A tax on stupid

A sure bet

Once upon a time, a long time ago, state lotteries were regarded as an aberration, something indulged in by more backward polities. Some of this reaction was a bit prissy—the same impulse that caused governments to enact sumptuary laws (or “sin” taxes) on liquor or other items deemed luxuries rather than necessities. It all changed with a vengeance in the eighties.

I'm not sure why the Reagan era witnessed a great boom in state-sponsored gambling, but that's when California joined the stampede to government-sanctioned lotteries. The state's voters enacted the California State Lottery by passing 1984's Proposition 37 with a thumping 58% majority. We were naturally quite surprised (goodness, yes!) when the people who wrote the initiative measure turned out to be the same folks who qualified under its provisions to win the state contract to operate the lottery games. While a few prescient individuals warned that Proposition 37 was the worst sort of self-interest politics, the voters weren't listening. In any case, they were distracted by the campaign promises. Californians swallowed the hype that said “our schools win too!” Tossing a fraction of the proceeds toward public education was enough to assuage people's concerns about officially embracing games of chance.

Boiled down to its essentials, the state lottery is a tax on stupidity. Sure, “you have to play to win,” but the reality is that the lottery is specifically designed to cut your money in half. That's right in the lottery law, as dutifully enacted by the voters. The initiative states that 84% of the revenues collected by the lottery go back to the public, but that 34 of those 84 points are allocated to schools. That leaves 50% of the revenue for prizes. The lottery is quite literally designed to cut your money in half.

While a small handful of players end up with substantial windfalls, the vast (vast!) majority see their money fly away. California's public schools, in the meantime, experience a constant barrage of criticisms for any complaints regarding meager funding. After all, everyone knows the schools are flush with lottery cash. As far as schools are concerned, however, the lottery benefit amounts to $154 per student. Sound good? The California State Lottery's own website puts it in context:

In FY 05/06, revenues from the Lottery generated $154 per pupil, or $1.28 billion total and supported over 8.3 million students in California’s public schools. These funds were in addition to the $10,325 per pupil, or $62 billion provided by California's general fund.

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The small increment provided by the lottery is perceived by the general public to be a flood of cash. The favorite rebuttal to any school funding proposal is, “Why don't you use all that lottery money?” Some “win”for our schools. As you can see, California's public school system is much too large to accrue significant benefit from lottery proceeds. However, by the same token—California's vast size—the modest 16% of revenues retained by the lottery operator is sufficient for an exceedingly sumptuous profit. That's who the lottery was designed to benefit from the very beginning.

Governor Schwarzenegger has his own plans for the state lottery. He wants to sell it. Arnold figures, as Republicans so often do, that the private sector would operate the lottery more efficiently. That would likely mean smaller pay-outs and a cut in the funding diverted to schools. (That last idea is probably good. Weaning public education away from the lottery would remove an irritating distraction.) The governor hopes to get the state out of debt by collecting a big lump sum from a suitable gaming company in return for ownership of the California State Lottery. The billions of dollars could finally get the state out of its deep fiscal hole—at least for a while.

Schwarzenegger is no more likely than any of his recent predecessors to make a real effort to align long-term state income expectations with state expenditure trends. He doesn't really want to cut spending and he hates the idea of raising taxes. One supposes that he could try to recover some moneys due the state from various damaging scams, but that does seem unlikely. Too strenuous an attempt in this direction might, of course, embarrass some of Arnold's most ardent supporters: the energy tycoons who played havoc with California's power supply and mortally wounded Governor Gray Davis's political career. It would never do if the current governor were to go after the shake-down artists who scammed the state big-time. Instead, Schwarzenegger has decided to embrace a gimmick, selling off a state asset for short-term gain.

His gimmick is to sell a gimmick.