Vice Squad
Tuesday, October 12, 2004
Teachers For Gambling

When states try to introduce a lottery, they not infrequently earmark some of the revenues to go to politically-popular causes -- education is a standard beneficiary. Lottery money (in the US) is green, however, like other revenues, so unless the lottery funds cover the entire state budget (plus some) within the earmarked category, then it isn't clear that the earmarking actually increases the resources available to the targeted cause. That is, money is fungible, so if the legislature has been giving $1000 per pupil to education and earmarked lottery funds come in at $200 per pupil, the legislature can simply cut back its other contributions to $800. The fact that there is an earmarked stream of revenues does not imply that the targeted cause will see a rise in its overall stream of revenues. And sure enough, this "futility reasoning" frequently seems to be borne out in practice; see the discussion in the text in the vicinity of endnotes 10 to 18 here. Of course, the legislative adjustment might not be immediate, so there might be a short-term revenue hike. All-in-all, though, earmarking that helps to market the introduction of a lottery can be a little misleading. (Some places, like Georgia and Britain, designed their lotteries to skirt the "fungibility" problem. One way to do this is to earmark the revenues for something that you otherwise would not fund at all. A problem with that approach, however, is that it means you must be dedicating the revenues to activities that were not previously regarded as strong candidates for major public funding.)

Sorry for the long-winded introduction. On to Michigan, where state lottery profits are earmarked to education. There's an upcoming ballot proposal that, if approved, would alter the state constitution to require a successful referendum before the state can expand certain forms of legal gambling. Enter here another effect of earmarking: strange political bedfellows: "In apocalyptic terms, Michigan school officials described on Monday a proposed constitutional amendment to limit gambling, predicting it would lead to drastic declines in state lottery money for the classroom." The lottery only contributes about 5% of the state revenues that go to the public schools, though, so the risk (except for that pesky transitional period) to public school funding from the ballot proposal should not be very severe.

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