May 22, 2007
Tax Foundation Amicus Brief Calls State Lottery "Profit" a Tax
For more information, contact Bill Ahern at 202-464-5101
North Carolina Court Will Decide if State Started Its Lottery Illegally
full study online at http://www.taxfoundation.org/news/show/22415.html
Washington, D.C., May 22, 2007 - Arguments were heard today in the case of the North Carolina Education Lottery, which according to the Tax Foundation amicus brief generates tax revenue, not "profits."
The state imposes a 35-percent assessment on the sale of each lottery ticket, and if that revenue is found to be a tax under the meaning of North Carolina law, then the lottery's enactment in 2005 did not meet the basic legislative requirements for enacting tax law.
"A ruling that the lottery is in part a tax will uphold the meaning of Article II, Section 23 of the North Carolina Constitution by ensuring transparency in the state tax system," said Tax Foundation Senior Tax Counsel Chris Atkins.
According to the Tax Foundation brief, the lottery revenue meets all three tests for defining a tax. Current U.S. Supreme Court Justice Stephen Breyer laid out the criteria for defining a tax when he decided the San Juan Cellular case for the First Circuit Court of Appeals in 1992. Breyer argued that a judge should consider who imposes the assessment, who pays the assessment, and what the revenue is spent on.
In this case, the assessment was imposed by the North Carolina state general assembly, not a narrowly focused regulatory body; the assessment is paid by a broad swath of the public, not by a narrow group that benefits from a particular government service; and the revenue is spent on public education, a broadly available benefit, not on a single industry or similarly narrow group. All these facts argue for defining the lottery's net revenue as tax revenue, not as a fee or profit or other miscellaneous charge.
From the courthouse, Tax Foundation Counsel Joseph Henchman reported that Judge James Wynn posed a hypothetical similar to one in the Tax Foundation brief: 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"?
"Judge Wynn seemed to be looking for the least disruptive way to find the lottery unconstitutional, which he felt could cause ‘chaos,' but didn't seem to be finding one from the state counsel," reported Henchman.
The Tax Foundation has long asserted that lottery revenue should be called tax revenue and that state lawmakers should never raise lottery revenue and simultaneously claim they "haven't raised taxes."
"Governor Easley did exactly that before the lottery's enactment, saying the state needed ‘a tax or a lottery,'" said Tax Foundation policy analyst Alicia Hansen, author of "Lottery Taxes and State Fiscal Policy," which lays out the Foundation's general principles for defining a tax in this area.
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The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
