Is the Lottery a Tax?

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.