The first – and hopefully last – special session of 2018 is now over.

The Legislature passed three bills: a $200 million infrastructure bill; a lottery bill; and a bill to distribute BP settlement money throughout the state. We reviewed the infrastructure bill earlier in the week, and it has been signed into law by the governor.

The lottery bill did not pass without drama. In fact, the most interesting part of session was that it almost did not pass at all. On Monday night, the House stunned many observers by rejecting the lottery conference report. After “sleeping on it,” several members changed their vote the next morning. The initial vote on the conference report was 53 for and 61 against. The do-over vote was 58 for and 54 against. Up until the end of the special session members who had voted “No” during the do-over were switching their vote to “Yes.”

Mississippi's path to a lottery

Once Gov. Phil Bryant came out in favor of the lottery, lawmakers began to feel it was inevitable. Long gone are the days when Gov. Ray Mabus (D) lost his re-election bid partly because of his support for the lottery. As Jake McGraw over at Rethink Mississippi details, the lottery was unconstitutional in Mississippi between 1868 and 1992. (Public opinion about lotteries seems to ebb and flow as ebbs and flows the controversy and corruption lotteries tend to facilitate.)

In 1992, voters cleared the way by amending the state constitution to allow for a lottery, but it took another 26 years before the lottery actually became law in Mississippi. One might wonder at this delay, but there is something to be said – said by James Madison, in fact – that public opinion often benefits from guidance, refinement – and delay. This refinement – owing to the divided form of government we all enjoy – is what distinguishes representative democracy from the tumult of purely majoritarian rule.

Mississippi becomes the 45th state to legalize the lottery, and our citizens will presumably no longer be crossing the state line to buy tickets in Louisiana, Arkansas and Tennessee. This phenomenon – that people are buying lottery tickets in other states – was one of the primary motivations to pass a lottery here. It is interesting, however, that the two states immune to this argument – Alaska and Hawaii – do not have lotteries. Just maybe these folks believe it’s bad policy.

BP money

Before going home on Wednesday, lawmakers were also forced to decide how to distribute $750 million in BP settlement funds – gotten from the 2010 Deepwater Horizon oil spill. Bickering over how to divvy up the windfall has preoccupied the Legislature for at least the past two sessions. The Senate bill proposed sending 75 percent of the money to the coast and 25 percent to the rest of the state. The House agreed, fending off several amendments and letting everyone go home Wednesday afternoon. Legislative leadership clearly wanted to avoid sending the bill to conference, where it would have become even more of a “Christmas tree.”

It has been reported that the 75 percent in settlement money will go to six counties: Hancock, Harrison, Jackson, Pearl River, Stone and George. The bill does not exactly say this. Rather, it stipulates the money will be used for programs and projects in the Gulf Coast region “as defined in the federal RESTORE Act, or twenty-five miles from the northern boundaries of the three coastal counties.” ... So which is it? The RESTORE Act’s definition of the “Gulf Coast region” goes well beyond six counties. Which definition governs how the money is to be used? The language is a bit confusing (but I ain’t a lawyer, only a Ph.D.). This confusion could spawn more squabbling – if not a lawsuit or two.

Several states have unfunded liabilities that can only be fixed with major reforms. Unfortunately, politicians find it easier to ignore the problem.

Unfunded public-pension liabilities are not a fun subject, and most politicians do all they can to avoid it. Nobody wants to be the sober one in a room full of drunks — but the party can’t go on forever, and eventually someone will have to clean up the mess.

According to a comprehensive survey by the American Legislative Exchange Council (ALEC) of 280 state-administered public-pension plans, the unfunded liabilities of state-administered pensions now exceed $6 trillion. The number increased by $433 billion in the last twelve months. An April report from Pew Charitable Trusts shows that state-pension debt has increased for 15 consecutive years. While this growing gap is a major concern for current public-sector employees and retirees, it should also worry the rest of us.

