Courts

Family North Carolina Magazine—May/Jun 2008

by Tami Fitzgerald

Lottery Appealed to State Supreme Court

Two years have passed since the North Carolina Education Lottery officially began selling lottery tickets, and the constitutionality of the Lottery Act’s passage is still being contested. The Lottery Act was passed in the last week of the 2005 Session of the General Assembly under questionable circumstances. Having been rushed through the House by former Speaker Jim Black in one day in April 2005 with a slim two-vote margin, the Lottery bill remained a threat in the Senate. The third day before the Session ended, detecting that two lottery opponents were out of town and unlikely to vote, Senate leadership quickly rushed the lottery bill onto the Senate floor and held two successive votes, ending in a tie that was broken by Lieutenant Governor Beverly Purdue. This was the culmination of months of lobbying by the lottery industry and Governor Mike Easley, with such great pressure being applied to some members of the General Assembly that they could not withstand the coercion.

Four months later, Charles Heatherly (a taxpayer), Rep. Paul Stam, Sen. Eddie Goodall, the Wake County Taxpayers’ Association, Tom Spampinato, and the North Carolina Family Policy Council filed suit in Wake County Superior Court seeking a declaratory judgment that the Lottery Act is unconstitutional because it was not passed in compliance with Article II, Section 23 of the N.C. Constitution. By design, the Constitution requires that “revenue bills” be passed with the deliberation that is required by actually “sleeping on it.” Such bills must receive two votes on two separate days in each chamber of the General Assembly, and the votes must be recorded so that taxpayers will know which of their legislators voted to raise their taxes. These are procedural checks and balances on the General Assembly’s power to tax that were ignored when the Lottery Act was considered, because those promoting passage of the bill knew that they might not be able to obtain the necessary votes on two separate days.

After the passage of the Lottery Act, Kevin Geddings, appointed to the State Lottery Commission by Black, was discovered to have worked for major lottery vendor, Scientific Games, for years and was convicted by federal authorities on five counts of fraud and sent to prison. Black’s former staff member and political director Meredith Norris pleaded no contest to state charges that she failed to register as a lobbyist in the 2005 session for Scientific Games, which she represented while continuing to work as Black’s unpaid political director. Black himself was the subject of a federal investigation that resulted in his resignation as Speaker, pleading guilty to federal corruption charges for accepting illegal campaign contributions in exchange for passing legislation favoring optometrists, and going to federal prison for a period of 5 years and 3 months. The investigations also resulted in former Rep. Mike Decker pleading guilty to federal conspiracy charges for being paid $50,000 and his son being given a job at the General Assembly in exchange for Decker switching his party affiliation from Republican to Democrat, resulting in a tie vote that retained Black as co-Speaker in 2003.

In the wake of all this corruption surrounding the lottery, the General Assembly passed a bill in the 2006 session setting up the Lottery Oversight Committee, whose job it is to meet at least four times a year to review how lottery revenue is being spent, to make sure it is supporting education and not supplanting other education funding, and to report its “analysis and any findings and recommendations” to the General Assembly every year by September 15th. This Committee, which is composed of nine members appointed from the general public equally by the Governor, Senate President Pro Tempore, and Speaker of the House, has never met—not once.

Not only is the General Assembly failing to carry out its duty to oversee the lottery’s funding of education, but the lottery itself has never performed up to expectations. The total amount generated from the state lottery during its first fiscal year of operation represented less than two percent of the state’s 2006-07 general fund budget and only three percent of the overall education budget. Lottery revenues came in nearly 25 percent below expected amounts, resulting in just $313 million earmarked for education, compared to the $425 million initially budgeted by Governor Easley and the General Assembly. As a result, state legislators budgeted only $350 million in net revenue from the lottery in the 2007-08 fiscal year. Even after lowering expectations for net revenue, lottery sales for the first seven months of the 2007-08 fiscal year have fallen below budget projections. Now, the projected revenues appear to have been just “pie in the sky” cooked up for the sake of getting the lottery passed.

Given the corruption and reduced revenues that have plagued the lottery’s first two years, a constitutional challenge to its validity provides hope for an end to the corruption and disappointing revenues. The lawsuit filed by the N.C. Family Policy Council and others in December 2005 was dismissed by Superior Court Judge Henry Hight on March 21, 2006, but an appeal of that dismissal has been pending ever since. The Plaintiffs filed a motion on June 15, 2006 asking the Supreme Court to take the case on discretionary review, thus bypassing the Court of Appeals. However, the Supreme Court denied discretionary review on December 15, 2006, so the Plaintiffs proceeded in the Court of Appeals, presenting oral arguments on May 22, 2007, but the Court delayed ruling on the case for ten months before handing down its decision on March 18, 2008.

