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Newspaper takes a hard look at the N.J. Lottery

Dec 4, 2005, 7:24 am

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New Jersey Lottery

They call her the Queen of the Lottery.

Her realm: the North Broad Foodmart, a convenience store behind a gas station off Route 22 in Hillside.

One evening, as the "queen," aka Pat Howard, an insurance agent who lives in Newark, waits in line for the "green machine," someone asks how much she spends.

"Maybe $20, $30" a day, she says.

At this, the crowded store falls silent. Then, all at once, everyone laughs.

After the "queen" is finished with her order, store manager Rashmi Patel spins a swivel screen atop the lottery machine to reveal Howard's purchases: $137.

"And that's just one time," he says. "She plays the same in the morning."

If players like Howard are hooked on the lottery, then the state is hooked on them.

Since its inception 35 years ago, the New Jersey Lottery has grown into a $2.3 billion business that delivers more than $800 million a year to the state treasury.

Lottery officials are quick to point out programs it supports — from scholarships to school lunches to homes for disabled veterans.

"The New Jersey Lottery serves to benefit every single aspect of the population of this state," said executive director Michellene Davis.

But the source of lottery revenue — the very people who buy the tickets — is not spread as evenly.

The Star-Ledger analyzed five years of lottery data by ZIP code, obtained through the state's Open Public Records Act, and found a consistent and undeniable pattern: Lottery revenues (ticket sales) rise as income falls. This is particularly true for its bread-and-butter money-makers — the Pick 3 and Pick 4 drawings and instant games.

Put another way, the lottery is a regressive form of taxation.

The Star-Ledger compared lottery sales and winnings with income levels based on Census data in 577 ZIP codes in New Jersey between 2000 and 2004. Among the findings:

  • Per-capita ticket sales were much higher in lower-income ZIP codes. In communities with average household income below $52,000, the lottery sold an average of $250 of tickets per person annually. That was more than double the amount for ZIP codes with $100,000 households.
  • There are more lottery retailers per capita in lower-income areas. Bayonne, where the average income is $58,971, has one outlet for every 750 residents; Princeton, with an average income of $134,638, has one for every 5,450 residents.
  • A contingent of hard-core players fuels sales in lower-income areas. From 2000 to 2004, 1,080 players reported winning at least 10 jackpots of more than $600 — large enough to be reported for tax purposes. The top three ZIP codes for these players were low-income neighborhoods in Irvington, Newark and North Bergen.

It all adds up to big bucks for state coffers — $809 million last year, making the lottery the No.1 "miscellaneous revenue" source, behind only the "big three" of sales, income and corporate taxes. In fact, the state receives roughly the same amount of money from lottery sales as it does from all realty transfers and casino taxes combined.

Faced with unprecedented budget shortfalls, state officials also are pressuring the lottery to grow, according to meeting minutes of the past five years. And thanks largely to the success of instant games, total sales have grown 44 percent in the past decade.

Finance experts say the state's dependence on the lottery to fund programs is troubling.

"It walks like a tax and talks like a tax," said Charles Clotfelter, a Duke University economist who has studied lottery sales patterns across the nation. "It just needs to be recognized that the state is putting a greater burden on low-income people."

Still, lottery officials dispute any suggestion the games feed on lower-income residents.

"The lottery is, above all else, a business," spokesman Dominick DeMarco said. "There is no business in the world that would target a group or groups of individuals that can't afford their product."

Lottery officials, including New Jersey's, long have hushed critics by arguing poor ZIP codes often include lottery retailers that cater to middle- and upper-income people who work in those neighborhoods.

But The Star-Ledger analysis accounted for this by adjusting each ZIP code's population to include workers as well as residents, using Census Bureau business data to determine "daytime populations." And even when ZIP codes with large daytime populations were removed from the overall statewide mix, the pattern held: Lottery sales fell as income rose.

Take the towns of Hillsborough and Belleville.

The two have roughly the same population, about 36,000, and similar daytime populations that include people who work but don't live in town, about 42,000.

When it comes to sales of lottery tickets, however, there's no comparison. Average annual sales at stores in Hillsborough, a wealthy Somerset County town, are about $1.8 million. In Belleville, a blue-collar town outside Newark in Essex County, it's $13.3 million.

Lottery officials contend the numbers still could be skewed by commuters and other travelers.

To address that argument, The Star-Ledger also analyzed data based on where players live.

Winners of jackpots of $600 or more must report their claims for tax purposes using their home address. And that data showed the same pattern: Working-class areas like Newark and Hillside had the most winners per capita, while the affluent communities of Belle Mead, Short Hills and Princeton Junction had the least.

Touchy Subject

The demographics of the lottery are a sensitive issue for officials.

Davis, the New Jersey Lottery executive director and a Seton Hall University graduate who received a college scholarship funded by the lottery, said she was "personally offended" by The Star-Ledger's findings.

"I don't agree with your analysis," Davis said. "And I'm saying even if your analysis were to be so," it doesn't take into account "the benefits that are stretched throughout the state."

Most lottery proceeds fund educational programs, including a school for the deaf, standardized tests for elementary, middle and high school students and scholarships for both low-income students and high achievers. Lottery funds also help the mentally ill and developmentally disabled.

"Every dollar provided by the lottery is one less dollar needed in the form of local and state taxes," Davis said.

Tom Vincz, a spokesman for the state Treasury Department, which oversees the lottery, pointed to one question from a 1999 Star-Ledger/ Rutgers-Eagleton Poll that showed lottery participation was about the same regardless of income. But the overall conclusion of that poll was that "the lottery is in fact regressive," meaning it takes a greater percentage of income from the poor than the wealthy.

"The end result is those that can least afford to pay wind up paying the most via the lottery," said James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers. "That means they have less money for other necessities in life.

"The receipts from the lottery are used for a whole range of public programs, and essentially the lower income winds up funding most of those programs," Hughes said. "The more affluent who are smart enough not to gamble realize it's really a fool's game. They're not contributing anything to the support of the programs."

To keep people playing, the lottery spends on advertising.

Faced with higher and higher revenue targets in successive state budgets, the New Jersey Lottery Commission, has asked the state for more money to promote drawings and instant games. Over the past six years, the agency's ad budget has jumped from less than $8 million to nearly $19 million.

"If you give us more money, we sell more tickets, and we have proven that time and time again," Lottery Commissioner Stephen Boswell told officials in 2003.

Feeding Dreams

It's after 7 o'clock on a Tuesday night, and the regulars have made their way to the North Broad Foodmart in Hillside.

Pat Howard may be the "queen," but there are other prominent members of this lottery family: Richard "Herb" Herbert, who works the crowd like he's mayor; Valerie Hall, who plays the lottery because "you have to be in it to win it;" and Wyatt Warren, a 70-year-old floor refinisher who plays "all day, every day" because "they say if I don't win, it goes to education."

There is barely enough room inside the cramped, well-stocked store to accommodate the steady stream of regulars.

For Bobby Hockaday, a 50-year-old carpenter and father of three, a 50-cent Pick 3 ticket gives him a shot at $250. That the odds are one in 1,000 doesn't matter. That the lottery pays out only 55 cents in prizes for every $1 wagered doesn't matter.

"What other way, legitimately, can you enter something and be the smallest guy in the place and have the opportunity to (win) a million?" Hockaday asks. "For $1, you got hope you might hit it and be rich the rest of your life."

Hillside is among the top 10 New Jersey towns for lottery sales per capita. Its 23 lottery outlets sell an average of $559,000 worth of tickets per year — 93 percent more than average. The average income in neighborhood surrounding the Foodmart is $59,000 — about 25 percent below state average.

Forty miles south, the lottery terminal at the Buy-Rite wine shop in upscale Rumson tells a different story: There is never a line to buy tickets, and store manager John Marcelli can think of just three lottery regulars.

Buy-Rite is home to the only lottery machine in the town of Rumson, where the average household income is $217,338.

While other stores pride themselves on carrying most every type of scratch-off — there were 140 in the market last year — this store carries just three: Firecracker Cash, Dominoes and Joker's Wild.

Alice Nobbs, who works for a catering business next door, is one of the Buy-Rite regulars. She finds it lacking in its selection of instants. If more people in Rumson played the lottery, Nobbs said, she wouldn't have to drive around for tickets.

She said the reason others here don't play is obvious: "They have money."

"If it wasn't for me, they'd probably get rid of that machine."

An Old Idea

Lotteries have been around for centuries. Moses used one to parcel out land. The Romans played forms of the game during Caesar's reign. And lotteries helped fund the Great Wall of China.

In the New World, lotteries arrived with the British, who used them to finance Virginia's Jamestown settlement.

