A Tax You Don’t Have to Pay

Is there really a tax that you don’t have to pay if you don’t want to — where you decide not to fill in the form and give them your money and you won’t end up in handcuffs?

Yes, there certainly is. And yet, surprisingly most people are very willing, even anxious, to pay this tax. What is it? It’s the state lotteries.

Let’s take a look at them to see where the money’s going and how much difference playing can make to your financial life.

The recent interest in state run gambling isn’t anything new. The first lottery to raise money for the public treasury was held by Augustus Caesar in ancient Rome. But in the last 15 years old Augie’s creation has become the most popular new tax in the country.

Today 37 states and the District of Columbia have some type of lotto or lottery in place. And the revenues for some are staggering.

New York State raised over $4 billion in the last year reported. Total lottery sales in 1996 were $42.9 billion. That’s nearly a 1,000% increase since 1982.

While we’re knee deep in numbers let’s take a look at where the money is going. A quick survey of the states shows that between 50% and 60% of the money goes back to the players in winnings.

New York State, for instance, pays out 50%. Colorado is on the high side at 59%. But, that still means that between 40 and 50% of the money spent on lotteries goes to operating costs, sales commissions, advertising or to the state as revenue.

The portion that actually goes into the state coffers for education or some other public good is somewhat smaller than you might think.

In Idaho it’s 23%. Colorado keeps 26% of the money wagered.  Finding out how much goes to administration, commissions and advertising is a little more difficult.

Most states are happier talking about the winnings and the amount of money they raise. But as an example, in Idaho 19% of the money spent disappears in overhead and administration.  But, as we said in our opening, it’s a tax that no one is forced to pay.

So who really cares about howmuch is going to advertising?  That’s the interesting thing. In states that have a lottery, 60% of the adults report playing at least once a year.

At the same time that people are revolting against the IRS, they appear perfectly willing to voluntarily pay taxes if they believe there’s a chance at a payoff.

Let’s see if we can’t take these big numbers and break them down into something understandable.

Take Colorado as an example. From July 1, 1996 to June 30, 1997 they had total lottery sales of $360.9 million. That works out to about $100 for every person in the state.  Does that seem like a lot? Colorado is not an exception. In New York the sales are over $150 per person.

In fact, the National Gambling Impact Study Commission sited a Boston Globe report that in one area of Boston people were spending over $900 per person!

But let’s get away from averages and focus in on one family. We’ll take a hypothetical family with Mom, Dad and two kids from our Colorado data. If they’re typical that would mean that $400 per year is going into the lottery.

Now you could argue that the $400 is part of their annual entertainment budget. And that would be fine. But, what happens if they do that each year? Are there other, better things that they could do with the money?

Well, if they’re a young family with the parents in their mid-20′s, those few dollars that they spend on the lotto each week would be worth $48,000 by the time they reach retirement. And that’s just assuming a 5% annual return on the money.

Another option would be to put the money spent on lotto into prepaying the mortgage.

On a 30 year fixed mortgage of $100,000 at 7.5%, they’d have that house paid off 52 months sooner.

Or what about a college fund for the kids. We’ll figure that they’ll need the money in 15 years. But this time let’s say they invest it in a growth stock mutual fund and earn 10% per year. That lotto money would have grown to $12,709.

You get the point. It’s a matter of asking how much amusement can you afford. For $33 per month you should be able to buy more than a few moments entertainment.

Now, I know that some of you are saying that you can dream about being wealthy all week because you play the lottery. But, if that’s really what you want you shouldn’t need more than a single $1 ticket each week to feed your dream.

A few players feel good about helping the programs that receive the state’s portion of the revenue. And that’s great. But, if you really feel that way, save the dollar and give a quarter to charity. At least then you’ll have a 1040 tax deduction if you itemize next year.

So it’s up to you. Here’s a tax that you don’t have to pay. It’s an expensive way to buy entertainment and provides limited money for public good.

So if you reached into your wallet or purse right now would you find a lottery ticket?

Gary Foreman is the publisher of The Dollar Stretcher.com.

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