“Lottery for Education” Steals a Good Name

6007594833_b6983433f0rockhorse photo FlickrCC 6007594833_b6893433f0rockhorse.jpg 

The New York State Lottery generates revenue to government outside the tax stream that goes directly “to education.”  This special fund, however, is not as most people thought in 1966 it would be, to enhance “education” above subsistence level.  It’s more like a reserve called  every year.  Used thus, it frees for  other expense sectors (e.g. pensions, welfare) money from taxes put into the General Fund that would have gone to “education.”  This can be called “total budget fungibility.”   

Compare government-sponsored lottery to the unpopular revenue-booster  of  increase in conventional taxes:  it looks to the average tax-payer like finding money in the street.  It is not.  It is socially unjust in taking money disproportionately from the less affluent.   It is two or three-fold  more expensive when hidden quantifiable socioeconomic costs are factored in.  Big-time predatory gambling like NYSL also leaves in its path untold harm that cannot be quantified, including family breakup and suicide.   In 2013 we face the spectre that newly-legalized casinos will be hailed, like Lottery, as benefactors to “education” and therefore to NY residents.   They would  be wolves in sheep’s clothing.  

Despite a long history as money-raisers for educational institutions and even governments, lotteries in mid-20th century America were widely regarded as corrupt, e.g. the defunct “Louisiana Lottery.”  To launch its own, New York State needed a really good marketing plan.  The first suggestion was “Lottery for Pensions,” to support retirees from State Government.  [Just kidding!]  No, the real first choice was “for Education.”    This eased guilt in early participants by its resemblance to a PTA benefit raffle, turning Lottery almost into a civic duty. 

The amendment to Article I § 9 of the State Constitution that passed referendum in November 1966 looked simple.  It created a Lottery Commission and set rules for how it would sell “tickets”  and govern itself.  No one dreamed then the NYS Lottery would become the business we have today, handling more than eighteen billion dollars a year via thousands of virtual slot machines and selling “tickets” for seven billion dollars more.  As New Yorkers look at amending our constitution again in 2013 to permit non-tribal casinos,  it is important for voters to learn from the 1966 experience what can grow over the decades out of a few amending words. 

Sad to say, in New York state aid to education has become acutely and chronically dependent on Lottery.   This gives Lottery, and other forms of predatory gambling like casinos,  a noble-sounding rationale to expand, as if necessary growth in spending “for education” must be tied to expansion of predatory gambling.  Lottery comes on as patron and rescuer of “education.”   It is more like the bad guy in a western who holds “education” in front of him as a human shield with a knife to her throat, threatening to kill her if he cannot have his way. How did this come about, and what does it foretell for our state?  

The NYS Lottery has justified itself since 1966 to most people by repeating that its proceeds go “to support education.”   This mantra, largely true, 1 has lulled into complaisance with the Lottery and its numerous add-ons two generations of New Yorkers who might not be so tolerant if Lottery had not been cleverly packaged at its start.   The market label “education” not only gave a smart start but also became an impervious protective wrapping as the lottery evolved technologically.  Many critics of the NYS Lottery believe its contribution to “education” moves through the General Fund and is simply tagged with a routing slip “from Lottery for education.”  On the contrary,  however, money the state government gets from Lottery does in fact go into a special fund earmarked by statute “for education”  which  cannot be tapped to make up for a shortfall somewhere else.   Lottery-derived revenues of  $ X “for education, ”  however,  allow the budget-makers to allocate $ X less to education from the General Fund than they would have had to without those revenues, yet still say that the total allocation is stable.   If the Lottery some year failed to make its budgeted contribution,  the General Fund would have to make good the difference. 2

The result is $X more total revenue to the state without an announced increase in rates of property taxes, sales tax or personal income tax.   When $X is about three billion dollars (~ 1% of NY government [state local and federal] spending) it looks like a handsome savings for the taxpayers.   It’s not really.  Earl Grinols, Distinguished Professor of Economics at Baylor, argues cogently in his book Gambling in America:Risks and Benefits (Cambridge  University Press, 2004) that raising a dollar of revenue to government by tax on casinos costs society two to three times  as much as getting that same dollar by increasing  a conventional tax.3  Grinols writes of casinos; big-time lottery, though not ever called a tax, is probably similar.  Most of the losses by customers (= income to Lottery) are from a small fraction of their number. 4 