As the costs of providing current pension benefits begin to weigh on city and state budgets, other public services are getting crowded out. This is putting pressure on many pension-plan managers to seek greater returns by buying riskier assets. Decades of underfunding adds to the pressure, as governments scramble to meet unrealistic return targets and pay out promised benefits at a level the private sector moved away from decades ago. This all points to the growing possibility that many states will need to raise taxes to keep the party going. But without major pension reform, we may soon see the day when taxpayers in fiscally responsible states are asked to bail out those states that just couldn’t, or wouldn’t, stop partying.

A few examples of what some of the party favors look like will help explain why the clean-up phase will be so infuriating. The retired head of the Oregon Health & Science University takes home a pension of $76,111 — each month! Fifty-eight percent of police and firefighters in Scranton, Pa., are on disability pensions; the average retirement age of a Scranton police officer is just under 45 years old. In Nevada, the average full-career state worker will receive more than $1.3 million in lifetime pension benefits. In five states (California, West Virginia, Oregon, Texas, and New Mexico), a retiree can receive an annual pension income that exceeds his last yearly salary.

In Mississippi, the unfunded pension picture is not a pretty one. We have total unfunded liabilities of over $80 billion. On a per capita basis, that means each Mississippian is responsible for roughly $27,000 of the debt. We only have 24 percent of these promises currently funded. But this issue affects states of all sizes and politics, and from all regions.

The states with the largest per capita debt are somewhat surprising: Alaska, Connecticut, Ohio, Illinois, and New Mexico. So are the states with the smallest per capita share of debt: Tennessee, Indiana, Nebraska, Wisconsin, and North Carolina.

However, perhaps the most important measure for a state’s pension health is its funding ratio. This is the percentage of the total pension obligations that is currently funded. The states that are the least funded to meet obligations include Connecticut (20 percent), Kentucky (21 percent), Illinois (23 percent), Mississippi (24 percent), and New Jersey (26 percent). In other words, Connecticut has saved $1 for every $5 of known debt obligation it has for current and future state system retirees. The states in the best shape: Wisconsin (62 percent funded), South Dakota (48 percent), New York (46 percent), Tennessee (46 percent), and North Carolina (45 percent).

What do the data tell us? For starters, note the strong correlation between states that have managed their pension programs responsibly and states with pro-growth economic policies that favor free-market solutions over government ones. Note that each of the five states with the highest funding levels are also states that rely less on the government to sustain their economies. In none of these states does government control more than 45 percent of the economy, which puts these states in the top half of that measure.

On the other end of the spectrum, 57 percent of Kentucky’s economy is controlled by government, while the public sector controls 55 percent of Mississippi’s economy. Obviously, states such as New Jersey and Illinois suffer from powerful public-employee unions that resist any attempts to adjust spending, renegotiate bad contracts, or move new employees to 401(k)-type retirement accounts that require self-financing of retirement programs (as with the tens of millions of workers in the private sector). But even in states without public-sector unions, such as Mississippi, lawmakers have been hesitant to make necessary changes.

The party is over. This is an easy math problem that, unlike the financial crisis from ten years ago, everyone can see coming. Let’s turn the lights on in state capitols and city halls everywhere and get the cleanup started.

The House of Representatives changed course on Tuesday, voting in favor of a state lottery. They did this less than 24 hours after rejecting the lottery conference report. Five Republicans and three Democrats switched from a "No" vote to a "Yes" vote. Two Democrats and one Republicans switched from a "Yes" vote to a "No" vote.

With approval from the House, the lottery is on its way to Gov. Phil Bryant for his signature.

This is a historic day in Mississippi. Lawmakers rose to the occasion and passed the last part of a sustainable infrastructure funding mechanism that will also provide additional money for public education.

— Phil Bryant (@PhilBryantMS) August 28, 2018

The Mississippi Infrastructure Modernization Act

In addition to creating a state lottery, lawmakers also created the Mississippi Infrastructure Modernization Act.

This new law provides more than $1 billion in infrastructure funding over the next five years. The legislation is the result of two years of negotiation and compromise between the House and Senate, seeking to find a fiscally responsible way to provide sustainable and reliable roads funding.

Here are the details on the Mississippi Infrastructure Modernization Act:

• Provides $200 million annually for roads and bridges. Funding will reach $1.1 billion over five years. This money will come from $300 million in new bonds/debt, internet sales tax revenue from the 7 percent online sales tax, a new annual tax ($75 to $150 annually) on hybrid and electric vehicles, and sports betting revenue.
• Of note, raising the gas tax was never part of this package.

Problems with initial bill

The initial lottery bill also left much to be desired, exempting the new lottery board from state public records and open meetings laws. The House addressed this problem by adding transparency language. A House amendment to leave the door open to video gaming also slowed the bill down. This change was opposed by casino operators as well as the faith community, which had thus far voiced muted opposition to the lottery.

A decades-old debate, Mississippi will become the 45th state to enact a lottery. A lottery board, appointed by the governor, will also serve as the board of the Mississippi Lottery Corporation. It would act as a private corporation domiciled in Mississippi. The lottery is expected to generate about $80 million in annual revenue, with 35 percent of total proceeds going to the state. The remaining 65 percent will go toward administrative costs/paying vendors and prize payouts.

A new report from a libertarian think tank shows personal and economic freedom is growing in Mississippi though we are still in the bottom 20 percent.  

Cato Institute’s Freedom in the Fifty States tracks freedom based on fiscal policy, regulatory policy, and personal freedom. Mississippi came in at 40th overall, a five spot jump from 2014, though still lower than our peak of 32 in the early-2000s.  

So what are we doing well? 

Our regulatory policy is in the top 10, and is moving in the right direction. Two years ago, lawmakers adopted a new law that will require all new licensing regulations to be approved before they take effect, ensuring new attempts to stifle competition will be reviewed before they are finalized. 

On land use freedom, health insurance freedom, labor market freedom, lawsuit freedom, and occupational freedom, which all encompass our regulatory policy, Mississippi is in the top half of all states in each category.  

Where can we improve? 

That was the good. But when it comes to fiscal policy, we have much room for growth. And it appears we are only moving backwards.  

Fiscal policy includes state and local taxation, government consumption, investment, employment, and debt. Essentially, how much are you being taxed and how much of our economic activity is controlled by government? 

“Mississippians’ overall tax burden is a bit above average nationally at 9.9 percent, but local taxes are quite low. This fiscal centralization goes along with a lack of choice among local government (less than 0.4 per 100 square miles). Debt is much lower than average, but government employment and consumption are far higher than average. State and local employment is 17.7 percent of private sector employment,” the report notes.  

Policy recommendations? Reduce spending on health and hospitals, where we are the third most liberal spending state, and on education and public welfare, where we spend well more than the national average as a share of the economy. Make government smaller, and reduce state taxes.  

Two years ago the legislature eliminated the 3 percent income tax bracket, permitted self-employed individuals to deduct half of their federal self-employment taxes, and removed the franchise tax on property and capital when fully implemented. That will help our future rankings.  

And while fiscal freedom has been going in the wrong direction, we are on the right course in personal freedom, largely due to the criminal justice reforms lawmakers have begun to make. We currently came in 34th. To move in to the top half, we need to continue on the right path with those reforms.  

How are our neighbors doing? 

Among our four border states, we were the only state below 31st overall. Alabama, Louisiana, and Arkansas were rated 28th, 30th, and 31st respectively. The outlier- in a good way- was Tennessee at 7th. 

As we mentioned, regulatory policy is our strength and Mississippi’s 7th place ranking topped all neighboring states, including Tennessee.  Personal freedom was a wash, only Louisiana enjoyed a rating higher than our 34th.  

It comes back to fiscal policy. Arkansas is ranked 33rd, Louisiana is 22nd, Alabama is 19th. Tennessee? 3rd. So what are they doing? “The Volunteer State lacks an income tax, and both state and local tax collections fall below the national average. We show state-level taxes falling from 5.1 percent of adjusted personal income in FY 2007 to 4.3 percent in FY 2014 and then back up to 4.5 percent in FY 2017. Local taxes have also fallen a bit since 2006, from about 3.7 to 3.3 percent of income. State and local debt is low, at 17.2 percent of income, and so is government consumption and investment, at 9.7 percent of income. Government employment is only 10.7 percent of private employment, a big drop since 2010 as the job market has recovered,” the report mentions.  

Over the past several years, Mississippi has made improvements in several areas. Only five states made greater gains over the past four years. Still, 40th isn’t where we want to hang our hat. By moving our fiscal policies closer to our neighbors, we will begin to enjoy a freer, and more prosperous, state.  

“No one is leaving this special session without getting something.” … Mississippi Legislator

Update: The House has changed course and voted in favor of a lottery Tuesday afternoon, sending the conference report creating a state lottery to the governor.

The 2018 special session took a surprising turn on Monday as the House voted down the state lottery conference report (SB 2001) by a bipartisan vote of 54 to 60. Moments later, the same lottery bill passed the Senate 31 to 17. The conference report was necessary because the Senate declined to agree to a House amendment that left the door open to video gambling. Democrats, led by House Minority Whip David Baria, were also disappointed that the bill does not directly allocate money for K-12 education.

The lottery bill has been held on what is called a motion to reconsider. This means that when the House reconvenes at 12:30, lottery supporters will have another chance to get a majority vote. If the motion is tabled (i.e., defeated), the lottery is likely dead for this special session.

Status of BP money

With the defeat of the lottery bill in the House, it has become clear why the special session call has not yet been expanded to include the so-called BP money. At issue is approximately $700 million in BP settlement funds. Options for the money include allocating a majority of the funds to either 3 (or 6) coastal counties. Or at least some of the money could be sent to all 82 Mississippi counties. Many observers predict a 70%/30% split between the two blocks.

The promise of getting more BP money or the threat of getting no BP money will be used by lottery supporters eager to flip the House vote. Whether this threat has any merit remains to be seen. But it would seem that Democrats have more to gain from delaying the lottery because they can use the issue next year to both advocate for more K-12 funding. They can also fault Republicans for cutting taxes and not spending more on infrastructure. Moreover, while the lottery remains popular statewide, pockets of resistance in conservative areas are fierce. It may even be enough to get some members “primaried.”

Problems with initial bill

The initial lottery bill also left much to be desired, exempting the new lottery board from state public records and open meetings laws. The House addressed this problem by adding transparency language. A House amendment to leave the door open to video gaming also slowed the bill down. This change was opposed by casino operators as well as the faith community, which has thus far voiced muted opposition to the lottery – and this morning may be wondering if they should have done more to oppose the bill.

A decades-old debate, Mississippi would become the 45th state to enact a lottery if the House approves. A lottery board, appointed by the governor, would also serve as the board of the Mississippi Lottery Corporation. It would act as a private corporation domiciled in Mississippi. The lottery is expected to generate about $80 million in annual revenue, with 35 percent of total proceeds going to the state. The remaining 65 percent will go toward administrative costs/paying vendors and prize payouts. It is MCPP’s contention that this 35 percent of revenue is essentially a tax and that the lottery bill is primarily a revenue bill.

The Mississippi Infrastructure Modernization Act

Also on Monday, the House sent HB 1 on to the governor.

HB 1 provides more than $1 billion in infrastructure funding over the next five years. The legislation is the result of two years of negotiation and compromise between the House and Senate, seeking to find a fiscally responsible way to provide sustainable and reliable roads funding. The Mississippi Infrastructure Modernization Act:

• Provides $200 million annually for roads and bridges. Funding will reach $1.1 billion over five years. This money will come from $300 million in new bonds/debt, internet sales tax revenue from the 7 percent online sales tax, a new annual tax ($75 to $150 annually) on hybrid and electric vehicles, and sports betting revenue.
• Of note, raising the gas tax was never part of this package.

There is a common assumption that we often hear about Mississippi government. It is that the government is too small and we have reduced taxes too much. Therefore, revenues are down, and we have less money to spend on key government responsibilities, and that is the reason we trail much of the country in various rankings.

This makes for an easy soundbite, and at first glance it might appear to make sense. But of Mississippi’s many problems, the size of government is not one of them. Indeed, we have relied too much on government to grow the economy rather than enact market based policies that have allowed other states to prosper.

As Mississippi was experiencing minimal growth for more than two decades, other states in the middle of the country were prospering. They grew because of policies that emphasized economic freedom and limited government.

Mississippi has the fifth largest government share of state economic activity, and that is due to state and local spending, not federal funds. While there is a large contingent who would want to see the government spend more, it would actually be pretty difficult.

When the government grows, the state has increased ownership and the private sector shrinks. And economic freedom, which is based on free markets and voluntary exchange, individual liberty, and personal responsibility, wanes.

According to the most recent Fraser Institute Economic Freedom of North America report, which measures government spending, taxes, and labor market freedom, Mississippi was ranked 45th among the 50 states. Similarly, Cato Institute’s Freedom in the Fifty States, which measures economic and personal freedom, placed Mississippi 40th in their most recent rankings.

What is the correlation between economic freedom and prosperity? The freer states are more prosperous, have higher per capita incomes, more entrepreneurial activity, and lower poverty rates. We have the model. We need to just look at what similar states have done for economic growth. And it is important to know the difference between the reality of economic growth and the practice of economic development; those can be very different things.

Government incentives, often in the name of economic development and being ‘business-friendly,’ attempt to lure businesses to the state through financial benefits, such as site preparation, infrastructure, job training, or special tax breaks. The only reason these incentives are necessary is because of higher taxes or policies that burden businesses. Instead of special incentives for a few, Mississippi should work to provide a favorable climate for every business. And let the market decide where a business locates or expands. An economic development officer can sell low taxes and low regulatory burdens to a company looking for a great location like Mississippi. What’s more, the data shows us that such policies allow existing businesses already in our state to expand and grow from a small employer to a large employer without getting any incentives from the taxpayers. That’s economic growth.

Being business friendly isn’t based on who can seek the most favors, it is based on how free your state is.

To their credit, state leaders have attempted to improve the economic climate of Mississippi, most notably through tax and regulatory reform. In 2017, the legislature adopted a new law that will require all new licensing regulations to be approved before they take effect, ensuring new attempts to stifle competition will be reviewed before they are finalized.

And the Taxpayer Pay Raise Act in 2016 will eliminate the 3 percent income tax bracket, allow self-employed individuals to deduct half of their federal self-employment taxes, and remove the franchise tax on property and capital when fully implemented. Even though Mississippi’s overall tax burden is still above the national average, this will move Mississippi closer to a flatter income tax and make our business climate more competitive.

These reforms weren’t easy, but showed forward thinking to align us closer with neighboring states. Making the case for spending more money on your favorite government program is not what is needed to prosper. We need to think much bigger than that. If we want to do better than the bottom ten in categories like per capita income, it starts with doing better in categories like business friendliness, regulatory practices, and tax rates.

Gov. Phil Bryant has called a special session to begin this Thursday. Lawmakers will address infrastructure repairs and maintenance, along with the allocation of BP money, according to the governor's call.

“We will be able to add roughly $200 million into roads and bridges in the state of Mississippi,” said Gov. Bryant. “It will start the first year of 2019 and go into $260 million that will grow after that, so you will eventually reach the $300 million, but in the first three years of this plan, we have put over $600 million into roads and bridges in the state of Mississippi without raising taxes.”

Where will the money come from? Dr. Jameson Taylor, Vice President for Policy at Mississippi Center for Public Policy, provides a preview of the special session.

Milton Friedman once said, “Nothing is so permanent as a temporary government measure.” And that certainly includes “temporary” tax increases.

In Mississippi where I live and work, residents in the capital city of Jackson know that very well. Voters recently approved a $65 million bond issue to cover maintenance woes that have long plagued the Jackson Public School District. It was sold by supporters as “not a tax increase,” but a continuation of a previous tax increase from a previous bond measure that had been paid off.

