Now He Asks

Gov. Mike Beebe joined this publication in opposing the creation of the Arkansas Scholarship Lottery, despite its appealing mission of helping Arkansas students pay for college. Unfortunately, the wildly popular governor didn’t actually risk any of his political capital – or give any voters pause – by announcing his opposition before he voted against the lottery on Election Day 2008.

Lottery tickets have now been on sale across the state for more than three months, and just as belatedly, the governor has started to wonder where the $140 million spent on lottery tickets came from. He has seen the state’s tax collections for December – almost $21 million below projections – and started to suspect some of that money might be flowing into the lottery rather than into the General Fund.

The answer, or some of it, is simple. The first rule of economics is money can be spent only once, and money being spent on untaxed lottery tickets is not being spent on taxed goods. But the direct cost to the state government is probably going to be pretty small.

Most of the money circulated through the lottery will re-enter the Arkansas economy one way or another. More than 60 percent is paid out in the form of winnings, and most of the winners are presumably Arkansans. Small prizes, and most of them are small, can be expected to be spent on taxable consumer goods fairly quickly – or reinvested in more lottery tickets. Larger prizes that must be claimed at lottery offices are subject to income taxes, and we can expect a fair amount of the take-home sum to be spent on taxable goods as well.

The portion of the lottery dollar that goes to the retailer – 5 percent of every ticket sold, and an additional 1 percent on winning tickets – will presumably be taxed as corporate income or as wages for employees. The portion spent on salaries (some of them quite handsome) for lottery employees is also taxed. The 25 cents or so of every lottery dollar that becomes college scholarship money may be temporarily out of circulation, but that money will also be spent in Arkansas. And those students who benefit are likely to earn more – and therefore pay more taxes.

The loss of $35 million or $40 million from the tax-generating economy over three months is not nearly enough to be the sole or even the largest reason for the downturn in state revenue collections. But it is still worthwhile for a government that is now in the business of encouraging and promoting long-odds gambling to determine what other parts of the economy might be paying the price.

That’s going to be hard to do since the lottery arrived as Arkansas’ unemployment rate was reaching the highest levels in nearly two decades (which seems to us to be the logical reason for the state’s revenue deficit). Is spending on clothing down because of the lottery or because Mommy’s out of work? Maybe both. Is spending on gasoline down because of the lottery or because the price of gas has jumped back above $2.60 per gallon? Probably both.

In a small, poor state it is safe to assume the lottery’s revenue didn’t come from money that was previously being diverted to retirement accounts or college funds. But we would like to know where it is coming from, so we await the answer to Gov. Beebe’s question.