The Lottery Gamble

Here's the best news to come out of the otherwise screwed-up 2000 election: The political juggernaut that during the last third of the twentieth century transformed the states from staunch foes of gambling into gambling's chief sponsors has slowed to a crawl. The voters of Arkansas rejected a lottery-casino ballot measure, joining the voters of Alabama, who turned down a lottery proposal in 1999. South Carolina voters were more ambivalent: They approved a lottery proposal, but they also elected a Republican House of Representatives that may refuse to pass the enabling legislation needed to put a lottery into effect.

What a contrast to the period that began in 1964, when New Hampshire became the first state ever to create, own, and operate a lottery. New Hampshire is one of only two states with neither an income tax nor a sales tax, and therein lies the tale. A lottery seemed to the state's voters a painless, voluntary tax.

Lotteries spread rapidly in this country during the 1970s and 1980s, when New Hampshire seemed a model to many states. In 1978 California voters passed Proposition 13, which placed severe restrictions on the state's taxing authority and inspired voters in some other states to enact similar measures. More important, Prop 13 and its progeny made politicians everywhere averse to new taxes. Only one state, Connecticut, has enacted a personal income tax or general sales tax since 1977. Ronald Reagan was elected president in 1980 on a promise to make substantial reductions in federal income tax rates. He not only accomplished this goal but also persuaded Congress to reduce spending on grant programs to the states.

To state governments caught in a vise between greater revenue needs and widespread opposition to taxes, the lottery seemed an appealing way out. During the late 1960s and the 1970s, 12 states (mostly in the Northeast) legalized lotteries. During the 1980s, 18 states--representing a majority of every region of the country except the South--followed suit. Six more states, including three in the South, legalized lotteries in the early 1990s. In all, 37 state governments and the District of Columbia--representing nearly 90 percent of the nation's population--now own and operate lotteries.

The desire for nontax revenues was not the only thing fueling the spread of lotteries; there also was competitive pressure on the states that didn't have a lottery. Once a critical mass of lottery states was reached, a race to the bottom began. In 1986, for example, John Carlin, the liberal Democratic governor of Kansas and an opponent of lotteries, saw how many dollars were flowing out of his state as people crossed the border to play in Missouri and Colorado. Carlin became a lottery convert, arguing that "not having one when your neighbor has one is like tying one hand behind your back." Kansas's story was repeated nearly everywhere. As the political scientists Frances Stokes Berry and William Berry found, the greater the number of lottery states that border a state without one, the more likely that state is to adopt a lottery.

What a deal with the devil Carlin and his fellow governors struck. To begin with, lotteries are a wildly regressive way of raising revenue. Although members of nearly every demographic group bet the lottery in roughly equal numbers, some bet much more frequently than others did. "The heaviest players," Duke University economists Charles Clotfelter and Philip Cook have found, are "blacks, high-school dropouts, and people in the lowest income category." Yet state lotteries depend on the participation of these frequent players. "If all players spent the same as the median player, $75 a year," report Clotfelter and Cook, "[lottery ticket] sales would fall by 76 percent." Eighty-two percent of lottery bets are made by just 20 percent of players--and this group is disproportionately poor, black, and uneducated.

Despite laws to the contrary, minors bet the lottery, too. The presence of lottery tickets alongside candy, chips, and crackers in neighborhood convenience stores places children directly in contact with gambling. In lottery states, three-fourths of high school seniors report having bet in a lottery, according to the 1999 report of the National Gambling Impact Study Commission. In Massachusetts the attorney general found that children as young as age nine were able to buy lottery tickets in 80 percent of their attempts.

An additional problem with lotteries is that the money that states make from them seldom goes where the law says it should. Eighteen states earmark their lottery revenues for education; others, for transportation or programs for seniors. But economists have discovered that in most states little if any net increase in spending for the earmarked purpose actually occurs. Instead these states substitute lottery revenues for money they otherwise would have spent from their general funds.

