gross for operating expenses such as advertising, payments to retailers, and equipment expenses.4This lowers the revenue actually available for state programs by $149 million to $317 million.
An additional amount, though, must be deducted to account for lost sales and other tax revenue associated with the untaxed purchase of lottery tickets. The money North Carolinians will use to play the lottery must come from savings or reduced purchase of other goods and services. Because the effective state and local tax rate the combined burden of income, sales, property, and other taxes is approximately 10 percent,5 we estimate that the lottery will result in $31.7 million in lost state and local taxes. This brings the net revenue gain to the state down to $285 million, a far cry from the $400 million to $500 million amount claimed by Easley in his speech.
As noted, the governor also suggested that significant revenues are being lost to neighboring state lotteries. There are several problems with Easley’s claims. First he implies that North Carolinians are playing the lottery in Virginia, Georgia, South Carolina and Tennessee, but only Virginia and Georgia currently have lotteries. While South Carolinians recently approved a lottery referendum, their legislature has yet to agree on a bill. Divisive issues include whether to allow advertising (the lack of which will reduce sales), and how to operate it. Tennessee has yet even to enact a referendum bill.
Looking only at the status quo, Georgia and Virginia state treasuries are netting about $36 million in revenues from N.C. lottery players, not the hundreds of millions claimed by the governor. The reason for the discrepancy is that Easley fails to take into consideration the prizes that North Carolinians win from out-of-state lotteries and the costs associated with running those lotteries. North Carolinians currently spend about $98 million on the Virginia lottery and another $10.5 million in Georgia. But because they win prizes in proportion to their spending indeed, the two states only measure winnings sent to our state, not tickets purchased by North Carolinians half of the gross flows back over the border. Another 15 to 16 percent is consumed by administrative costs.6 SoVirginia and Georgia only “pocket” $36 million in revenues from North Carolina players (see above). In the context of a $15 billion budget, this is a minuscule amount. In fact, it is lower than the likely fee (4% to 5% of the gross, or $37 million to $47 million) North Carolina would pay to its out-of-state lottery contractor.
If and when South Carolina adds its lottery to the mix, it is reasonable to expect the net revenues collected from N.C. players to rise to $102 million. To be especially generous to the governor, if we add Tennessee to the scenario, though it currently has no plans to implement a lottery, we project that the “revenue gain” by the treasuries of all four states would total $110 million. Even if this entire amount were recouped through implementation of a North Carolina lottery it would not even cover the $149 million in administrative costs needed to run our game. In effect, we would be spending $1.35 to save $1.00.
It is clear that a North Carolina lottery would not be the cash cow for the state that Easley has claimed it would be. As noted, it would raise about $285 million annually, not $400 million to $500 million. If these latter amounts represent the cost of his proposed education initiative putting aside, for the purposes of this discussion, the program’s merits then the challenge to find sufficient funding is not to lottery foes but to the governor himself. If the purpose is simply to balance future budgets, then our suggestion has always been to reduce the size of state government. At least $285 million can easily be saved by eliminating unnecessarily and wasteful state spending.7
Dr. Roy Cordato, Vice President for Research