SCRATCH N' SNIFF
How the Lottery System is Dependent on the Poor

By Andrew J. Klein

The Mystery

On November 7, 2000, Governor Jim Hodges of South Carolina scored a major victory in a statewide referendum where voters decided by a margin of 4% to legalize gambling in South Carolina and to institute a statewide lottery to compete with Georgia's lottery. Hodges, a Democrat, claimed that the Georgia lottery had been drawing nearly $130 million a year from South Carolinians into Georgia's coffers.

With the new referendum, South Carolina becomes the 37th state to have a lottery, with North Carolina expected to quickly fall in line. CNN painted the referendum as "a question of morals...for both sides," sketching a battle between old-fashioned church groups hellbent on maintaining a Biblical morality and new-economy do-gooders determined to raise the education budget by any means necessary.

While it's true that South Carolinians fought a fiercer battle than most to keep the lottery out of their state — what with the cacophonous mix of teachers, preachers, public officials, economists, statisticians, and daughters of compulsive gamblers — what can explain the uncanny appearance of Georgia Lottery chairwoman Rebecca Paul, flanked by the mysterious G-Tech lobbyists (headed by the son of former South Carolina Governor Dick Riley, no less), urging South Carolina to adopt its own lottery, despite the potential $130 million in lost revenue the adoption of a South Carolinian lotto would cost to Paul's own state of Georgia?

"Why in the world would the chairwoman of the Georgia Lottery be over here promoting us to go into competition with Georgia?" asked one bewildered South Carolina businessman at a town hall meeting.

The PLAYERS

Lottery critics have repeatedly made the charge that a state-run lottery is little more than an ultra-regressive tax sucking huge amounts of money from the poorest sectors of the economy and handing it over to the rich by way of a tax break. Proponents claim that the lottery is equally funded by all members of society, and that the money is earmarked for good causes (in most states, for education or the environment). Granted, the lottery is not exactly a tax. A player receives, for his or her dollar contribution to the state's coffers, a worthless piece of paper with which to play. Though players are technically free to play, as they desire, demographic studies reveal disturbing, if not unforeseeable, trends among players.

A survey commissioned in 1999 by the National Gambling Impact Study Commission, an organization set up by Congress to study the effects of the recent gambling explosion in American culture, found that, while lottery participation rates were spread out somewhat evenly across the board (nearly half of the adult population play in any given year), the amount wagered on the lottery increased steadily as the study moved down income and education brackets: players with incomes of less than $25,000 annually wagered well over twice as much as those with incomes of $50,000 and up. If that isn't regressive enough, you need only change the view from "money spent" to "percentage of income spent," and all the numbers double again, so much so that low income persons spend about four times as much of their money as upper income people on the lottery.

Robert Goodman, Hampshire College economist and author of The Luck Business, cast a grim light on the class gambling disparity: "Low income people actually see things like lotteries as a way to make money, an investment opportunity; higher income people view it as a form of play or entertainment." Indeed, the heaviest lottery players are black, male, high school dropouts with an average household income of under $10,000. Worse still, a huge percentage of lottery sales come from this very small percentage of heavy players, many of whom suffer from compulsive gambling disorders. According to a 1999 Duke University study, the top 5 percent of players (who dole out $3,870 annually) account for 54% of total lottery sales; the top 10% (who spend $2,593 annually) account for 68%; and the top 20% (who spend $1,619 annually) account for 82% of total lottery sales. The lottery system is completely dependent upon these individuals, without whom its revenues would plummet below operation costs. So even as New York slashes welfare rolls down to nothing, it's happy to accept over $1,600 annually from individuals among its lowest-income bracket, who exhibit signs of compulsive gambling disorders. New York is not only happy to accept this money, but actively solicits it with million-dollar ad campaigns that dangle images of obscene wealth and empty promises before those who are both the most vulnerable to them and the furthest removed. The paradox goes unnoticed that a state that wants to build sustainable economic growth should first and foremost encourage savings, and thrift among its constituents, and then subsidize real investment among its poorer sectors. Indeed, money spent on the lottery in a poor neighborhood is money forever vanished from the local economy, money that could have been spent on local goods and services or invested into local production that could conceivably draw money into the area.

