Iowa is currently wrestling with the issue of so-called Touch Play Lotto machines, which have been installed in numerous bars, convenience stores, and restaurants throughout the state. Small business owners invested a little more than $7,000 for each machine, which gives them the privilege of selling a lottery-type product via a machine with bells and whistles. These machines resemble slot machines, but they are slightly different.
First, they dispense tickets, not cash. Second, their protocols for winnings are controlled by the lottery commission, rather than internal algorithms within the machine itself.
According to a story by Elizabeth Ahlin in today’s Omaha World-Herald (front page on the Iowa edition), there are currently more than 6000 of these machines operating in Iowa. Doing the math, that translates into private investment of more than $42 million. (The World-Herald reports total private investment of $130 million, based on the spokesman for the TouchPlay Coalition. The difference, which is significant, should be explored. The group, which is advocating the protection of this investment, would surely have an incentive to overstate it.)
The reason why business owners invest in these machines is quite clear: lottery officials predict that over the next fiscal year, consumers will drop more than $380 million into these machines. Of that amount, about $255 million will be returned as prizes (of course, income taxes can be expected to take away a significant percentage of that amount). Of the remaining $125 million, the state gets 24 percent or $30 million, leaving about $95 million for the industry to pocket. Even without my trusty calculator, I think that sounds like a pretty fast payback for the owners.
Doing some quick math, that means that the expected value of every dollar you put in to these machines is about 67 cents before tax effects. Assuming you report taxes on your winnings (as you should, good citizens), and further assuming that the average tax rate for state and federal taxes is a modest 25 percent, that expected value goes down further. Ultimately, you are only getting about 50 cents on the dollar. Would a rational citizen bet if they knew the odds were stacked against you two to one? Would a benevolent government choose to take money from its citizens in this way? Go figure.
The legislature is now coming to the realization that this may not be the best thing to have in every convenience store and restaurant in the state. For one thing, for those of you with kids who play video games, there is just something about electronic games that make us want to keep playing. That is bad enough if it is Super Mario Brothers and your kids are wasting their study time, but it is potentially disastrous if the mom and dad are wasting their grocery and rent money. Another dimension of this problem involves the matter of minors gambling – we proscribe them from entering casinos where slot machines are housed, but we can’t keep the under-21 crowd out of all the 7-11 stores, can we?
The big controversy brewing now is whether the state can take the right to use these away. My own prediction: they can, and without legal liability to the owners. I am not privy to all the facts, but unless there is a contractual right to operate for a period of time, the mere act of purchasing a good in reliance upon the stability of existing laws is generally not sufficient to protect you from legal change.
The message to small business owners who bought these machines: caveat emptor. You use them at the pleasure of the state. The law may be an ass for not giving you compensation, but that’s the risk one takes for dealing with a fickle government. At the least, I think the legislature should post warnings on all such machines: Using these machines is bad for your fiscal health.