As lawmakers continue to hash out the details of the State Budget that includes a provision to significantly expand government-sponsored gambling in North Carolina, a recent Tax Foundation article argues that the State Lottery operates as a partial tax and that any increases in the lottery should be considered a tax increase. As NC Family previously reported, the current version of the Senate budget proposal would authorize a 50 percent expansion in lottery advertising, from one percent of annual lottery revenues to 1.5 percent, which represents a potential increase of over $9 million in additional lottery ads.
It has been estimated that such an increase would net government coffers $63 million more in revenue, based on an expectation that increased lottery advertising would generate over $220 million more in lottery sales over the next two years. In addition, the Senate budget anticipates $15.5 million in new net revenue (after prizes and administrative costs) from over $54 million in sales over the next two years from presently nonexistent “E-Instant Games,” which are equivalent to online scratch-off tickets.
In a recent Tax Foundation blog post, Joseph Henchman, Vice President for Legal and State Projects, points to the proposed lottery changes in the Senate’s proposed budget, saying, “While 65 cents of every dollar [from the NC lottery] pays for prizes and administration, the rest is imposed by the government, pays for general government expenses, and does not specifically benefit the payor.” According to Henchman, “That’s the classic definition of a tax, upheld in nearly every federal and state court.” He goes on to explain that when North Carolina lawmakers passed the State Lottery in 2005, they failed to treat it as a tax, because they failed to hold a required number of readings and votes on the bill on separate days as required by the State Constitution.
This issue became the subject of a lawsuit filed by the N.C. Institute for Constitutional Law on behalf of several plaintiffs including the North Carolina Family Policy Council. The Tax Foundation filed a series of briefs in support of that lawsuit arguing that the State Lottery meets all three tests required for a tax. The case made it to the State Supreme Court, which, as Henchman explains, “deadlocked in a 3 to 3 tie” in a ruling issued in 2009. According to Henchman, despite the unresolved legal questions surrounding the State Lottery, the facts “argue for defining the lottery’s net revenue as tax revenue, not as a fee or profit or other miscellaneous charge.”
In any event, lawmakers should remove the provision in the Senate budget that would expand lottery advertising and that would put North Carolina in the online gambling business through the creation of “E-Instant Games.” Any expansion of state-sponsored gambling is bad public policy that will only increase gambling addiction in the Tar Heel State, leaving more victims in its wake.
TAKE ACTION: Please contact your State House and Senate members and ask them to remove these gambling expansion provisions from the budget.
To identify your State Senator or State Representative: