As state legislatures assess their budget situations this spring, most of them have reason to be pleased. Earlier in the fiscal year, legislative offices in 48 of the 50 states characterized their revenue futures as either "optimistic" or "stable." One of the two exceptions was understandable: Louisiana, decimated by natural disaster, called its outlook "pessimistic," which may have been an understatement. But the other exception was a bit of a surprise. It was Rhode Island, which hasn't suffered any unusual setbacks in recent months, either environmental or economic.
Why the budgetary concern in the Ocean State? Well, it's a little complicated. It has to do with higher fuel prices but not in the way that you might predict. The problem is that when gas prices go up, drivers have less change in their pockets. And with less change, they purchase fewer lottery tickets. If energy prices stay high for long enough, they can begin to erode lottery revenues. Officials from Tennessee to New Hampshire reported a decrease in lottery sales last summer, and the decline became even more dramatic in the wake of the further spike in gas prices that followed Hurricane Katrina.
The falloff in gambling sales has been a minor problem in most states, but Rhode Island is something of a special case. Its lottery far outsells that of any other state in terms of per-capita revenue. In 2004, per-capita sales in Rhode Island were nearly double those of the next highest state, South Dakota. In fact, despite its small size, Rhode Island is 13th in the nation in lottery sales. It's one of a handful of states where lottery and gambling revenues account for more than 10 percent of total state revenue. Gambling has now surpassed corporate income taxes to become the state's third-largest source of revenue, behind taxes on sales and personal income.
So, as gas prices have continued to rise, fiscal forecasters in Rhode Island have had to re-evaluate lottery revenues. In November, they reduced the revenue estimate for the current fiscal year by $25 million, an adjustment of about 7 percent. That won't bankrupt the treasury, but it does illustrate the problems posed by relying disproportionately on a single revenue source. Moreover, it may point to some risks inherent in dependence on gambling. When people stop betting, the state loses. And as Rhode Island has learned, they can stop betting for a whole variety of unexpected reasons.