What if we told you that the seventh-biggest lottery market in the country charged no sales tax on lottery tickets, costing that market hundreds of millions of dollars in tax revenue?
That’s exactly what’s happening in Georgia, where the lottery has not charged a dime of sales tax on ticket sales since it launched 30 years ago.
Now, an audit from the University of Georgia’s Car Vinson Institute of Government has revealed that the decision will cost the state around $230 million in tax revenue in fiscal year 2024.
Understanding the Georgia Lottery tax exemption
Like many states with a lottery, Georgia’s lottery sales directly benefit its education system, pouring hundreds of millions of dollars into the system every year.
When lawmakers legalized the lottery in 1993, they eliminated a sales tax on tickets because they believed it would lead to higher sales and, consequently, more revenue for the education system.
The University of Georgia’s audit confirmed the theory still holds. It projected that, over the next 10 years, a lack of sales tax accounts for $5.5 billion in ticket sales and an additional $1.4 billion in education funding.
And, from a legal standpoint, sales tax is meant for physical property. Lottery tickets don’t qualify as physical property, the audit noted, because customers are paying for a chance to win.
Additionally, sales tax exemptions for lottery sales are pretty standard across the country.
“Lottery tickets are exempt from sales tax in almost all states: law designates that consumers are buying a chance to win and not purchasing physical property,” the Carl Vinson Institute of Government audit said. “No states in the southeast currently collect sales tax on lottery tickets.”
Adding a lottery sales tax would add more than $2 billion in revenue
While the audit acknowledged that the sales tax exemption leads to higher sales and more revenue for the state’s education system, it noted that the overall economic impact of the exemption is poor.
Over the next 10 years, the audit projects that the exemption will return about 87 cents in economic impact for every dollar saved on sales tax. However, if the state adds a sales tax, it would get a $1.33 return for every dollar of sales tax the state collects.
Among the driving factors for increased economic impact from a lottery sales tax is job creation. Right now, the audit noted that, for every $1 million the lottery generates, around 18 jobs are created. If the state were to levy a sales tax on ticket sales, then it could produce 27 jobs for every $1 million.
Specifically, the audit projected that adding sales tax to lottery sales could support more than 6,100 jobs over the next 10 years.
Will Georgia implement a lottery sales tax? Probably not
While the audit projected that adding a tax on lottery sales could provide the state with additional jobs and considerable economic impact, it admitted that the impact of a tax will affect sales and disproportionately impact residents with lower incomes.
Change on taxed ticket purchases is a change too drastic
For example, adding sales tax to lottery tickets would reduce sales not because people would be miffed about paying more. The audit noted it’s a matter of convenience.
“The research team also posits that, since almost all lottery tickets are purchased with cash, and adding sales tax would impose the additional burden of paying with change, ticket sales may drop. The extent to which this ‘inconvenience factor’ would increase or decrease the price elasticity of demand is unknown.”
The audit went on to point out that retailers could counteract that inconvenience by accepting debit cards for lottery transactions. However, retailers aren’t likely to do so because they’d pay transaction fees on debit purchases.
Tax would hurt those with lower incomes
In addition to the inconvenience of paying with change, the audit found that a tax would have an outsized impact on the state’s poorer residents. It noted that people with lower incomes tend to play the lottery more than those with higher incomes.
If they were to pay sales tax on their purchases, that tax would account for a significantly higher portion of their annual income.
“If two consumers pay 7.64 cents in sales tax on a $1 lottery ticket, but one makes $40,000 a year and the other makes $400,000 a year, the lower-income consumer is paying a 10x higher proportion of their income, relatively speaking,” the audit said.
“Since research shows that lower-income consumers are significantly more likely to purchase lottery tickets…adding sales tax to the expenditure could be considered doubly regressive from a tax and income standpoint.”