RALEIGH – The state of North Carolina is making a bad argument in defending the coming state lottery against a legal challenge from the N.C. Institute for Constitutional Law. That’s not to say it won’t succeed.
The argument is that if consumers voluntarily purchase an item with a state exaction attached to it, it cannot be a tax. No one is forced to play the lottery, it is asserted, and thus the 35 percent of every lottery dollar received by the state treasury cannot be a tax.
The reason this matter is significant is that the state constitution requires any bill creating a state tax to pass separate readings on separate legislative days. In other words, a tax bill can’t simply be slipped through the NC House or Senate in a sudden stroke, thanks to an accident, clever scheduling, or bathroom break. The constitution essentially mandates that there be true majority support for legislation that will increase the tax burden. It’s a rather sensible provision.
No one disputes that the lottery bill itself was enacted without the required separate votes. Marshall Lancaster, a friend who has done some contract work for JLF in the past, wrote recently in the Raleigh News & Observer that prior votes on the state budget bill, containing the details of implementation for a state lottery commission, did meet the test of separate readings. At best, however, Lancaster’s argument would rebut another ICL charge, that a provision to borrow money from the state treasury to get the lottery commission going had also been enacted contrary to the state constitution. It does not appear to speak to the tax matter.
As I indicated, one of the state’s responses is very weak. If it is impossible for government to tax a voluntary purchase, what is a sales tax? A gas tax? A beer tax? A cigarette tax? I would be shocked if the state prevailed here.
A better version of the argument, made in Wake Superior Court on Monday, is that the state’s 35 percent share of the lottery take is a fee rather than a tax. “It is just a charge for buying a ticket,” Norma Harrell of the Attorney General’s office argued. This is a better argument, but still not a good one. If there is a fee or charge imbedded in the lottery price, it consists of a separate share of lottery proceeds that covers the cost of running the lottery commission, compensating vendors, and advertising the games. The state’s 35 percent share is not a fee for services rendered. It will not be spent to benefit lottery players. It is an exaction. It is a tax.
Judge Henry Hight no doubts feels a great deal of pressure here. He has promised to rule on the lawsuit by week’s end. Lottery tickets are supposed to go on sale by the end of the month. Some are already speculating that even if the judge agrees with ICL’s Robert Orr, former justice of the NC Supreme Court, Hight may allow the state to proceed with ticket sales pending appeal.
I don’t pretend to know what Hight will do, and I’m not confident even of the outcome should the entire matter end up back before the General Assembly for a re-vote on the lottery bill. Many opponents expect a different outcome given what’s happened since last summer. Perhaps.
What I am confident of is that the state’s arguments here aren’t very strong. A tax is a tax.
Hood is president of the John Locke Foundation.