Lottery is a way to raise revenue without visibly raising taxes.  “Lottery for education” is a master stroke of labeling, if no one looks at the deplorable means to this end.  The good-cause label may once have eased the guilt of neophyte “players.”  It has long since become whitewash for government sponsorship of a revenue generator that has  exploited  lower-income groups 5 and ruined many lives while making an essential part of New York life partially dependent on it.   I don’t think New Yorkers in 1966 anticipated anything like this growth, made possible by the protective label “for education.”  We can’t pretend that anyone now plays the NYS Lottery to contribute to “education” any more than “for pensions.”    “For education,” literally true, is now a phrase to deflect criticism and justify uncapped rapacity.  

Don’t get me wrong.  The state needs money for education; no cause is more worthy. In 2012, if Lottery had not contributed about 2.9 billion dollars 4 to Albany “to education,” that sum would have had to be got from some other expense sector.  The more the state relies on Lottery as a rescuer, however, the more education is hostage to it and to the concept that gambling is good for “education.”     We are reaching, or have reached, the point where some may think that all growth in state spending for aid to education must come from the Lottery.  We are at the point where our Governor proposes that taxes on the new non-tribal casinos he wants will go “to education.”  We are at the point where legislation is introduced (S00331) to legalize betting on college sports at OTB parlors with net profits  “to education. ”  [Not kidding on this one.] 

The Lottery’s contribution (14%)  2  to “State Aid to Education” is no small sum now.  New Yorkers should note, however, that “state aid”  makes up less than 20% of total spending on public K-12 education; the rest is mostly local, with some federal. 7  No one should think that Lottery provides 14% of the total spending on education in the state; it’s more like 4%. 

Between 2004 and 2012 State aid to education rose by 57% as did State spending on pensions [see table 1.]  I’m all for pensions, but point out that the increase in that sector would have been much harder to do without loud screams if Lottery had not put about 23 billion dollars into “education” over that same time.   That dedicated stream allowed more money to flow to other important expense sectors with less curb appeal than education.  Its input to “Albany” makes a fixed amount of tax dollars go farther.  The more money there is from gambling “to education” the more there is to spend on things other than education.  Yet no one says Lottery brings revenue to “The State” or to “Albany.”  It’s always “to education”   as if that end could wash away all the loss and misery Lottery inflicts.  It is not noble and beneficent for the Governor to say as he now has that casino taxes will go “to education” and imply that the more casinos there are  in NY the better education will be served or the less it will be underserved.

In 1966 we New Yorkers were beguiled by three well-chosen words “for education” and “tickets”  into what has become a nightmare: a cherished institution of government – public K-12 education – increasingly dependent on government-sponsored predatory gambling.  New York legislators in 2013 must remember this sorcerer’s apprentice lesson in reading the few words of the proposed amendment “no more than seven casinos as prescribed by the legislature.”   There is nothing there to protect the state’s people against a worst case scenario.

Footnotes and references    

1 Saying that revenue to New York State netted from the State Lottery is “for education” is not wholly true.  The racinos, for example, must parcel out some of their net win from video slot machines to the thoroughbred industry, the tracks, advertising etc.  About half  their net win goes “for education.”    Most of the money grossed by the Lottery in “traditional games” like Lotto or scratch-offs, which might be considered “revenue to the state,”   goes of course back out into prizes.  About 31% of total sales does go “for education.”  This is about 75% of what’s left after prizes, operating expenses, advertising etc.

