Editorial: Lottery winner beats the taxman, too

Not that we’re envious that some other Californian bought the lucky Powerball ticket that won one-third of the record $1.586 billion jackpot.

We wish that person happy trails, a following wind, and many lazy afternoons sipping umbrella drinks, assuming he or she didn’t forget the ticket was in a pair of dirty pants that ended up in the wash.

We’ve long thought that playing the lottery is a waste of money, though three decades after Proposition 37, the initiative that created the California Lottery, we shrug. If people want to spend a buck or $10 on a computer-generated paper dream, that’s their business. There are worse ways to waste money.

Old-timers will recall the 1984 initiative campaign that created the lottery. “And the kids win, too,” became Proposition 37’s tagline, a reference to the overstated claim that schools would reap a bonanza from lottery ticket sales. Anyone who thought the lottery would save the schools long ago realized the joke was on us. And it remains so.

Thanks to Sean Cockerham of McClatchy’s Washington bureau, we’re reminded that California’s newest multimillionaire won’t have to pay state income taxes on that $528.8 million bolt of unbelievably good fortune.

Lottery winnings are tax exempt, unlike money you might win at the poker table, or at the slots or on the ponies. Given California’s hefty income tax rate, whoever the Californian is who won the $528.8 million share can keep the $70 million or so that otherwise would have gone to the state treasury.

For that, we can thank the firm of Woodward & McDowell, the consultants who were responsible for Proposition 37 of 1984 and inserted the language mandating that “no state or local taxes shall be imposed upon the following: (a) The sale of lottery tickets or shares of the lottery.” It was one of the ways that lottery promoters found to inoculate the measure against attack from its hapless opponents.

Today, the Legislature couldn’t eliminate the lottery tax exemption if it wanted to. Voters would need to remove the tax break by initiative, since it was inserted into law by initiative, thanks to our wondrous direct democracy system.

The winner will, however, have to tithe unto the U.S. Treasury, and then some. Uncle Sam is nobody’s chump when it comes to collecting what’s due.

Under California Lottery rules, the 7-Eleven in the San Bernardino County enclave of Chino Hills that sold the winning ticket will receive a $1 million bonus. The business will have to pay state taxes on that money. About 40 percent of that payment will end up going to schools. So there’s that asterisk, at least, for California’s non-winners. Call it a consolation prize for the kids.

This story was originally published January 18, 2016 at 7:17 AM with the headline "Editorial: Lottery winner beats the taxman, too."