After a few starts and stops, the lottery system we know today took hold four decades ago.

In 1964, New Hampshire, desperate for revenue but reluctant to raise taxes, legalized the first modern state lottery. New York and New Jersey followed — in part to crack down on illegal numbers' rackets.

On Jan. 7, 1970, New Jersey Gov. William Cahill drew the first winning number: 3-9-4-5-8-4.

And while New Hampshire and New York proceeded with caution, it was a different story in New Jersey.

Here, the lottery was advertised as a "get-rich-quick scheme," as the state treasurer at the time, John A. Kervick, approvingly put it. And the state made it available to the masses — in supermarkets, corner stores, taverns and liquor stores.

The result was a lottery craze.

In its first three months, New Jersey was forced to hold extra drawings to deal with mounting surpluses. The $73 million in first- year sales far surpassed early estimates of $20 million.

Politicians got caught up in the fervor. Under New Jersey law, at least 30 percent of lottery revenue goes to fund education and state institutions. The state quickly came to count on lottery money to fund a smorgasbord of educational and social-service initiatives — now some 20 programs administered by five agencies.

Since 1970, the lottery has produced $14.7 billion for state coffers.

The Critics

Nationally, New Jersey ranks near the top in its reliance on lottery revenue.

According to the Tax Foundation, a policy think tank in Washington, D.C., only three other states — Maryland, Massachusetts and Georgia — derive a greater percentage of revenue from lottery ticket sales.

As politicians recognized the lottery's importance, the agency seemed above reproach. Its most prominent critic was Assembly Speaker Alan Karcher, whose book "Lotteries" argued the games were a form of regressive taxation. But the book was published 15 years ago, and Karcher died in 1999.

"The system is exploitative, abuses the work ethic and taxes the poor," he told The Star-Ledger in 1990.

The New Jersey Lottery has not faced another critic like Karcher, but like lotteries across the country, its image remains a concern.

The lottery has DeMarco, its in- house public relations officer, but in 2003 it also hired the politically connected public-relations firm MWW Group for $330,000 a year. A requirement of the bid was to show how it could handle a crisis.

"We utilize the efforts of the PR firm and the advertising firm to ensure the public has not just the games ... but information" on how the money is spent, said Davis, the lottery's executive director.

At least one state lawmaker wants to know more.

Nellie Pou, a Democratic assemblywoman from Paterson, has introduced a bill that would require the lottery to break down sales by town, so lawmakers can see which areas spend the most.

Her concern: that low-income areas like Paterson are contributing more to the lottery than they're getting back.

Looking for the Green

Every month, as many as 100 retailers apply for a lottery "green machine." They must undergo financial and criminal background checks and pay a one-time $700 fee. (The only other cost is a $100 annual fee.) In the end, they are selected based on their location, hours of operation and expected sales volume.

In recent years, the number of retailers has remained steady at about 6,000.

A "green machine" can be a boon to business. Retailers get a 5 percent cut of sales. For the best, that can amount to $100,000 a year.

The Star-Ledger's analysis also found the lottery is far more likely to grant licenses to merchants with stores in lower-income neighborhoods. In ZIP codes where residents earn an average of less than $52,000, there are about four outlets for every 5,000 people. In ZIP codes where the income level is above $100,000, there are about two for every 5,000 people.

DeMarco, the lottery's spokesman, said locations are "in direct correlation with the number of other retail, business and service establishments in that same area."

But based on the population of residents and workers, a city like Bayonne, which has an average household income of $58,945, statistically could be expected to have 45 lottery retailers. Instead, there are more than 100.

At Pyramid Traders in Bayonne, there are two lines in the tiny store — one for the lottery and one for everything else. The lottery line is always longer.

Pyramid owner Mukesh "Mike" Patel said his lottery business is driven by regulars who "come three blocks that way and three blocks that way," pointing up and down Broadway with his thumb.

Minnie Venable is one.

The 65-year-old woman, who stepped up her lottery habit after she retired from a laundry company two years ago, stops at Pyramid at least twice a day. Sometimes, if she's feeling lucky, she'll stop in a third time.

"I love the lottery," Venable says over and over again.

She has reason to. She recently won $175,000 playing Jersey Cash 5, her favorite game. She had her kitchen redone with some of the winnings.

"This is my favorite lucky store," she says. "This is the lucky spot."

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