Paul L. Caron

Saturday, July 16, 2011

Johnston: State Lotteries Replace Corporate Income Taxes as Revenue Source

Reuters, U.S. Lotteries and the State Taxman, by David Cay Johnston:

The long-term shift in tax burdens from capital and corporations to individuals and their activities is perhaps best illustrated by the rise of state lotteries, the most heavily taxed consumer product in America.

Because gambling is voluntary, there is little organized opposition to levies on gambling winnings. Contrast that with the ferocious, well-organized and well-financed opposition to income taxes, especially corporate income taxes.

In 11 states, lotteries provided more revenue than the state corporate income tax in 2009, Tax Foundation data show. ...

State income taxes typically equal five percentage points or so of income recognized in a state, whether paid to individuals or corporations. Overall, lotteries pay out only about 62% of their revenue as winnings, an implicit 38% tax rate on lottery tickets. On top of that, people who win $600 or more have their take reported to federal and state tax authorities and must pay income taxes of up to 45% on their windfalls. This shift from corporate to lottery revenues was unimaginable just half a century ago, when gambling was a crime everywhere except Nevada — the residue of scandals in the 1890s that killed off widespread legal gambling.

These days the 44 states with lotteries (plus the District of Columbia and Puerto Rico) get 44 cents from this form of gambling for each dollar of state corporate income tax. On top of this are taxes in those states that license temples of chance.

Even more remarkable is the continuing popularity of state lotteries despite significantly high tax rates, noted Charles T. Clotfelter, a Duke University professor of law and economics who co-authored pioneering studies of lottery winners two decades ago. ...

Fred Thompson, a Willamette University professor of public management who has served on two Oregon commissions on state revenue, sees the rise of lotteries and the relative decline of state corporate income taxes as “something of an outrage,” but one that he said makes perfect political sense. Like many other public finance economists, Thompson sees lotteries as a tax that falls mostly on the working poor, albeit voluntarily. And Thompson is among those who see the corporate income tax as a levy mostly on corporation owners, who by definition are wealthier than most people. So why have lotteries, seen as a vice half a century ago, become ubiquitous today? “Because there’s no resistance to them, while taxes, especially corporate taxes, are opposed,” Thompson said. Plus, it’s an easy way to raise revenue. ...

State governments have never been particularly heavy taxers of corporations.Back in 1963, when lotteries were still illegal, so lottery revenues were zero, state corporate income taxes raised about $10.4 billion in today’s dollars. That’s almost 60% of the $17.9 billion or so that state lotteries bring in today.

Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Johnston: State Lotteries Replace Corporate Income Taxes as Revenue Source:


What the heck do lotteries have to do with corporate income taxes? Nothing really, but Johnston will do anything to say that corporate income taxes are too low. He will spin anything to say that.

You could have an issue like whether dogs should be required to have contact information on their collars and Johnston would somehow turn it into a column about corporations are evil and aren't paying their fair share (fair of course being arbitrarily determined by Johnston with no rationale as to why X is fair and Y is unfair).

If Johnston was really knowledgeable about tax issues (which he isn't), he would have understood that one reason that C corp taxes have been falling is because of the rise of flow-throughs. And similarly, Johnston's stupidity on taxes is evident in the first line when he talks about a long-term shift from corporations and capital to individuals. Who owns the capital?

I lost a lot of respect for Tax Analysts when they hired Johnston, a guy who is a lot like right-wing talk radio: tell your audience what they want to hear.

Posted by: AZ | Jul 16, 2011 8:15:35 AM

David Cay Johnston is claiming a mulligan on his first drive. Unfortunately, this one goes into the woods, too.

Posted by: Woody | Jul 16, 2011 8:51:49 AM

And then there are the three states that have no corporate income tax, but do have a lottery: Washington, South Dakota and Texas (which does have a small "franchise tax" that applies to some businesses).

But what's the point? Before state lotteries, there was legalized gambling in the form of bingo at the local church. Since state lotteries, there is Indian casino gambling, which contributes revenue to state and local governments while reducing lottery ticket sales.

The most heavily taxed consumer product in America, contrary to Johnston's assertion, is not gambling. It is cigarettes, when federal excise tax is included.

He's also wrong about the $600 reporting requirement on slot machine winnings; the correct amount is $1,200. In many cases these winnings are not taxed because of offsetting deductions for losses.

Posted by: Bob | Jul 16, 2011 9:48:16 AM

Lotteries are voluntary. Corporate income taxes are not.

Posted by: Woody | Jul 16, 2011 2:59:26 PM

David Cay Johnston reminds me of Paul Krugman.

He was once a respectable academic (I presume), but has since degenerated into a partisan political hack who uses the prestige of his pedigree to score cheap political points with shoddy numbers and even weaker arguments. Both are blinded by their partisan fervor and often miss obvious mistakes in their analyses, as we just saw with DCJ.

Posted by: Todd | Jul 16, 2011 3:34:42 PM

For those interested, here's a comprehensive study on state gambling revenues.

State's Gambling Revenues Rose in 2010
By: Lucy Dadayan and Robert B. Ward
06/23/2011 -- The Nelson A. Rockefeller Institute of Government

Gambling revenues to states rose modestly in fiscal 2010, with a 2.0 percent gain from the preceding year. The increase put gambling revenues back in the black after a 2.5 percent decline in the previous year, but collections in 2010 were still slightly below the 2008 level.

Interstate competition continues to produce both winners and losers among states, particularly in the Northeast. Results in fiscal 2010 confirmed that state-sanctioned gambling tends to generate relatively slow revenue growth, except when policymakers expand the market by authorizing new casinos or other operations. As with other fiscal choices, states may overlook the short-term nature of rapid growth in such revenue, ignoring longer-range implications as they balance annual budgets.

This report examines the four major types of legalized gambling from which states earn significant revenues — lotteries, casinos, racinos (hybrids of casinos and racetracks), and traditional pari-mutuel wagering. In addition, the report provides an overview of revenues from Indian casinos in states for which we were able to collect data.

Download full text (pdf)

Posted by: Woody | Jul 16, 2011 9:59:22 PM

Hey David Cay Johnston: That's what a serious analysis of state gambling revenues looks like. Notice the word "corporation" or "rich" isn't included in the abstract.

Posted by: AZ | Jul 17, 2011 10:17:36 AM

The responses of David Cay Johnston's friends on his Facebook page as opposed to the commenters here is quite revealing about politics in America that pander to the uninformed, misinformed, and emotional types vs. logical, knowledgeable thinkers. --

Wow! This really says it all, doesn't it?

Thank you for your great work, Mr Johnston. You are always on point on how the middle class is getting screwed.

OK, you're sure about this one now? No misreads or parenthetical negatives lurking in the way, right? (JUst teasing you! Good job on speedy retraction! I hope that didn't hurt you in any way. Who knew they were using whacko methods. Glad your'e still serving up the good info!

God, I'm glad you write this sort of thing.


Posted by: Woody | Jul 18, 2011 9:19:33 AM