Research shows more money goes to schools, but ad blitz may have unintended costs

"The states now offering lotteries do not simply make a product available in order to accommodate the widespread taste for buying a low-priced chance at a big prize. They seek to foster that taste. ...The state lottery agencies have in fact evolved into a new breed of government agency created in the mold of the modern corporation with its eyes firmly fixed on the bottom line."

So wrote Charles Clotfelter and Philip Cook, professors of public policy studies and economics at Duke University and authors of the authoritative 1989 Selling Hope: State Lotteries in America. The book describes how lotteries work and explores whether, despite generating large amounts of new revenue for hard-pressed states, they operate in the public interest.

Jack Betts of The Charlotte Observer caught up with Clotfelter by telephone to chat about North Carolina's newly adopted lottery, which will begin operation some time in 2006. Here's an edited version of that conversation:

Q. North Carolina's lottery prescribed that 35 percent of its revenues be set aside for education purposes, 15 percent for operating expenses and dispensing tickets, and 50 percent for prizes. How does that compare with other states?

"The 15 percent for operations seems higher than average, and the 50 percent for prizes is on the low side. The average is around 55 percent. The 35 percent set aside for education is significant.

"We look at the amount that is taken as revenue and liken it to a tax, an implicit tax. And what (N.C. is) doing is like selling a candy bar for a dollar, and taking 35 cents of it for the tax, leaving 65 cents for the candy bar. Compared to excise taxes on products like tobacco and alcohol, that's a pretty high tax. And (the state is) choosing to place this implicit tax on the buyers of a product they happen to be the monopoly producer of. And when they advertise this product, they are in a qualitatively different position from any other state activity.

"Look at it this way: What if North Carolina had somehow garnered the monopoly on carrots? Sure, there are some substitutes for carrots, but to buy a carrot, you would have to buy it from the state. People might get exercised at paying a 35 percent tax on carrots. It would be unusual to have a monopoly on carrots, and charge a high tax on carrots, and then advertise aggressively to sell more carrots, wouldn't it? But at least carrots are good for you.

Q. Can North Carolina devise a way to avoid supplanting other education spending once lottery revenues start coming in?

"The best way to avoid it is to spend money on something that the state has never spent money on before. That way (the state) can't take money away from other expenditures. (The state) can't do that in this case because the money is going for education.

"Georgia may be the exception. It instituted a brand new program (the Hope scholarships for college tuition) that had never been there before.

"There is some new research that shows that education revenues go, substantially, where they are supposed to go. Previously, research indicated there was some substitution of lottery revenues for existing spending."

Q. Will North Carolina have to advertise more aggressively than many expect in order to keep lottery revenues up?

"Probably. Offering just 50 percent of the revenue for prizes is not going to be as attractive as some other state lotteries are. And directing 35 percent of revenues for education paints a lottery state into a corner.

"One of the dilemmas here is that, having touted a lottery for revenue purposes, it is going to be up to those who run the lottery to go get that revenue. That organization is going to be in the best position to pursue the revenue and see that it comes in. I'm sure the wheels are already turning. You can sell a lot of things with enough advertising -- carrots or anything else."

Q. The lottery sets aside $1 million for gambling addiction treatment. Is that sufficient?

"I have no idea. It's not my field. For most people, a state lottery is not a harmful activity. But from what Phil Cook and I have read over the years, there is a small percentage in every state that is susceptible to gambling. For these people, availability of the games is one problem and advertising makes it worse. And there are some games that are more addictive than others.

"On top of the list of 'evil' games are video lottery games with instant payoffs. That's like going from soccer to rugby. And if that's the case in North Carolina, I think the word 'firestorm' might not be too strong. I think opposition might rise up against it."

Q. What advice would you have for state policymakers in preparing for a lottery?

"Be prepared to be taken out to lunch a lot.

"The lottery operators' mouths have been watering for a long time, looking at North Carolina, the biggest anti-lottery state left, until now.

"Phil Cook and I predicted for years that North Carolina would have a lottery, but we've only recently been proven right. At least it does comply with the wishes of a vast majority of the public.

"But it does put the state in a rather odd position. The states that run lotteries, especially the aggressive ones, have a hard time telling a middle schooler to stay in school, work hard and graduate when the message they send (by promoting a lottery) is 'Take a chance, you might get rich quick.' "