In an effort to fund Mississippi’s infrastructure projects, Magnolia State lawmakers are considering a proposal to establish a state lottery. According to the National Conference of State Legislatures, Mississippi is one of six states without a lottery.
In 2017, the Mississippi Legislature created a study group to examine lottery revenue in nearby states and make recommendations for a potential Mississippi state lottery. According to the Associated Press, the study group found Arkansas’ lottery raised $85.2 million in 2016, Louisiana raised $177.9 million, and Tennessee raised $395 million in lottery earnings. Additionally, Mississippi’s state economist found that Mississippians spent between $5 million and $10 million on the Arkansas lottery in 2016. Residents of the Magnolia State spent an additional $30 million in the Louisiana lottery.
The state lottery, like all “sin” taxes, is an unreliable and regressive method of funding state coffers. In a 2018 report examining the effects of sin taxes on state budgets, the Pew Charitable Trusts discovered lotteries were the largest source of gaming revenue across the 44 states operating them. According to Pew, gaming revenue only generates 2.4 percent of Mississippi’s total revenue, a small portion compared to most states.
While some proponents of state lotteries argue they do not represent a real tax since they are voluntary, the tax they pay on the lottery purchase is not. Alicia Hansen of the Tax Foundation says this argument confuses the purchase of a product with the payment of the tax on the product. “Purchasing a lottery ticket is voluntary, but the tax portion of the ticket price is not, just as a sales or excise tax is compulsory on a voluntary purchase of alcohol, clothing or books. Lottery revenue is a poorly designed tax, failing the tests of sound tax policy. Policymakers, however, often fail to recognize or acknowledge that the revenue is a tax, preferring to label it ‘miscellaneous revenue.'”
Although lottery revenues for most states have remained fairly stable since they first emerged in the 1970s, recent reports show lottery revenues are decreasing. The Pew study cited above also found lottery revenue declined in 22 states of the 44 states with lotteries from 2014 to 2015. Many attribute this decline to fewer Millennials playing the lottery and to a new phenomenon known as “jackpot fatigue,” where fewer people play until jackpots exceed normal levels. In 2016, West Virginia lottery revenue decreased 2.6 percent. In Rhode Island, lottery revenue decreased by 3.2 percent in 2016. In Missouri, lottery revenue was down 3.3 percent in 2015.
Creating a lottery will make the state more reliant on gambling revenues, which have proven to be regressive and unreliable. According to Jens Beckert and Mark Lutter of the Max Planck Institute for the Study of Societies, “Low-income households spend a higher percentage of their income on lotteries than their wealthier peers do. Annually, US households spend $162 on lotteries on average; for low-income households, the figure is $289 and for those who make less than $10,000 it’s $597, or around 6% of their yearly income.”
Moreover, researchers have found other forms of gaming and the increasing number of casinos have negatively impacted state lottery revenues. For instance, Pew also found lottery revenues decreased in Maryland, Pennsylvania, and West Virginia after new casinos were built.
Lottery taxes are still supported by some elected officials because they are not paid by a majority of their constituents and are generally less visible than broad-based taxes, but they are a poor source of state revenue. Lawmakers and government officials tend to shift targeted taxes to other products when revenues run short of expectations.
Further, not all lottery winners have benefited from their winnings over the long term. The National Endowment for Financial Education estimates that as many as 70 percent of those who land sudden windfalls lose their money within several years.
Instead of creating a new discriminatory tax through a state lottery, Mississippi should focus on tax reforms that lower rates, put dollars back into the pockets of taxpayers, and encourage government efficiency by placing reasonable limits on spending.
The following documents examine lotteries and sin taxes in greater detail.
State Lotteries Fight ‘Jackpot Fatigue,’ Casino Competition
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2017/07/13/state-lotteries-fight-jackpot-fatigue-casino-competition
Elaine Povich of Stateline examines the phenomenon of jackpot fatigue and how it is affecting state lottery revenues.
Are Sin Taxes Healthy for State Budgets?
http://www.pewtrusts.org/en/research-and-analysis/reports/2018/07/19/are-sin-taxes-healthy-for-state-budgets
In this study by the Pew Charitable Trusts and the Nelson A. Rockefeller Institute of Government, the authors examine state sin taxes and observe that state revenue growth from taxes on alcohol and gambling is unlikely to be sustained due to how the products are taxed, changes in demand, and casino competition. In addition to studying state revenue trends for longstanding sin taxes, Pew and Rockefeller analyzed newer taxes on e-cigarettes and recreational marijuana. The report examines trends from 2008 through 2016 and relies on federal and state revenue data, academic and other relevant literature, and interviews with state officials.
Taxing Habits
https://www.bostonfed.org/-/media/Documents/RegionalReview/taxhabits.pdf
In this article in Regional Review, Phineas Baxandall examines the growing use of sin taxes to fund state spending and sin taxes’ negative impacts on the economy and consumers’ lives. “Insofar as policies discourage alcohol and cigarette consumption, they also cut off potential sources of revenue. Punishing those who create social costs also disproportionately punishes the poor. And singling out a vice for taxation indirectly promotes the activity as a virtuous contributor to the public purse,” writes Baxandall.
The Wages of Sin Taxes
https://heartland.org/publications-resources/publications/the-wages-of-sin-taxes
In this paper by Christopher Snowdon of the Adam Smith Institute, the author examines the government’s decision to increase taxes on cigarettes and alcohol and to introduce minimum alcohol pricing in 2016. “The report argues that ‘sin taxes’ (taxes on commodities seen as harmful to health) are ineffective in reducing consumption and are not necessary for recouping lost revenue. The taxes are highly regressive and force the poor to pay for the government’s mishandling of public finances,” wrote Snowdon.
Regressive Effects: Causes and Consequences of Selective Consumption Taxation
https://heartland.org/publications-resources/publications/regressive-effects-causes-and-consequences-of-selective-consumption-taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor. “The study concludes that selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them,” the authors wrote.
Sin Taxes Harm Public Health, Pocketbooks
https://heartland.org/news-opinion/news/sin-taxes-harm-public-health-pocketbooks?source=policybot
Jesse Hathaway writes in this article for Budget & Tax News about the ineffectiveness of sin taxes. “Instead of using them as ‘health taxes,’ lawmakers are exploiting sin taxes as ‘stealth taxes’ to boost government revenue through a divide-and-conquer strategy, hitting small groups of people who cannot effectively fight back,” wrote Hathaway.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Sin Taxes: Size, Growth, and Creation of the Sindustry
https://heartland.org/publications-resources/publications/sin-taxes-size-growth-and-creation-of-the-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.
Taxing Sin
https://heartland.org/publications-resources/publications/taxing-sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write.
The States Most Dependent on Sin Taxes
http://www.governing.com/topics/finance/gov-sin-tax-states-dependency.html
Governing magazine tallied fiscal year 2014 tax revenues states received from taxing alcohol, casinos, tobacco products, or certain kinds of video games. The article outlines the states with the largest share of total tax revenues generated by sin taxes.
The Political Economy of Excise Taxation: Some Ethical and Legal Issues
https://heartland.org/publications-resources/publications/the-political-economy-of-excise-taxation-some-ethical-and-legal-issues-1?source=policybot
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called “sin” taxes, because they punish people for politically incorrect behavior, such as smoking or consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.
The Economics of Sin Taxes
http://www.acton.org/pub/religion-liberty/volume-4-number-2/economics-sin-taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