Lottery money merely rearranges the configuration of dollars within a state; it is cannibalistic. Lifting residents' money directly out of the local infrastructure only adds to the general deterioration of the neighborhood and fuels the dreams of residents to "Go from Washington Boulevard to Easy Street," as one Lotto billboard in the heart of a Chicago slum recently put it.

Everybody who has ever worked in an office has considered dropping a dollar or two into the office pool when the multi-state powerball jackpot reaches $130 million dollars. State lottery officials foster the illusion that this is the kind of activity from which lottery revenues come; but the reality of the lottery is not the "gentlemen's raffle" so much as the scratch-off ticket, video poker, keno and numbers games, products designed to maintain the interests and compulsions of heavy players for whom one drawing or ticket a week is not enough. Pressure to increase revenues forces states to continually introduce newer and flashier lottery games that increasingly cater to instantly gratify and foster gambling addiction among problem players. If the state wants to make more money, it simply cuts the number of prizes. It's that easy. Unfortunately, lottery addiction is a two-way mechanism: Just as the revenues are dependent upon a heavy group of poor, gambling-addicted players, the state coffers and the politicians who manage them are equally addicted to the Lotto revenue. Whether or not a person chooses to call the money a "tax" is a matter of semantics: It isn't a "bond" and it isn't a "gift" — and yet it all comes out the other end looking the same.

Whether supplementing or simply replacing ordinary tax dollars, lottery revenue enables the state to do more for its constituents without increasing the burden on anyone who doesn't "want" to play. This makes for an extremely difficult proposition for a public figure to pass up and, once in place, only a politician with a death wish would even consider getting rid of the goose that lays the golden egg, which would amount to the announcement that taxes are going to have to be raised to maintain the status quo. But perhaps this is what CNN was getting at with their headline about "a question of morals" — nobody seems to be complaining as we lead the poor to slaughter in a kind of tax martyrdom, one dollar at a time. Afterall, isn't it right for the state to take our money since we are willingly giving it up?

The MONEY

Only when the public squarely admits where its $16 billion (the net profit in the United States in 1996 [out of a total sales of $43 billion minus payouts and maintenance]) in lottery revenue is coming from will it be able to make an informed, intelligent decision about whether or not the lottery goals are lofty enough to justify its means. Jim Hodges and other pro-Lotto South Carolinians followed an ancient rhetorical tradition when they positioned lottery revenues as a means of improving failing state schools. This is a hard proposal to refuse; with the ever increasing crisis in American education, no state can successfully conjure up a lottery system without the accompanying incantations of "earmarking" lottery funds for education, the environment, fireman's pensions, children's hospitals, laptops for the homeless, pet surgery, or what have you. But given the fact that budgets are confusing and money is fungible, it may take some time before the verdict is out as to where the lottery money has gone: It is far too easy to place $150 million in lottery revenue into the education budget and easier still to move the $150 million that was there to spend it somewhere else. And technically, no one is lying to anyone. Most states, in reality, do not even have to engage in such clever shell games. Lottery money, despite protestations to the contrary, is fed straight into the general budget, where it is carved up along with all the rest of the money, at the legislature's discretion.

Fortunately New Yorkers need no longer labor under the illusion that their lottery money has gone anywhere near where it was supposed to. In a press release issued in April 1998, H. Carl McCall, New York State Comptroller, pronounced that "Lottery money has never supplemented state aid — not yesterday, not today, and most likely not tomorrow...let's stop kidding ourselves. More money for the Lottery does not translate into more money for education." McCall went on to cite as an example, how, in 1996, Governor George Pataki proposed a school-aid cut of $117 million, while at the same time introducing a new QuickDraw game estimated to increase lottery revenues by $69 million. The press release accompanied a long, damning report drawn up by McCall's office in which he maintains that "in New York, as in many other states, lottery earnings have been earmarked for education primarily as a public relations device."