Had voters in Jackson rejected the measure, there property taxes would have decreased five mills. The school district currently has, and will continue to have, the highest taxes in the metro area. Jackson residents pay 84.01 mills to support a school district that has been rated “F” by the state for the previous two years. Residents of nearby “A” or “B” rated districts pay between 54.55 and 67.94 mills.

But what occurred in Jackson isn’t much different than what we have seen throughout the country. And it’s been going on for longer than we probably imagine.

In 1936, Pennsylvania adopted the Johnstown Flood Tax, a temporary 10 percent tax on liquor to help victims of a flood rebuild. It was set to expire on May 31, 1937. That didn’t happen. By 1942, the tax collected $42 million and the town had been rebuilt. The tax remained. Eighty-two years later, the temporary, 10 percent tax is now a permanent, 18 percent tax.

Temporary taxes became very popular during the recession a decade ago. Faced with shrinking revenue, states and municipalities enacted numerous “temporary” tax measures. Many were either made permanent or replaced with new taxes.

In California, personal income taxes were increased by 0.25 percent on all rates and the sales tax rate increased from 7.25 percent to 8.25 percent. They both expired, but were replaced by new taxes via referendums. The sales tax rate was increased to 7.5 percent, a quarter-point increase from the original rate and personal income taxes on top earners were increased.

In Connecticut, a temporary 10 percent corporate income tax surtax was extended twice and increased to 20 percent.

In Delaware, the state temporarily increased the income tax rate for top earners from 5.95 percent to 6.95 percent. By 2014, the increase had been reduced to 6.6 percent as it was made permanent. Residents were still hit with a .65 percent increase. Estate and business tax increases were also made permanent.

In Kansas, sales tax rates were temporarily increased from 5.7 percent to 6.3 percent. The state then reduced the rate to 6.15 percent and made it permanent, reflecting a .45 percent increase.

And more recently in Louisiana, the state temporarily raised sales tax rates from 4 percent to 5 percent. The tax increase was set to expire on June 30 of this year. Instead, the state adopted a 4.45 percent sales tax, a .45 increase from the previous tax rate.

One could argue that many of the recent tax increases made permanent were actually at lower rates than their original temporary hikes; thereby resulting in tax “relief.” This is similar to calling a 3 percent increase to a government agency a “reduction in spending” or a “cut” because the agency had planned or requested a 5 percent increase in its budget.

It’s semantics, and everyone knows it, especially the proponents of the higher taxes. In many places, residents are paying higher taxes than they were prior to the recession. Calling it by another name does not stop it from being a net increase, even if it is slightly less than the “temporary” increase.

The goal, amongst the tax proponents, is for residents to get use to the higher tax and eventually it just becomes accepted. Then when a tax increase expires, or a bond is paid off, a politician or government agency bureaucrat tries to convince you that this new tax increase is not an increase at all, but rather, it is a commendable action to keep your tax rates the same.  It’s like magic. Think of it is a slight of words, rather than a slight of hand.

So the next time you hear a politician sell you on a “temporary” tax increase, smile and tell them you’ve seen this act before.

Lotteries tend to be popular with the public because they conjure up dreams of easy money and the good life. Indeed, Mississippi voters approved the concept of a state lottery in 1992 when they repealed a constitutional ban on lotteries. That same year, Mississippi’s first dockside casino opened. While many forms of gambling are now legal in Mississippi, state law still prohibits the operation of a lottery and the in-state purchase of lottery tickets. 

In evaluating whether Mississippi should legalize the lottery, lawmakers should realize, first and foremost, that the lottery is a kind of tax – and that, in particular, it is a regressive, or unfair, tax that has negative social impacts.

The Lottery is a New Tax

The primary purpose of a state-monopolized lottery is to generate revenue for the state. This reality is not well understood. There are essentially two types of lotteries: those operated by private vendors; and those controlled by government. Because private lotteries have historically been plagued by corrupt practices (and not infrequently government-run lotteries as well), states have sought to control their own lotteries.

