Why I Oppose the State Lottery

October 5th, 2005 by

To the Editor of the Raleigh News & Observer

Dear Editor:

You recently ran a story to the effect that the North Carolina lottery will bring the bucks back home to North Carolina instead of being siphoned off into the swamps of South Carolina. This is far from the truth.

There are two basic economic reasons: administrative expenses and income taxes. The lottery has administrative expenses that will go out of state to GTech and other vendors. But, more importantly, one must consider this question after the imposition of income taxes.

A lottery is almost unique. Most economic activity has a rough equivalence between income and expenses with the difference being profit. But under our tax laws, lottery losers are not able to deduct their losses against income taxes. But the winners are, by definition, in the highest income brackets and taxed at the highest rates with only a trivial amount of losses to deduct against their winnings. The effect is that a North Carolina lottery actually loses about $210 million more to Uncle Sam than we are now losing by playing the South Carolina and Virginia lotteries. This more than offsets any loss to Virginia and South Carolina from the convoys to the state line. We see the cars. But we should also be able to visualize money flowing out of state when taxpayers put a $.37 stamp on their IRS returns with a bigger check (or a request for smaller refund) inside.

Conversely the taxpayers of other states are subsidizing us by our not having a lottery. Since most states have a lottery we are currently the winners of this game.
The chart below demonstrates the amount of money that North Carolina’s economy and North Carolina gamblers will cumulatively lose by this new lottery. Since this net loss is disproportionally from the poor (and near poor) we can now estimate the amount of money that will be transferred from the poor, which I will describe as approximately the 4th and 5th quintile of income, to the rest of us. It is at least several hundreds of millions of dollars. My best estimate is $500 million. A lottery is a real disaster for the 40% of the people in lower income groups. Please note that the assumptions used in calculating this chart are from lottery proponents and uses the figure of $1,800,000,000 that they say will be wagered in year 3 of the lottery in North Carolina.


Assumed Rates


With NC Lottery


Total Amt. spent by NC Gamblers  



Administration Expenses




Amt. Leaving NC Based on G-Tech Rate of




Prize to NC Residents if Payout




Federal Taxes Paid on Prizes




State Taxes Paid Other States




NC Income Taxes




NC Sales Tax Not Included




Prizes less Taxes ignoring Losses  



Losses to NC Gamblers- amt. wagered  



Net Loss to NC Residents who Gamble  




Loss to NC  




Of course there are many substantive reasons why a lottery is really bad public policy.

A lottery exploits the poor and gullible. Those with incomes under $20,000 per year play and pay much more than others. It is the most regressive tax possible on those who are not good at arithmetic.

Massive amounts of false and deceptive advertising are necessary to sustain a lottery. The lottery commission will breathlessly advertise a million dollar prize. After a winner is declared the Commission will pay it at $50,000 a year for 20 years. If I pulled that stunt as an attorney I would be reprimanded or disbarred since the present worth of such a prize is between $300,000 – 400,000 depending on interest rates.

The lottery bill is not about freedom. Gambling remains illegal under the lottery law which creates a state run business which the law declares to be criminal if you did it.

Easy access to gambling through a state lottery means that citizens will gamble a lot more. Studies consistently show that 5 percent of the adult population (and 10-15 percent of teenagers) will become compulsive gamblers. In one study, 86 percent of compulsive gamblers had committed a felony to obtain money to gamble. I estimate that North Carolina will have between 150,000 to 200,000 compulsive gamblers within 10 years. Bankruptcies, crime and poverty will follow. Taxpayers will be asked to clean up the mess.

A lottery hurts retail businesses. Lost sales mean fewer businesses and fewer jobs. Every dollar that goes to a lottery is money that cannot be spent somewhere else – or invested.

A lottery creates a climate which is conducive to organized crime. Once our poorer neighbors start gambling via the lottery they will soon discover that the Mafia offers better odds, unsecured credit, and no pesky reports to the IRS for the occasional winner. The effective rate of return on bets with organized crime is negative 6%. But with the lottery the effective rate of return is negative 65%. Where do you think our gamblers will turn when they have run through their bank accounts?

Putting the state in the gambling business sends the wrong message to children. Parents should raise their children to study hard, work hard, and learn to manage money. States with lotteries are saying to children “Don’t worry about work and savings. Gamble, hit the jackpot, and you’ll be rich!” Is this the message you want the state to send to your children?

One of the cruelest of lottery hoaxes is that it will pay for “education” for the “chirrun”. A lottery that produces what its proponents predict will only pay 4¢ on the dollar of the education budget. It will be the work of an afternoon for budget writers to reduce the state appropriation to match this by simply understating one time the cost of living. The Governor has already started this magical supplanting of education money by stating that much of his preschool and class size reduction monies now in the budget will be paid for by lottery money. Just one more scam on the trusting people of North Carolina.

Sincerely yours,

Representative Paul Stam

The writer represents Southern Wake County in the North Carolina House of Representatives.