State lotteries as disguised taxes - and with high administrative costs

The Tax Foundation has an interesting blog post today (12/28/10) - "How Much Implicit Tax Revenue Did Lotteries Raise in FY2010?" by Alicia Hansen. She describes the lottery funds kept by the state to fund schools, parks or other programs as "implicit tax revenue."

The theory is that just as when someone buys something subject to an excise tax, money goes to the tax collector, the same is true with a lottery ticket. Except that the implicit tax is typically much higher for the lottery ticket than for most other items (52% implicit tax in California per Tax Foundation calculations).

I think this is an interesting perspective. The tax angle gets lost from public view, I think, because it is the state selling the lottery ticket while other items subject to excise tax, such as alcohol and gasoline, are sold by companies who collect and remit the excise taxes. And, the implicit tax rate is not noted on the receipt for the purchase of the ticket.

For lottery tickets, the state collects all of the revenue with it going to: (1) administrative costs, (2) winner payouts, and (3) general fund revenues. Looking at the lottery as an implicit tax, also indicates that the administrative costs are quite high. I'd include the winner payouts in that category. To collect the tax, the state has to pay out about two-thirds of what it collects from the ticket price (per information posted on the National Conference of State Legislatures (NCSL) website). It really is an odd way to bring in dollars to the government coffers! And, it is a regressive tax too.

And, there is the standard concern about why the government promotes gambling. Lotteries enable people to say they are buying the ticket to help schools. The California lottery page describes lottery players as "partners in our state's education." (Where, clearly, statistics isn't a school subject!) Schools would be better off if people just gave the lottery money directly to their local school.

Back to the tax angle. In California, taxes and regulatory fees can only be enacted or raised with a 2/3 vote of the state legislature (fees were added by Prop 26 that passed 11/2/10). Could the economic reality of the lottery as a tax carry over to require that certain changes be voted on by a supermajority? Interesting question.

So, I would add state lotteries to the discussions on state tax/spending/budget reform. What do you think?