A divided three-judge panel of the N.C. Court of Appeals upheld the constitutionality of the N.C. Lottery Act, ruling that the Lottery Act was not a revenue bill and did not, therefore, have to comply with constitutional provisions requiring that revenue bills receive two recorded votes on two separate days in the General Assembly before they become law.

All the parties to the lawsuit agreed in advance that the Lottery Act did not comply with Article II, Section 23 of the N.C. Constitution, so the case turned on a legal question of whether the lottery raises money on the credit of the State, pledges the faith of the State for the payment of a debt, or constitutes a tax, any of which would make the lottery a “revenue bill” subject to the procedural requirements of Article II, Section 23 of the Constitution.

Judge James A. Wynn wrote the opinion for the majority, which consisted of himself and Judge Robert Hunter, wherein he affirmed the Superior Court’s dismissal of the plaintiffs’ claims. He argued that the lottery does not raise money on the credit of the State or pledge the faith of the State for the payment of lottery winnings, because the Lottery Commission was established by statute as an “independent, self-supporting, and revenue-raising agency” and is separate from the State. In other words, the Lottery Commission created by the State to oversee the lottery operations is not a state agency. He argued that lottery winnings could only be paid out of lottery ticket sale revenues, not out of general state revenues, because the language of the Lottery Act did not expand a winner’s right to recover winnings from any other State revenues.

Judge Wynn also concluded that the lottery does not impose a tax because of the voluntary nature of participation in the lottery. He likened it to a toll, saying that: “A person uses a toll road at his option; if he does not use it, he pays no toll.” Judge Wynn said that the “revenue-raising purpose of the lottery is not the critical factor in determining if the Lottery Act imposes a tax.” Because buying a lottery ticket is voluntary, and is not levied or imposed on consumers, Judge Wynn concluded that it is not a tax. He distinguished it from a sales tax, because a sales tax is imposed on all members of the general population every time they make a purchase and is not voluntary. One who purchases a lottery ticket, said Judge Wynn, “receives the exclusive benefit of the right to a chance of winning the lottery prizes.”

Judge Ann Marie Calabria wrote a well-reasoned dissent emphasizing that because the legislature did not include language in the Lottery Act limiting lottery prizes to lottery revenues, it had raised money on the credit of the State and pledged the State’s credit for the repayment of lottery winnings. She argued:

“By selling lottery tickets, the State is contracting with purchasers for the opportunity to have a claim for State revenues, but it has neither dedicated an exclusive revenue stream from which they are to be paid nor has it limited its liability to such a revenue stream. As such, a prize winner may assert a claim generally against the State and thus the State has pledged its credit for payment of prizes. This fact alone makes the Lottery Act a revenue bill for purposes of Article II, § 23.”

Judge Calabria also criticized the majority for using the wrong test—the voluntary nature of purchasing a lottery ticket—to determine whether the lottery imposes a tax. She noted that the N.C. Supreme Court has adopted the prevailing test to determine whether an assessment is a tax outlined in San Juan Cellular Telephone Co. v. Public Service Commission of Puerto Rico, which calls for the consideration of three primary factors: (1) the entity that imposes the assessment; (2) the parties upon whom the assessment is imposed; and (3) whether the assessment is expended for general public purposes, or used for the regulation or benefit of the parties upon whom it is imposed. Judge Calabria found that the 35% net revenues allocated to the State by the Lottery Act constitute a tax, because: “First, the General Assembly imposed the assessment, and such enactments favor the finding of a tax…. Second, the assessment is imposed on every purchaser of lottery tickets….(‘An assessment imposed upon a broad class of parties is more likely to be a
tax … .’) … Third, the purpose of the assessment is to raise revenue for education programs which is a ‘general public purpose.’”

She distinguished the lottery tax from tolls and liquor fees, because those fees are generated to provide the service from which they are generated, whereas the 35% lottery payment to education is generated to provide a service totally unrelated to the lottery—public education. She concluded the Lottery Act is unconstitutional because its primary purpose is to raise general revenues, which makes it a “revenue bill” subject to Article II, § 23 of the State Constitution.

Since the Court of Appeals was divided, the plaintiffs have the right to appeal the decision to the N.C. Supreme Court. The North Carolina Family Policy Council and the other plaintiffs have made the decision to appeal, and they will continue to be represented in the case by the N.C. Institute for Constitutional Law. It will take several months for both sides to submit briefs, so a final resolution of Heatherly v. State is not expected any time soon.

Tami L. Fitzgerald is staff attorney with the North Carolina Family Policy Council.