North Carolina Supreme Court Will Decide if Lottery Is Really a Tax

Published August 1, 2007

The North Carolina Supreme Court heard oral arguments on May 22 in an appeal of a ruling in a lawsuit that argues the state’s education lottery is really a tax that lawmakers enacted illegally.

North Carolina charges a 35 percent assessment on the sale of each lottery ticket. If that revenue is found to be a tax under the meaning of North Carolina law, then the lottery’s enactment in 2005 did not meet the basic legislative requirements for enacting tax law, according to Dean Webster, executive director of the North Carolina Institute for Constitutional Law (NCICL).

NCICL filed the lawsuit in 2005 on behalf of four persons and two organizations in the state.

State law requires separate votes on different days before a revenue measure can be approved. That did not happen with the lottery.

“The lottery bill was hurried through. There was lots of interesting wheeling and dealing to get it through as it was,” Webster said.

Pleased with Arguments

Webster said the oral arguments “went well. We were pleased with the questions by the judges. They have given the case a lot of thought so far, but you cannot always go by how the questions go.”

Other organizations, including the Washington, DC-based Tax Foundation, have filed briefs in support of NCICL’s lawsuit, which argues lottery “profits” are really tax revenues.

“A ruling that the lottery is in part a tax will uphold the meaning of Article II, Section 23 of the North Carolina Constitution by ensuring transparency in the state tax system,” said Tax Foundation Senior Tax Counsel Chris Atkins.

The Tax Foundation has long argued lottery revenue should be called tax revenue and state lawmakers should never increase lottery revenue and claim they haven’t raised taxes.

Meets All Criteria

Current U.S. Supreme Court Justice Stephen Breyer laid out the criteria for defining a tax in deciding the San Juan Cellular case for the First Circuit Court of Appeals in 1992. Breyer argued a judge should consider who imposes the assessment, who pays the assessment, and what the revenue is spent on.

In the current case, the assessment was imposed by the North Carolina state general assembly, not a narrowly focused regulatory body; the assessment is paid by a broad swath of the public, not a narrow group that benefits from a particular government service; and the revenue is spent on public education, a broadly available benefit, not on a single industry or similarly narrow group.

Those facts argue for defining the lottery’s net revenue as tax revenue, not as a fee or profit or other miscellaneous charge, according to the plaintiffs.

Participation Voluntary

Norma Harrell, an attorney in the state attorney general’s office, defended the lottery, arguing, “It is our position that a lottery does not impose a tax. We think the legislature intended to create a lottery. We also think the lottery intended to provide funding for education and that’s clear from the statute.”

Harrell also argued, “Nobody forces somebody to buy a lottery ticket, just as no one forces anybody to ride a toll road.”

The appeal followed a 2006 ruling by a state trial court that the General Assembly had legally enacted the lottery.

Steve Stanek ([email protected]) is a research fellow of The Heartland Institute and managing editor of Budget & Tax News. Bill Ahern ([email protected]) is director of communications at the Tax Foundation.

For more information …

Tax Foundation amicus brief challenging the North Carolina lottery,

North Carolina Institute for Constitutional Law’s lawsuit against the lottery,