Finance & Investing

Are Lottery Taxes Lopsided? You Can Bet On It.

Guest post by Norm Champ, author of Going Public.

As a lawyer in the investment world and a former senior officer at the Securities and Exchange Commission, I want to see more Americans take advantage of the wealth-creating power of our capital markets. The evidence is strong and certain: Even modest sums, invested prudently with diversified risk, result in higher net worth for people over the long run.

The Debt-to-Savings Ratio of Average Americans is Out-of-Whack

Making things infuriatingly worse is the trend of government-sponsored lotteries and casinos, which add “invisible taxes” to the lopsided burden on ordinary household finances.

The average savings rates of Americans are among the lowest of all modern democracies, generally somewhere around 5 percent or less. Consumer credit card debt, meanwhile, is disturbingly high, around $16,000 on average. Average car loan debt is $27,000 per household. Average student loans, $48,000. Mortgage debt, $169,000.

​The savings/debt scales are weighted even more heavily on the side of personal debt when “voluntary” taxes paid in the form of lottery and casino gambling promoted by government is taken into account. The practice of public financing via laws that enable government to profit from lotteries and casinos is grievous enough to warrant its own Hall of Shame.

The Hall would be packed with honorees. Currently, 44 states, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia have operating lotteries. The lotteries typically dedicate net revenue to social and educational programs, so that governments can use positive P.R. from “doing good” to retain public support for what has become a leading source of revenue for them.

Lottery Taxes Don’t Replace Existing Taxes; They Add to Them

Make no mistake about it: What lottery revenue amounts to is invisible – extra – taxes, paid voluntarily by citizens.

​ Plus, the whole public lottery game is sort of rigged – at least in the sense of not being transparent. Since the Clinton Gambling Commission, studies have pointed to the role of lotteries in gambling addiction, shown their disproportionate effect on poor and low-income citizens, made clear that states vary widely in their accountability for spending of lottery revenues, and indicated plainly that state advertising fails badly at making the poor odds of winning apparent.

In some states the burden has shifted so that more revenue is now raised from lotteries than from corporate income taxes. In New York State, taxpayers in the lowest segment of earners pay more for the lottery on average (about $1,000) per year than any other form of taxation, according to analysis by data expert Max Galka. At the same time, poor folks – households earning under $13,000 per year – spend about a tenth of their income on lottery tickets, according to one heavily-quoted study. States use saturation advertising to incite frenzied ticket buying, and then tax the winners.

We Must Empower Ourselves with Knowledge

Lotteries are not bound by the Federal Trade Commission’s truth-in-advertising laws that cover private businesses. They can outsource advertising to top marketing and communications firms with state-of-the-art tools for manipulating consumer behavior.  As the novelty of lottery games wears off after they are introduced—and the drain on wallets becomes clearer—states constantly invent new games and new marketing strategies, thereby driving up costs, as well as artificially stimulating demand in ways that remind me of penny stock brokers hard-selling from a boiler room.  Lotteries are not just a way we all wind up paying more taxes and our low-income citizens end up being exploited. Most importantly, they are siphoning millions of dollars people could be saving or investing wisely.

We learned stark lessons from the 2008 crash about how inevitably we are exposed to bankruptcy, foreclosures, and poverty when an economic crisis hits and our savings are inadequate. We must empower ourselves to understand how money works and how to make it work for us. We need to build financial literacy in high school, college and the early working years – and this includes understanding how lotteries work against our best interests.    I don’t expect lotteries to be repealed and eliminated tomorrow. But it is high time to ask our state and federal lawmakers to impose common-sense changes to benefit us all. Reduce the number of new games introduced each year. Hold state lottery advertising campaigns accountable to federal truth-in-advertising laws, requiring disclosure of risks and odds. Insist that state lotteries set aside a share of marketing dollars for promoting good savings habits and financial literacy. Let’s bet on ourselves, for a change.

Norm Champ is a partner in the New York office of Kirkland & Ellis LLP. Norm is a member of the Investment Funds Group. Previously, Norm was the director of the Division of Investment Management at the U.S. Securities and Exchange Commission (SEC).


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