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Study: Lotteries regressive tax on poor

NASHVILLE, Tenn. (BP)–State-run lotteries are a regressive tax that disproportionately burden poor Americans, a new study by the Tax Foundation asserts.

The 40-page report by the Washington, D.C.-based nonpartisan organization argues that lotteries fail the test “of sound tax policy” and allow legislators “to increase spending while claiming credit for keeping taxes low.” However, the July 3 report says, lotteries indeed are a form of tax collecting — just as are taxes on other voluntarily purchased goods such as alcohol and tobacco. In fiscal year 2005, the report says, an average of 30.1 percent of every dollar spent on lottery games was kept by states to fund various projects — whether it be education, parks and recreation projects or simply placing the money in the general fund.

“The only difference between the lottery tax and sales or excise taxes [on alcohol, tobacco and other goods] is that the lottery tax is built into the price of the ticket, rather than reported separately,” the study said.

The average American in fiscal year 2005 spent $177 on lottery games. When including only residents of lottery states, that figure jumps to nearly $200, the study said. In fact, the average American spent more on lottery games than on reading materials ($130) and on movies ($32.55 — admission fees only) combined, the study said.

Much of the profit states reap comes from the poor, the study said. The lottery is regressive because the poor “spend more on lotteries as a percentage of their income.” Lottery proponents sometimes counter by citing data showing that the poor in certain states spend less on lotteries than do the middle and upper classes. But such an argument is misguided, the study said, because a “true measure of regressivity” must take into account the percentage of income.

“$500 worth of lottery tickets in one year may be a drop in the bucket to an upper-income individual, but it is a significant portion of a poor person’s income,” the study said. “Taking into account only the dollar amount spent misses the point.”

The Tax Foundation study cited two previous studies:

— In 1996, the National Gambling Impact Study Commission’s report showed that lottery players with incomes under $10,000 spent almost three times as much on the lottery as did those who made more than $50,000.

— In 2005, a Newark Star-Ledger analysis found that in a study based on ZIP codes, “communities with average household income below $52,000” sold an average “of $250 of tickets per person annually.” By comparison, that was more than double the amount for communities “with average incomes above $100,000,” the study said.

The regressivity of lotteries is further compounded when examining states that earmark lottery funds for education, according to the Tax Foundation study.

“[L]ower-income individuals — the very people who are more likely to spend heavily on lotteries — are less likely to benefit from the earmarked proceeds because they are less likely to attend college,” it said.

A 2002 study of the Georgia Lottery by the National Tax Journal found that “higher income households tend to receive a higher level of benefits from lottery–funded programs than do lower–income households.” That ’02 study additionally found that “lower income households (those reporting under $25,000 annual income) spend more on the lottery than they receive in benefits, while higher income households (those reporting over $50,000 annual income) receive a positive net benefit.”

The ’02 study was significant because the Georgia Lottery often is viewed by other states as a model.

“[F]ew Georgians seem to notice that the lottery is redistributing money from lower-income lottery players to higher-income scholarship recipients,” the Tax Foundation study said.

“… Lottery proponents counter the regressivity claim by arguing that the lottery is voluntary and that the poor spend a disproportionate amount of their income on other consumer items as well, but this argument ignores the fact that, unlike other consumer goods, lottery tickets are sold and promoted by the government,” the study said.

“Should the government be in the business of selling, marketing and profiting from an item on which the poor spend — albeit voluntarily — a higher percentage of their income (or even a higher dollar amount) than do the middle class and the wealthy?”

State lotteries are unique in that they were banned just 40 years ago but today are promoted heavily by state governments through radio and television advertisements, the study said. If government-run liquor stores — which several states have — were “advertised this extensively, a public outcry would likely ensue,” the study said.

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  • Michael Foust