Perhaps the worst thing about lotteries is that they put states into the business of gambling, which generates its own downward spiral of increasing regressivity and deception. States come to depend on the revenues from lottery games as part of their ongoing budgets. But people get bored betting the same games over and over again. Ticket sales and revenues to the state treasury drop. So state lottery agencies ramp up their advertising, much of which is designed to persuade those who already bet a great deal to bet a great deal more.

The federal government is no help. Although commercial sweepstakes operators like Publishers Clearinghouse are governed by the Federal Trade Commission's truth-in-advertising rules, Congress has exempted state lotteries from such restraints. With few exceptions, lottery agencies use their freedom from federal regulation to advertise their games misleadingly, thereby fostering the impression that the odds of winning a big prize are good and that playing the lottery is a sensible way to enhance one's financial status. In doing so, these agencies encourage luck--not hard work or saving and investment--as a strategy for success.

"When I was younger, I suppose I could have done more to plan my future," says a smiling young man in a commercial for the Connecticut lottery. "But I didn't. Or I could have made some smart investments. But I didn't. Heck, I could have bought a one-dollar Connecticut lotto ticket, won a jackpot worth millions, and gotten a nice big check every year for 20 years. And I did! I won!" The commercial ends with a voice-over saying, "Overall chance of winning is one in 30." But that is the chance of winning a small prize in an instant lottery, not "a jackpot worth millions."

Bettors may become less and less susceptible to commercials like this, but they are hardly immune to the epidemic at large. State lottery agencies, pressured by their governors and legislatures to keep the revenues coming, develop new, more enticing games. Over the years, the monthly drawing has given way to the daily drawing, the instant scratch-off game, and lotto. The five states that have recently decided to market slot machine┬ľstyle video lottery terminals may represent the wave of the future. In the late 1990s, lottery revenues fell in nearly half the states; but the video states experienced annual growth rates ranging from 9 percent to 26 percent.

Until recently political conditions seemed ripe for a new round of state lottery enactments. Except for Alaskans and Hawaiians, every American lives in a state that either has a lottery or shares a border with one or more lottery states. Ambitious politicians in nonlottery states have a strong incentive to urge such enactments. Lotteries are a normal activity of state government, they argue, pointing to the money the state loses when its people cross the border to bet in other states.

But the rejection of a lottery by the voters of Alabama and Arkansas, as well as South Carolinians' tepid approval of one, suggests that the political tide may have turned. Before 1999 referenda to create state-run lotteries were almost unbeatable: 32 passed, and only two (both in North Dakota) were defeated. Since 1999 lottery referenda have gone one for three. Voters in Maine, a lottery state since 1974, turned down a ballot measure in the 2000 election to allow video gambling at racetracks. Tennessee voters are far from certain to approve a lottery in 2002, when a referendum is scheduled to take place. That's a big change from just a few years ago, when easy passage would have been a sure thing.

Lotteries are on the political decline for several reasons. The recently formed National Coalition Against Legalized Gambling (NCALG), a grass-roots organization that can be counted on to set up shop in almost any state that is considering a lottery, deserves part of the credit. NCALG is especially good at rousing opponents from both ends of the political spectrum. Liberals are called to arms by the issues of social justice that a lottery raises. Conservatives are energized by their conviction that gambling is morally destructive.

Anyway, the promise of new revenues from a lottery is less alluring than it used to be. Now that lotteries have been around long enough for economists and other social scientists to study their effects, the word is out: They're bad news. They are regressive, deceptive, and--for both children and adults--enticing to the point of being addictive. The revenues they generate for a state are roughly equivalent to those that an increase in the sales tax of less than 1 percent would produce. But the main argument against lotteries should have been as apparent to New Hampshire 37 years ago as it is to Alabama and Arkansas today: It's not the place of government to encourage people to gamble.

Gambling Online

The political outlook isn't bleak for all forms of gambling--or even for all sectors of the dot-com economy. Distressingly, Internet gambling is on the rise.