Currently, all but a handful of states have state-controlled lottery monopolies. These monopolies are unique insofar as they are not “natural monopolies.” Road building, sewerage provision, and until recently, mail delivery, are examples of natural monopolies typically presumed to be properly controlled by government. In the case of the lottery no overriding financial or logistical reason justifies a government monopoly.

The state’s monopoly over the lottery allows it to charge a price for the lottery ticket that is well above what a private lottery might charge. This excess charge is essentially a tax. The tax is around 27 percent, but it varies in every state. This 27 percent surcharge is what in gambling parlance is called “the vig.” It’s what “the House” gets regardless of the outcome. In the case of the lottery, the House is the state – and it has a big edge. After the government gets its take, the rest of the money generated by the lottery will go toward winnings and administration. Then, the actual winner has to pay state and federal income taxes on top of that.

It might seem strange to think of the lottery as a tax. The Tax Foundation explains:

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 the case of a lottery, the Mississippi legislature would be imposing the assessment – just like any other tax, as opposed to a targeted fee imposed by a state agency. Likewise, lottery ticket buyers represent “a broad swath of the public,” rather than a “narrow group that benefits from a particular government service.” In its application, the lottery thus functions like a tax, rather than a fine or fee. Finally, lottery revenue is generally fungible, or at least spent on a “broadly defined benefit.” In short, the lottery meets all three legal tests for defining a tax.

The following statements by lottery proponents confirm this conclusion:

“The Legislature is not passing any revenue (tax increase). That (lottery revenue) is money available for education – should be spent on education.” – Mississippi Attorney General Jim Hood

“When you’re looking at some of the challenges that we’re having and you see a revenue bill that would generate somewhere between 50 and 60 million dollars – just an estimate – I think that's something that needs to be taken seriously by the members of both the House and the Senate.” – Mississippi Governor Phil Bryant

“I think it should go to education. But in as much as when we earmark money, sometimes we take that money from that department, so with that in mind, the best thing would be to just put it in the general fund.” – State Rep. Alyce Clarke

In summary, the lottery is a “revenue bill” that will be passed with the intention of generating money for the General Fund, or at least, for a broadly defined purpose, such as education. In other words, it meets the legal definition of a tax.

Lottery proponents often balk at defining the lottery as a tax, asserting that buying a lottery ticket is voluntary. Because the state would hold a monopoly over the lottery, however, the tax is not voluntary at all. In order to purchase a lottery ticket, consumers must pay the lottery tax. True, participating in the lottery is not mandatory, but neither is purchasing a car, earning income, or doing all manner of things that are taxed. As long as the primary purpose of the lottery is to generate revenue, and as long as a significant portion of lottery profits are collected as revenue, the lottery is a tax.

Under Mississippi’s joint legislative rules (rule 18), all bills generally related to revenue must be accorded a 3/5 vote by the legislature. Because the lottery is a tax (and, at a minimum, related to raising revenue) any bill that would create a state-controlled lottery must pass by a 3/5 vote in the Mississippi legislature. Otherwise, the lottery will be challenged in state court.

Because the lottery is a tax, its fiscal impact must also be evaluated in light of other forms of taxation. While all taxes influence behavior in some way, economists generally agree taxes should have low compliance costs, be fairly applied and minimize negative social impacts.

The Lottery is a Bad Tax

In comparison to other taxes, the lottery is particularly bad policy. To begin with, the lottery is an inefficient tax with high administrative costs. Observes economist Dr. Roy Cordato: “To raise a dollar’s worth of state revenue through a lottery could cost anywhere from 20 to over 50 times more than it would cost to raise the same dollar through other forms of taxation.” These administrative costs are thought to range between 15 percent and 20 percent and go toward advertising and paying retailers who sell lottery tickets.

In addition, the lottery is an unfair, or “regressive” tax. Generally speaking, “a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich.”

