Touchplay and the Iowa Cigarette Tax

Submitted by Nick Weltha on Thu, 06/21/2007 - 08:43.

In 2001, state legislators of the Administration and Regulation Appropriations subcommittee requested that the Lottery look for new sources of revenue that would not require a change in statues in order to help balance the State budget. The declining Iowa economy, mimicking the rest of the nation, was clearly impacting the state's tax revenues.

The solution came in the form of TouchPlay devices, which eventually went into testing in April of 2004, bringing in mediocre revenues. It wasn't until August, when testing at 20 gas stations and convenience stores occurred, that the potential was truly realized.

“The TouchPlay machines have performed well in the c-store market test, with the businesses that offer them and those businesses’ customers both appreciating a new entertainment option. The machines also are providing a valuable new revenue stream to the c-stores. The addition of TouchPlay machines in the c-stores has had an effect on the sale of some other lottery products there, but overall sales at stores involved in the test have increased – and increased at a higher rate than sales at the lottery’s other retail locations. Officials at the state Gambling Treatment Program report no calls to the gambling hot line related to the TouchPlay machines and no reports of underage use have been received.” (“Semiannual Report on Lottery Operations” – Nov. 2004 - Iowa Lottery)

The Iowa Lottery went on to report $1.5 million in revenue from the TouchPlay machines in fiscal year 2005, approximately 24% of the $6.4 million in revenue, the rest of which was spread among the operators, retailers, and distributors of the machines.

Things changed in 2006, where $27.3 million in state revenue was reported for the same machines (the machines were banned 10 months into this fiscal year). In fact, the Iowa Lottery had set performance-based goals for generating a total of $54.6 million in net revenue for the state. The percent increase was set at 4 percent for Lottery employees. Coupled with the state's inflation increase, this totaled 6 percent.

“The Lottery signed contracts with four manufacturers to produce TouchPlay machines for distribution in Iowa. The Iowa Lottery’s contracts with the manufacturers of the TouchPlay Machines specified that the Lottery would receive 24.0% of the net receipts in FY 2006, 27.0% in FY 2007, 30.0% in FY 2008, and 34.0% in FY 2009.” (“Fiscal Facts 2006” – State of Iowa)

The state clearly had incentive for these machines to continue operation. What changed their minds?

Causing even more trouble, the TouchPlay machines were not rejected, but banned in May of 2006. In this last year, 5 separate lawsuits (the fifth being tried in a federal court) have been filed against the state, with one recently guaranteed a jury trial. The state is likely to be forced to settle all suits, probably in the tens to hundreds of millions (though retailers and distributors claim to be owed about a billion) to offset the costs of the machines. Some owners are still paying up to $20,000 a month for machines that are no longer in use.

The proceedings that led up to the ban on TouchPlay machines consisted of a task force made up of six members, two of which were representatives of Casino and Riverboat representatives. One these two, Jane Bell, is a registered state lobbyist on behalf of Ameristar Casinos. It is not clear why they were asked to be a part of this task force, however their involvement was instrumental in ensuring that a TouchPlay ban was eventually settled upon. The Senate vote: 40-10, left the one distributor on the panel, Craig Cohoon of Moss Distributing, in a state of shock.

While many states have raised state cigarette taxes to improve health care, none have been successful in implementing what Chet Culver, governor of Iowa, has proposed: “universal health care” affecting 50,000 children and 6,000 adults (far short of the 300,000 uninsured in Iowa). Among his campaign promises during his gubernatorial campaign, this “universal health care” is quite inadequate and trite.

In order to solve the budget crisis and still get in his promise of health care, Culver is increasing the state tax from $0.36 to $1.36. The American Cancer Society predicts a $63 million increase in state revenues, accounting for lost smokers. Culver's plan costs $127 million.

Consider this, the expectations were for the current fiscal year of TouchPlay operations (2007) to have generated approximately $60 million in revenue. Scrambling to make up for this deficit, the legislature resorted to targeting smokers, ironically the same demographic of primarily low-income young non-voters, expecting the state's cigarette tax to bring in $150 million as opposed to the $87 million cigarette taxes would normally. The difference? $63 million. This is no coincidence.

However the non-partisan and non-public health Legislative Services Agency suggested an increase of $125 million would come from an increase in $1.00 per pack. They did, however, suggest that this increase does not account for tax evasion (jumping across the border to Missouri to buy smokes) and a decrease in the total number of Iowa smokers (habit-kickers due to the increase in price). It is not clear how the American Cancer Society came to their number, but it may have accounted for both these.

Sound fiscal policy is not substituting a voluntary tax for a psuedo-voluntary tax. The claims that the state will generate a total cigarette tax revenue of $150 million is a hefty tax burden on the 450,000-plus smokers in Iowa. Is this really a solution to a social ill, or a redistribution of wealth from the demographic of low-income cigarette smokers right back to them – minus the state bureaucracy costs? Many of the smokers in the state are not insured. Not only that, but those covered by the plan are under 19% of the total uninsured in the state and less than 2% of the population! Can the state of Iowa legislators truly suggest this is efficient redistribution of wealth?

Lastly, and probably most importantly, why is it that a 278% increase in the tax is only going to bring in a 72% (ACS) to 143% (LSA) in additional state revenues?

Sources:

http://www4.legis.state.ia.us/lfb/subcom/oversight/lottery_2006/TouchPla...

http://www.dom.state.ia.us/news/060308_TouchPlay/TouchPlay_report_noAppe...

http://www.drake.edu/journalism/IFOICWebSite/Whitepaper.html

http://www.multimediagames.com/Investors/ConfCalls/SecondQuarter2006.htm

http://www.bobkressig.com/downloads/286-1.pdf

http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20060610/NEW...

http://www.desmoinesregister.com/apps/pbcs.dll/article?AID=/20070330/NEW...

http://www.legis.state.ia.us/lsadocs/SC_MaterialsDist/2007/SDSJL008.PDF

http://staffweb.legis.state.ia.us/lfb/docs/fiscal_facts/Fiscal_Facts_200...

http://www.dom.state.ia.us/planning_performance/reports/Lottery.doc

http://www.ialottery.com/PressRoom/N02-01-07.html