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'We can't win if you don't play': WI's lottery makes the rich richer

By   /   April 4, 2012  /   No Comments

By Ryan Ekvall | Wisconsin Reporter

MADISON — Wisconsin Lottery Director Michael Edmonds is ecstatic. In 2011, the lottery had its third best sales year, at more than $500 million. And Edmonds expects 2012 to be even better.

“Last week alone, we had total Mega Million sales of $11.3 million,” he told Wisconsin Reporter.

It’s well understood that, as a percentage of their incomes, poor people outspend wealthier players on those lottery tickets. Multiple studies find individuals in government-assistance programs more likely to participate in lottery markets than those who aren’t.

“Some poor people see playing the lottery as their best opportunity for improving their financial situations,” said Emily Haisley, lead author of a 2008 study for the Department of Organizational Behavior and Theory at Carnegie Mellon University in Pennsylvania as well as a professor at Yale University in Connecticut.

Is the lottery just a poor man’s Wall Street?

“It’s a horrible plan,” said Kent Grote, economics professor at Lake Forest College in Illinois. “The odds of winning the jackpot in the lottery are horribly low. Your odds of winning are less than 100 million to 1.”

Wisconsin’s wealthy might send those poor people a muffin basket and a nice thank-you — maybe a twist on the state’s popular lotto-motto: “We can’t win if you don’t play.”

That’s because Wisconsin’s lottery actually makes the rich richer.

Forty-three states manage lotteries. Some of those states, like California, use lottery revenue to fund education. Colorado uses it for environmental protection. In Pennsylvania, lottery income funds state health care expenses for seniors.

Wisconsin sets aside lottery proceeds for homeowners in the form of a Lottery Property Tax Credit.

“Property tax owners see it on their property tax bill in the fall,” said state lottery director Michael Edmonds. “It’s a small credit, usually less than $100. But it’s distributed among over a million property owners in the state.”

And because property ownership is disproportionately a wealthier person’s prerogative, Wisconsin’s state lottery is actually a strange system of income redistribution — a mechanism for transferring cash from the state’s poorest to its wealthiest residents.

That’s a problem, said Mark Robyn, an economist at the Tax Foundation, a nonpartisan Washington, D.C., think tank on tax policy.

“This is just a way to shift the tax burden onto a politically disfavored group of individuals and keep the benefits for everyone else. It seems like a poor way to fund government,” Robyn said.

But that’s how the Wisconsin state lottery works.

In 2009-2010, for instance, Wisconsinites spent $480,939,257 on lottery tickets. State law requires that lottery winners take at least 50 percent of all lottery revenue — in 2009-10, that came to 271,538,304. That same year, the state issued $127,116,472 in credits to property owners. The rest goes to administrative costs — almost $32 million — and payments to retailers in the form of bonuses for sales performance — about $28 million.

This is no one-size-fits-all credit. Using a complex formula befitting government tax and assessment everywhere, Wisconsin lottery revenue is paid out on the first $9,000 of a home’s assessed value. Multiply that $9,000 by a variable — the local school tax rate — and the recipient obtains a lottery credit.

But there’s a twist. A part of the lottery’s revenue — about $15 million last year — is piped into the school levy credit, a separate state fund that issues property-tax credits. That credit is calculated based on the total assessed value of a home. There’s no cap.

Last year, a primary residence worth $150,000 was eligible for a $226 credit. A home worth $250,000 could earn a $377 credit.

People who don’t own a home — the people more likely to spend more of their income playing the lottery? They got nothing.

The lottery was pitched to voters in 1987 as a way to fund property-tax relief. Voters approved it overwhelmingly, and then-Gov. Tommy Thomson was its first customer. He did not win.

It was left to the Legislature to turn lottery funding toward a cornucopia of other projects — schools, district attorneys salaries and a Farmland Tax Relief Credit. The courts have intervened, narrowing the system to its original purpose — property tax relief.

State officials have always been aware of — and anxious about — the lottery’s impact on poorer Wisconsinites. Shortly after voter approval, the Legislature demanded that the lottery board study the lottery’s impact on Wisconsin residents “of various income levels.”

The lottery board hired the University of Wisconsin-Madison’s Institute for Research on Poverty. The institute’s studies in 1989, 1992 and 1995 found that the poor spend just as much as wealthier lottery players, but that those ticket purchases represent a larger percentage of a poorer player’s income.

No one is required to play the lottery, of course. But some lottery critics assert the lottery is, nevertheless, a tax — an unfair tax.

“The idea that people think it’s not a tax is problematic. It’s not voluntary. No tax is voluntary,” said the Tax Foundation’s Robyn. “And because it’s a tax and it funds various government services, it brings up the question: Is that a good way to fund those services?”

Robyn has his own answer: No.

“It’s regressive,” he said. “That’s problematic. Presumably, if government provides services to everyone, and the services provided by the lottery are valuable, we should be willing to pay for those taxes in a way that is equitable.”