In 2015, Americans spent $73 billion on lottery tickets. That’s about $630 for every household in the United States. It’s also about the same amount spent on the SNAP (Food Stamps) program annually. According to the Associated Press, Americans spend more on the lottery than on “movies, video games, books, music and sports tickets combined.” 

Every American household, however, is not spending $630 on the lottery. Generally, the poorest one-third of Americans buy more than half of all lottery tickets. Even the North American Association of State and Provincial Lotteries, an industry association group, acknowledges 25 percent of lottery players earn less than $25,000 annually.

A report from Harvard’s Shorenstein Center on Media, Politics and Public Policy reviews some of the academic literature demonstrating the regressivity of the lottery tax:

A 2012 report in the Journal of Gambling Studies finds that “those in the lowest fifth in terms of socioeconomic status (SES) had the ‘highest rate of lottery gambling (61%) and the highest mean level of days gambled in the past year (26.1 days).’”

A 2011 study, also in the Journal of Gambling Studies, concludes the “poor are still the leading patron of the lottery.”

A 2010 report in the Journal of Community Psychology observes that “lottery outlets are often clustered in neighborhoods with large numbers of minorities, who are at greatest risk for developing gambling addictions.”

Likewise, a 2009 survey commissioned by the South Carolina lottery found that those earning less than $40,000 a year constitute the majority of lottery players, even though they make up less than one-third of the state’s population. Another 10-year study that looked at lottery sales data in 39 states found “a strong and positive relationship between sales and poverty rates” (but not a similar relation between poverty and movie ticket sales, movies being an alternative form of inexpensive entertainment). The authors, however, conclude that “the poor are relatively more likely to see the lottery as a financial investment, and relatively less likely to play for entertainment.” Similarly, other research suggests lottery ticket purchases are financed by forgoing basic necessities. Generally, the breakdown is a 3 percent reduction of spending on food; and a 7 percent reduction on rent and other items.

Again, all this is to say that the lottery is a regressive tax disproportionately paid by low-income people.

In terms of tax policy, it’s also helpful to consider what kind of behavior a lottery tax encourages or discourages. The real question here is whether a state lottery would encourage more gambling or whether it would merely capture gambling that is already occurring via other lotteries in neighboring states.

The answer is complex. Clearly, Mississippi is hoping to both capture a market that exists (and is being diverted to other states) and also develop a new market. The strongest argument for a state lottery is that the state is losing lottery tax revenue to other states when Mississippi residents buy lottery tickets in other states. Interestingly enough, the two states immune to this dynamic – Alaska and Hawaii – do not have state lotteries.

Clearly, for many Mississippi residents, travelling to another state to buy a lottery ticket constitutes an investment of time and money – what economists call an “opportunity cost.” Some evidence suggests that, all things being equal, large jackpots are necessary to attract middle-class and out-of-state customers to buy out-of-state lottery tickets. When the jackpot is high enough, people will drive to another state to buy a lottery ticket. These same customers are more likely to play the lottery as a form of entertainment.

By contrast, low-income players disproportionately favor scratch-off (instant win) lottery cards; and the largest segment of lottery revenue (as high as 80 percent) comes from scratch-off games. For this reason, scratch-off cards represent the worst, and most regressive, form of lottery taxation. While the state is likely “losing” some revenue to players who cross the border to play scratch-offs, the spontaneous nature of such play suggests the loss is minimal. No doubt, a legalized lottery will see targeted advertising aimed at creating new players for these games. As in other states, much of this advertising will appear in low-income neighborhoods. As in other states, every year will see new marketing plans aimed at attracting new players. As in other states, new and more games will be developed with the hope of increasing frequency of play. In order to keep generating revenue from the lottery tax, the government will become the foremost proponent of gambling in Mississippi.

Some readers will note that this brief is silent about the ethics of a lottery. From an economic perspective, a lottery is destructive because it is a nonproductive activity. As stated above, the lottery, at best, is a form of entertainment; at worst, it is encouraging poor financial decisions by those who can least afford to gamble away their resources. In terms of tax policy, the lottery constitutes a high new tax with a regressive impact on the majority of players.