March 18, 2008
Tax Foundation Criticizes North Carolina Lottery Ruling
Majority Opinion Might Create Loophole Around Taxpayer Protections
WASHINGTON, Mar. 18, 2008 - This morning, the North Carolina Court of Appeals upheld the constitutionality of the North Carolina Education Lottery by a 2 to 1 vote in Heatherly v. State. The court majority held that the lottery is not a tax, and thus did not violate taxpayer protections requiring new taxes to meet certain procedural thresholds.
"The majority opinion misses the mark in an important way," said Joseph Henchman, Tax Counsel at the Washington, D.C.-based Tax Foundation, which submitted an amicus brief supporting the constitutional challenge. "While it is true that lottery ticket purchasers receive a benefit in the form of prizes and operation costs, that's only 65 percent of what they pay. The other 35 percent goes straight to the government general fund, and that's a tax."
The majority opinion, written by Judge James Wynn, Jr. (D), held that the purchase of lottery tickets is more akin to paying a toll to enjoy a government-provided benefit rather than paying a tax. Further, purchasers of a winning ticket enjoy an exclusive right to the benefits that accrue, a benefit not shared generally by the citizens of North Carolina (like tax revenue would be).
"Part of a ticket can be described as a fee and analogous to tolls," Henchman said. "But that's not the case with the remaining 35 percent, which is a tax."
Henchman particularly criticized the majority's conclusion that the lottery cannot be a tax because the purchase of tickets is voluntary.
"Many people equate lotteries with 'voluntariness,' but that avoids the key point: just because a purchase is voluntary, that doesn't make the payment of tax voluntary," Henchman said. "People voluntarily purchase liquor from state-owned liquor stores in North Carolina, but part of that payment is still a tax (the state liquor tax)."
"The 35 percent of lottery revenues that go to the general fund are above and beyond the fees necessary to run the program, and because the proceeds are used to benefit all North Carolinians, it is a tax," Henchman added.
Judge Ann Marie Calabria (R), in a twelve-page dissent, echoed arguments made in the Tax Foundation's brief.
"[T]he thirty-five percent assessment is a tax," Judge Calabria wrote. "[T]he purpose of the assessment is to raise revenue for education programs which is a general public purpose. Unlike a fee, the assessment does not merely create incidental revenue used for education."
Judge Calabria also criticized the majority's fixation on voluntariness.
"The majority focuses on whether a person voluntarily chooses to purchase a lottery ticket. Yet, it does not matter whether a person voluntarily chooses to purchase a lottery ticket or voluntarily chooses to pay a toll. Virtually every purchase is voluntary and the majority's analysis would convert nearly every assessment, including a general sales tax, into a 'fee.'"
Henchman echoed the warning.
"The majority opinion, by seeming to convert nearly every assessment into a fee, might allow any new tax to get around important taxpayer protections."
The North Carolina Institute for Constitutional Law, which brought the challenge, will be considering whether to appeal the case to the North Carolina Supreme Court.
Read the Tax Foundation's report on the Heatherly case here.
The nonpartisan, nonprofit Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.
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