Since 1995, when the first gambling Web site was launched, more than 500 sites have cropped up. Most of these are virtual casinos licensed in countries such as Antigua and Australia, where Internet gambling is legal. An analyst for Christiansen/Cummings Associates calculates that online gambling revenues more than doubled from $300 million in 1997 to $651 million in 1998, then redoubled to $1.2 billion in 1999 and nearly redoubled again to $2.0 billion in 2000. Other industry analysts offer higher estimates.

The U.S. government has not been oblivious to this pattern. When Janet Reno was attorney general, she declared: "You can't hide online and you can't run offshore." But about all she had to work with was the Wire Communications Act, a 40-year-old law designed to keep people from using telephones and telegraphs to place bets on horse races and football games. The law is, at best, tenuously applicable to online casinos, much less enforceable against an Internet industry that is moving from telephone wires to cellular, fiber-optic, and satellite technologies.

Surprisingly, not many people support Internet gambling. The only group that has lobbied on its behalf in Washington is the Interactive Gaming Council, an association of Web-based casinos and sports books that is located in Vancouver, Canada. As for the general public, a 1999 Gallup poll found that 75 percent of Americans disapproved of "legalized gambling or betting using the Internet"--by far the largest margin of opposition to any form of gambling.

And the public is right to disapprove. Internet betting offers a unique temptation to people who are prone to gamble destructively. For the large and rapidly increasing number of Americans who have online access through personal computers, gambling Web sites are a 24/7 presence. Young people, for whom playing online games is a major form of recreation, are especially vulnerable. Gambling Web sites typically accept the word of bettors who claim to be of legal age. Potentially addictive in their own right and a gateway to other, more dangerous forms of gambling, Internet casinos contribute to gambling disorders.

Online gambling also may foster crime in a distinctive and especially problematic way. Until recently, traditional bricks-and-mortar casinos were places where cash-rich criminal organizations could launder money: They simply bought chips with illegally obtained cash, played a little, then cashed in the chips for untainted currency. Congress closed this door in the mid-1980s by requiring casinos to report every transaction larger than $10,000. But Internet venues can evade this law simply by basing themselves outside the United States.

Another problem with the industry is how it affects government, especially at the state level. Web sites based in other countries pay no taxes in the United States. Yet the states are left to deal with the crime, bankruptcy, and gambling disorders that may result.

The will to prevent Internet gambling is widespread in Washington, but strong uncertainties remain about how this should happen. Much of Congress's attention has been devoted to Arizona Senator Jon Kyl's proposed Internet Gambling Prohibition Act, a bill that would extend the coverage of the old wire act to include Internet-related technologies such as fiber-optic cable and microwave transmission.

The Kyl bill, which passed the Senate in 1999, has received strong support from an unusual political coalition: a broad spectrum of Christian groups, ranging from the liberal National Council of Churches, which regards gambling as a threat to the poor, to the conservative Southern Baptist Convention, which is concerned primarily with issues of morality. These groups are joined by the American Gaming Association, which represents the established and closely regulated casino industry, and by amateur and professional sports organizations such as the National Collegiate Athletic Association and the National Football League, which worry about the effects of Internet-based sports betting on the integrity of their games.

But even some who share the Kyl bill's goals doubt that it would be effective in achieving them. Policing activities in cyberspace--especially when they are legal in the countries where the Web sites are based--is no easy task.

Yet Congress can, as Century Foundation President Richard Leone says, "put sand in the wheels" of Internet gambling. In addition to passing the Kyl bill, it could follow the 1999 National Gambling Impact Study Commission's suggestions both to "prohibit wire transfers to known Internet gambling sites, or [to] the banks who represent them" and to render unrecoverable in U.S. courts "any credit card debts incurred while gambling on the Internet." To be sure, Americans who wanted desperately to gamble on the Internet would find a way to get their money to the necessary places--perhaps by opening an account in an overseas bank, then instructing that bank to transfer funds to an Internet gambling site. But the casual, experimental, or underage Internet gambler who had to go to more trouble than entering a credit card number would be deterred.