New York is hardly alone in this deception. Not a single state's education budget has ever undergone any significant increase after introducing a lottery. Most states have actually decreased education spending after the introduction of a lottery, hoping that the gambling revenues will make up the difference. Likewise, no state has ever shown any improvement in students' test scores or overall academic achievement following the introduction of a lottery. Florida's educational budget decreased from 60% to 51% within five years of introducing the lottery. Gary Landry, spokesman for the Florida Education Association, claimed that "We've been hurt by the lottery...the state has replaced general revenues with lottery money at a time when enrollments are increasing." Virginia lottery officials were forced to publicly apologize in 1997 for implying that lottery money actually supplemented education money, rather than merely adding general revenue to the state. Georgia's much-touted Hope Scholarship program, in which a certain percentage of the money was legally forced to go exclusively to merit scholarship programs that allegedly did not exist beyond the lottery, has also fallen into disarray; the initial scholarship income cap of $65,000 was quickly raised, then removed. And because the scholarship is purely merit based, it winds up going mainly to children of upper-income families who have the tools and resources available to perform academically. So in this particularly perverse situation, according to University of Georgia economist David Mustard, who is studying the Hope Scholarship program for the National Science Foundation, "what you're looking at is money generally coming in from lower income, poorly educated families, often urban minorities, and going disproportionately to high income, highly educated families" in the form of college scholarships.

The BUTLER

Although purportedly an affair between the public and their elected governments, the Lotto explosion is driven to a high degree by private enterprise. Lucrative state-lottery contracts offer a few cents on every dollar in lottery revenue to the corporation lucky enough to be awarded the job of installing and maintaining the actual Lotto infrastructure. These corporations are completely private, and they spend millions of dollars every year lobbying state representatives to legalize gambling in the hopes of receiving the lottery contract. In the last twenty years, the vast majority of these contracts have gone to G-Tech, a company which, according to Fortune magazine, "practically built the lottery business...it handles everything from running a lottery's complex computer network to teaching store clerks how to run its terminals." As of 1999, G-Tech held a 70% market share in the United States for lottery contracts and two thirds of all foreign contracts, employing over 4,000 workers. It had crushed all of its competitors through massive lobbying blitzes and a series of corrupt, bewildering backroom deals with state officials, many of whom went on to find cushy jobs in G-Tech's employ.

In Georgia in 1993, under the auspices of Rebecca Paul, G-Tech submitted a bid to install machines that was $27 million higher than its competitor's bid and still walked away with the contract. Lottery directors and gaming commissioners who went up against G-Tech found themselves demoted or out of a job, usually at the behest of powerful lobbyists who had been retained by G-Tech at massive salaries on the contingent basis that G-Tech would receive the contract in question. The lobbyists were former or current high-ranking state government officials, friends and relatives of the current administration, or anyone else who could be counted on to grant favorable access for G-Tech against competing lottery companies as well as pesky citizens who were exercising their democratic right to vote against having a lottery in the first place. G-Tech's earnings reports regularly contain up to three full pages describing the various allegations and investigations against the company at any given time.

In 1996, with the Federal investigators closing in, G-Tech National Sales Director J. David Smith resigned and was subsequently brought up on charges of commercial bribery, fraud, money laundering, and the transporting of stolen monies. In February 1998, G-Tech lost a major libel case in England, after a competitor for the British Lottery (headed by Richard Branson of Virgin Ltd.) claimed that G-Tech had tried to bribe him into dropping out of the race. G-Tech's CEO Guy Snowden, Smith's mentor, himself resigned after the scuffle.

Although G-Tech has since hired a number of "cleaners in an attempt to whitewash its history and reputation," — eg, corporate officers well known for their morale practices, a former FBI investigator-turned-inside watchdog -the fact remains that it is a private company that can only ever achieve its bottom line by encouraging and promoting state-sponsored gambling. Insult is added to injury when, as soon as a state decides to impose the world's most regressive tax, it turns the entire operation over to a corrupt corporation instead of at least running things on its own, however "inefficient" it may be to do so. Unfortunately, with the new Presidency, we are likely to see at a Federal level a continuation of what we've seen over the last twenty years and not only in terms of lottery sales, that is, the attempt to model the government after big business. With that goal in mind, it isn't surprising to see why governments are addicted to the bottom line and happy to sell out their own constituents, thank you.