Lotteries are not a new phenomena. Dating back to the time of Caesar, lotteries have been used by governments as a source of revenue, even including appearances in the Colonies in the 1700s (George Washington, John Hancock and Benjamin Franklin each used lotteries to fund various projects). They have been in favor and then have fallen out of favor (usually as a result of scandal) through the ages. In the United States they fell out of favor commencing in the 1820s and were ultimately banned in all states except Louisiana by 1878, followed by Congressional bans of interstate lotteries and use of the mail for lotteries in the 1890s.


The modern era of lotteries in the United States commenced in 1964 when the New Hampshire legislature created the first legal lottery of the 20th century. It was called a "sweepstakes" and was tied to horse races to avoid federal anti-lottery statutes. Other states followed the lead of New Hampshire, commencing with New York and New Jersey. Today there are state-run lotteries in at least 38 states representing over a 40 billion dollar business with no end to expansion in sight.


State legislators view their state lotteries as a means of raising revenue without touching one of the third rails of politics – raising taxes. While understandable from a political perspective, it is nonetheless troubling for several reasons.


Many legislators express strong opposition to casino gambling, often characterizing tax-paying casinos as destroyers of families or potential havens for organized crime (the organized crime bogeyman is at best a specious charge in today's highly regulated gaming industry). In point of fact, if the casino industry established payout formulas identical to the typical state lottery, there would be legislative investigations and demands to shut down the industry for gouging patrons. Moreover, in their rush to grab ever-increasing amounts of lottery dollars from the masses, state legislators totally ignore a wealth of statistical data indicating that the poorest members of society are the persons most likely to play state lotteries and, in addition, are often the most likely to develop a gambling problem. Hypocrisy is the word that comes to mind.


But wait, if the money earned by a state lottery goes to schools (as is the case in many states), that seems like a good thing (at least that is what the state lottery folks keep telling everyone), so what is the problem? Unfortunately, the reality is somewhat different than the pitch. Yes, in many states lottery proceeds are earmarked for a specific category of state spending. But this is not an add-on to what the state already spends on that particular government program. Rather, it is an open invitation to reduce the allocation of general funds to the subject program, increasingly forcing the program to rely upon the proceeds from the state lottery. This places pressure on the state lottery to continually increase its revenues in order to meet escalating demands for funding the program, which can only be achieved by constantly expanding the breadth and scope of the state lottery regardless of the consequences. A vicious circle is thus created in which state lotteries and the state legislatures that rely upon these lottery funds to solve monetary shortfalls become fiscal junkies.


Of greatest concern to most knowledgeable independent observers of trends in the growth of and reliance upon state lotteries is the newest trend – expansion away from the traditional numbers games into electronic games including keno and video lottery terminals and expansion into the internet under the umbrella of state action. Electronic wizardry today in the gaming equipment business is such that the video lottery terminal of yesteryear can now be made to look, sound and act like a slot machine for all intents and purposes. In other words, state lotteries think they can surreptitiously expand into the traditional casino business through the back door – which is exactly what is happening.


State lotteries are not accomplishing this expansion into new territory by opening glitzy casinos in major cities. Instead the focus is on installing electronic keno and new era video lottery terminals a/k/a slot machines in neighborhood bars, restaurants and convenience stores. At least one state lottery has engaged in a full-fledged campaign with bar owners to install keno games that play a new game every five minutes, pitching to the bar owners that by installing this new generation of electronic lottery games in their bars they can keep their customers in the bar longer and make more money from increased beverage sales. Let me get this straight – while the state legislature is increasing the penalties for drunk driving and several state agencies are funding major "Do Not Drink and Drive" campaigns, the state lottery (which is also a state agency) is encouraging bar owners to install lottery machines in their bars in order to keep customers in the bar longer. If private enterprise engaged in this sort of conduct, somebody would be going to jail.


Then there is the issue of crime and corruption. Unlike the highly professional staffs of casino gaming boards, most, if not all, state lottery agencies have neither the personnel nor the sophistication to properly investigate and regulate licensees. A more fundamental pervasive concern is corruption within state government resulting from the inability to effectively regulate the conduct of elected office holders and the inflexibility of civil service rules regarding the selection and disciplining of state employees. This is a disaster waiting to happen.


It is also important not to neglect the impact of the expansion activities of state lotteries on charitable gaming. In many states charitable gaming (bingo, pull tabs, millionaire parties and similar games run by churches and nonprofit clubs such as the Eagles) provides major funding to a wide variety of charitable endeavors. The current aggressiveness of state lotteries will, in all likelihood, have a devastating impact on charitable gaming.


Finally, there is the traditional tax-paying casino industry that exists alongside of state lotteries in many states. The expansion of state lotteries into traditional casino gaming will clearly have an adverse impact on traditional casinos, resulting in a loss of tax revenue. The reaction of state legislatures to this development can be predicted – raise the casino tax rate. This, in turn, will discourage casino expansion and encourage employment cutbacks, which results in a less dynamic tax-paying casino industry, fewer tax-paying casino employees and no net additional taxes. The only folks who do not seem to understand this basic economics lesson are shortsighted, cash-hungry elected representatives.


This article is intended to be a cautionary tale. Throughout the country the directors of state lotteries and their supporters in all branches of state government are rapidly implementing new programs to expand lottery revenues with little thought regarding the practical long-term consequences of their actions. It is time for them to take a cold shower. Since that is unlikely to occur on a voluntary basis, the public needs to be thoroughly educated regarding planned state lottery activities and encouraged to deliver a simple message to state bureaucrats – think before you jump.


Robert W. Stocker II is a Member of Dickinson Wright PLLC. He can be reached at rstocker@dickinsonwright.com.