Saturday, December 30, 2006

The Tax Foundation Can't Win for Losing

Even when I somewhat agree with the Tax Foundation, I am somewhat astonished by their cavalier abuse of the facts. Case in point: The recent post Is Maryland Gambling on Gambling to Balance the Budget?

I agree with the Tax Foundation that funding government via a state operated gambling operation is poor tax policy. My primary objection is that the revenue garnered through gaming operations is, in effect, a regressive form of tax. However, I would not say, as the Tax Foundation does (quoting an article from the Lottery Post),that:

The lottery's diminishing contribution to the state budget is one of many reasons why Maryland is facing nearly $8 billion in deficits over the next five years, analysts say.

That's a great point. It is, alas, basically not true. In the last six fiscal years, the gross revenue and net revenue (after expenses) from the lottery to Maryland's treasury were as follows:

YearGross SalesNet Revenue
2001$1.2 Billion$407 Million
2002$1.3 Billion$443 Million
2003$1.32 Billion$445 Million
2004$1.395 Billion$458 Million
2005$1.485 Billion$477 Million
2006$1.561 Billion$501 Million

As shown in the above table, the total net revenues over the six year period from the lottery increased by about 25%. Maryland State's expenditures over that period increased by less than 29%, that is, a percentage that is only slightly more than percentage growth of the lottery. Thus, while it is literally true that the lottery's contribution to the state budget has been "diminishing," neither the rate nor amount of decline could be said to materially contribute to a looming $8 billion budgetary shortfall (in a budget that, in FY 2006, was slightly less than $26 billion). (Note: The shortfall is projected over a 5 year period. My back of the envelope estimation tells me that the shortfall will be about 6% of the budget. That's a problem, but hardly a catastrophe.)

Note to The Tax Foundation: Even good arguments are undermined when their proponents substitute truthiness for truth.


Anonymous said...

But I don't understand. That argument is from Lottery Post, not the Tax Foundation... This post doesn't make any sense at all.

Stuart Levine said...

Yes, the quote is from the Lottery Post, but it is a statement of fact that was adopted (perhaps a better characterization is "swallowed, hook, line, and sinker") by the Tax Foundation. As the Tax Foundation posting says in its intro: "Like many other states, Maryland has been relying heavily on its lottery as a revenue source. But legislators are discovering that their bet has not paid off the way they hoped." (Emphasis added.)

In other words, TF is claiming, via a quote from the Lottery Post, that allegedly falling lottery revenues (a non-fact) are contributing materially to Maryland's budgetary shortfall (a false conclusion).

Anonymous said...

I’m glad to hear that you are opposed to the use of state-run lotteries as a government revenue source. I’d like to respond to your criticism of my post.
I have cited Lottery Post in the past and have found it to be reliable. In this case, Lottery Post was also citing a study performed by the Maryland Public Policy Institute. I—and Lottery Post—am not claiming that lottery revenues are falling, rather that lottery revenues are not living up to expectations and are diminishing as a percentage of total state revenue, compared to other revenue sources. One of the sentences I quoted was the following: " ‘They may have seen some growth in the lottery [sales], but relative to growth in the economy, it's not keeping track,’ said Tori Gorman, a former economist for the state legislature.”

As for the lottery being responsible for the budget shortfall, the exact statement from Lottery Post is, “The lottery's diminishing contribution to the state budget is one of many reasons why Maryland is facing nearly $8 billion in deficits over the next five years, analysts say.” (Emphasis added.) I do not believe it is responsible budgeting to blame the budget shortfall even in part on the lottery, because the lottery should not be used to fill state coffers in the first place. However, some people do blame the lottery. A Washington Times article posted on the Maryland Public Policy Institute’s website states, “A structural deficit means the state has committed to spend more money over the next five years than it is projected to receive in revenues from taxes and lottery-ticket sales.” If a revenue source fails to raise enough money to meet legislators’ expectations, then it may be blamed in part for the budget shortfall.

Stuart Levine said...

I'm sorry, but I think that you have parsed the comments on the TF weblog too thin.

First, what does the statement "I have cited Lottery Post in the past and have found it to be reliable," mean? That any misleading statements were their fault, not yours?

Second,the thrust of your post was that somehow declining revenues from the lottery are a principal contributor to the expected state budget shortfall. As the numbers I cite show, while it is true that the growth in lottery revenues has not kept pace with spending, the shortfall is not dramatic.

Going further, I actually tracked down the Maryland Public Policy Institute piece that is the source for the Lottery Post article which was the source for your posting. That piece does not argue that that the long term revenue from the lottery is falling relative to Maryland's budget needs. Rather, the piece uses "total personal income" as the relevant metric. This is an odd choice for a measuring rod. (Interestingly, the study also finds that there is even a greater percentage decline in business franchise taxes.) The study can be found here.

It is also worthy of note that the study suggested that "Maryland should re-think its reliance on gambling revenues either by replacing the lottery with an alternative (i.e., personal property tax), or by enhancing lottery revenues with additional gaming (casinos, slot machines, etc)." In other words, not less gambling, but, perhaps, more, but different, gambling.

It can't be denied that any source of revenue that's declining even slightly can be said to share part of the blame when there is a revenue shortfall. But the thrust of your posting was that the lottery was, if not the main, then a significant secondary culprit. That conclusion simply cannot be supported by the facts.