A decade and a half ago, as a new governor confronting a chronically unbalanced budget and a massive debt owed to schools, universities and localities, I sought to lighten a fiscal brainstorming session by saying, “Hey, I know a great new revenue source. We’ll put the state in the cigarette business. We’ll call ‘em ‘Hoosier Smokes.’ The margins will be terrific and the take enormous.”
My teammates looked properly shocked, but then I confirmed that, of course, I was kidding, but wanted to make a different point: The state already operates a lucrative, high-margin business that promotes addictive, often self-destructive behavior and preys primarily on poor people. It’s called the lottery.
We found more appropriate ways to balance the books and pay off the debts. But the spread and growth of state lotteries as a public-finance tool has never stopped troubling me. I recognize that my view is an isolated one. Among the many ways that governments extract money from the public, lotteries are uniquely popular across income, social, geographic and political spectrums.
I once proposed a plan not to end the Hoosier Lottery but merely to cap its revenue at current levels and devote the monetized value of their future growth to making community college free to young people of moderate means.
Republicans were unenthused, and Democrats were actively opposed. The bill went nowhere. As far as I can tell, the result would have been the same in most other states.
One would expect second thoughts to be more common. Lotteries manifest all the elements of bad taxation. Although the payer/player knows he is handing the government his money, it’s unlikely he realizes how much of his dollar the state is planning to keep. And the double taxation - by the lottery itself and by the taxes on any winnings - means that the “benefit” even for the occasional winner further obscures the amount of the rake-off.
But the biggest and most obvious offense is these systems’ severe regressivity. While somewhat higher percentages of upper-income citizens report participating in lotteries, their play is much more casual.
A 2002 study at the University of Buffalo’s Research Institute on Addictions, echoed by a Bankrate.com report earlier this year, found that top-quintile players spend well under half as much as bottom-quintile players. As a percentage of income, the money spent by low-income people is 10 times that of wealthier residents who play the lottery.
If the nature of lottery taxation is a bit deceptive, the way it has been marketed is an outright con job. In state after state, lotteries were sold as benefiting education. It has seldom happened. Repeated studies find no correlation, or even a negative correlation, between lottery revenue and K-12 or higher-education spending.
Give credit for candor to the National Association of State and Provincial Lotteries, whose formal position is “The lottery is simply a form of entertainment that happens to benefit your state.” Maybe we should view state lotteries as a modern twist on the “bread and circuses” public entertainments of antiquity, only in this version the government supplies only the circus, and the people fork over the bread.
Since this regressive, addictive, partially hidden tax is here to stay, might a little improvement still be conceivable? Beyond their other unsavory features, state lotteries far and away offer the lousiest odds in an expanding American gambling universe. As a national average, only about 60 percent of dollars gambled on lotteries are paid out to “winners.” In many places, one’s chances are even worse: Delaware pays out 27 percent, Oregon 25 percent, South Dakota only 20 percent.
I used to point out to fans of the lottery system, “The Atlantic City mob let you keep 92 percent.” Here’s a modest suggestion: States should consider reducing their skim of the wagers; at 73 percent, even Massachusetts’ leading payout seems unfairly skimpy. No state would go broke sharing a little more of the take; in only nine states do lotto revenue amount to even 3 percent of total state receipts.
Mitch Daniels is president of Purdue University and a former governor of Indiana.