2 https://stateaid.nysed.gov/publications/handbooks/handbook_2012.pdf  see footnote 1 p. 4

3   Grinols, Gambling in America pp. 179-81 shows how this “2 or 3 to 1” ratio  is derived.  Here we have rephrased the explanation slightly:

  • Let C = the increase in quantifiable social cost of gambling per year due to introducing a casino to a relatively casino-free region.  Two figures for C are given in note 3, above:  $143 and $163.   C is a cost to society at large, although some part of it is underwritten by government through taxes paid earlier. 
  • Let L = the average loss at the casino, per adult, per year, by gamblers in its drawing area. 
  • Let t = the tax rate on casino revenue.  
  • The revenue to government, given by the product of t and L (denoted as  t L) is a cost to the casino industry.  Total cost of casino emplacement to all non-governmental parties per tax dollar collected = (C + t L) / (t  L) = 1 + C / (t  L).

For C = $143, L = $400, and t = 20%, total cost per $ collected via gambling revenues = 1 + 1.79  = $2.79.

For C = $143, L = $300, and t = 20%, total cost per $ collected via gambling revenues = 1 + 2.38  = $3.38.

For C = $163, L = $400, and t = 20%, total cost per $ collected via gambling revenues = 1 + 2.04  = $3.04.

For C = $163, L = $300, and t = 20%, total cost per $ collected via gambling revenues = 1 + 2.71 =  $3 .71.

  • These estimates of the cost per dollar collected should be compared to Tax Deadweight Loss or Marginal Excess Burden (MEB), the incremental cost of raising yet more revenue from an already existing tax such as income tax or sales tax. The MEB is borne by the tax-paying sector, not by government.  See Ballard, Shoven and Whalley, American Economic Review, (1975), Vol. 75, No. 1, pp. 129-38.  Several ranges of estimates for MEB are available.  Ballard et al. suggest a range between $1.17 and  $1.57 for each incremental dollar received in taxes.  Grinols uses the high end of the range, which makes tax by casino seem less overpriced than in a scenario with a lower MEB.  For example, $3.04 is a bit less than twice $1.57, but 2.6 times as much as $1.17.   By using a fairly high estimate for average loss per adult/year ($400), Grinols makes tax by casino look more cost-effective than it would be if average losses were lower.  In all of these choices of estimates, Grinols is being conservative, in the sense that he is minimizing the marginal cost to society of taxing by casino rather than stepping up rates on existing sources of revenue. 
  • Grinols  also notes that in order to achieve parity between tax by casino and the MEB, assuming an MEB of $1.57 and holding C at $163 and L at $400, it would be necessary to tax the casino at a rate of 71% — an implausible rate.   [ 1 + 163/(400 * 0.71) = 1.57 ]  Note:  amounts shown above are 2003 dollars.

 

 4   http://govinfo.library.unt.edu/ngisc/meetings/mar1798/mar17p10.html Testimony of Dr.  Robert Goodman and of the Hon. Dan Bosley,  afternoon session

 

5 Grinols, op cit. pp 150-51, 156

 

6  http://nylottery.ny.gov/wps/portal  go to “About Us” at bottom of page >Financial statement

7 www.usgovernmentspending.com/piechart_2013_NY_total other years available from menu

 

  2004 2012 Increase in $ Increase as %
Pensions 9.4 14.8 5.4 57%
Education 8.6 13.5 4.9 57%
Transportation 9 12.6 3.6 40%
Health 35.1 47.6 12.5 35%
Welfare 6.5 11.5 5 77%
Total 88.8 126.1 37.3 42%
Lottery profit 1.9 2.89 1 52%

 

Table 1.  Spending by NY state government in billions of dollars in 2012 compared to 2004    Sources refs 6 (rows 1-6) and ref 7 (row 7)

The opinions in this essay are those of the writer, Stephen Q. Shafer, and do not necessarily reflect those of all members of CAGNY-Action or CAGNY Information.

The photo of a rocking horse at top alludes to a short story by D.H. Lawrence, “The Rocking-Horse Winner.”  Young Paul, by rocking frantically,  can foretell the  winners of horse races, enabling his family to become rich.   “The voices in the house … simply trilled and screamed in a sort of ecstasy :’there must be more money! O-h-h; there must be more money.  Oh now, now-w! … more than ever!’ “

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