Lottery Tax Credit Funding Unconstitutional?

In the spirit of the holidays, state leaders gave the Wisconsin lottery a $48 million gift in the 2017-19 state budget. The gift will help keep down homeowners’ property tax bills this year and next. But it may come with several lumps of coal. One is the unusual use of state income and sales taxes to subsidize lottery expenses, and the other may be an end-run around the state constitution.

The $48 million transfer from the state’s general fund—supported mainly by income and sales taxes—to the separate lottery fund was nestled snugly into the budget bill, and drew little attention when it was passed in the fall. The tax money will pay some lottery costs, specifically compensation to retailers for selling tickets. This beefs up the amount available for lottery tax credits to homeowners.

More property tax relief is, no doubt, welcome. But there is a hitch because the lottery is different from other state programs. Until voters amended the state constitution to permit the lottery, Wisconsin had banned all gambling for nearly 140 years. At the time of the constitutional amendment, the lottery was intended as a freestanding fund that relied solely on its own sales to operate. Shifting $48 million in general fund revenues to the lottery breaks with that understanding.

Unlike other transfers between separate funds when state leaders moved money to stabilize shaky budgets, the lottery does not appear to need such support. Though lottery sales peaked in the mid-1990s, they have remained relatively constant since and have risen modestly in recent years.

Instead, the motivation appears to be an effort to increase the lottery property tax credit. Lottery credits were initially projected to decline in 2017-19; lawmakers and the governor may have wanted to avoid such a drop just before the 2018 elections. Thanks to the transfer, appropriations for the credit will increase $8 million in 2017-18 and $40 million in 2018-19, to almost $207 million, the highest in almost 20 years.

The boost could prove short-lived, however, if past experience is a guide. In the 1999-2001 budget, lawmakers attempted to pour $440 million of general tax money into the lottery, a move that drew fire from both the attorney general and a prominent tax attorney. They reasoned that, because the lottery credit is constitutionally targeted only to homeowners—and not to businesses or other property owners—using general fund taxes rather than lottery proceeds to fund the credit could violate the state constitution. Wisconsin’s constitution requires that all types of property be taxed uniformly.

Then-Gov. Tommy Thompson (R) echoed those concerns when he vetoed the provision, citing “grave doubts” about its constitutionality. Thompson also said he did “not believe we should be paying administrative expenses of the lottery with general tax dollars on a permanent basis.”

If similar questions arise about the latest budget move, both the Wisconsin lottery and property taxpayers might eventually discover that their pre-election property tax treat was actually two lumps of coal—a questionable tax subsidy of the independent lottery fund and a violation of the state constitution.

Todd Berry, president of the Wisconsin Taxpayers Alliance.