DALLAS -- If Texans vote next Tuesday to legalize a lottery, the biggest winner is likely to be the state, which is counting on an estimated $461 million in lottery profits to balance the budget for the next two years.

The losers will include hundreds of Texas cities and counties.

Assuming that the constitutional amendment is approved, the state estimates that $1.3 billion of pocket money may go to lottery tickets rather than movies and other taxable entertainment.

And, according to state figures, that could mean an annual drop of $8.6 million or more in localities' share of state sales tax revenues.

State officials say municipalities will hardly feel the hit. "When you spread it over all the local governments, it's not a lot of money," said Deputy Comptroller Billy Hamilton. "They may see it differently."

Local officials have not protested, but analysts say scores of small communities could suffer even if they lose just a few thousand dollars a year.

"There is no doubt that local governments will lose revenue at the expense of the state," said Fiona Sigalla, an associate economist at the Federal Reserve Bank of Dallas who has studied the lottery proposal. "Given the financial burden that local governments are under right now, every little bit counts."

Tom Plaut, chief revenue estimator for the Texas comptroller's office, calculated the estimates for the bite a lottery would take out of sales tax receipts.

He figured the localities' loss by calculating how much revenue the 1.5% levy -- the average local share of the 8.25% Texas sales tax -- would generate on the $1.3 billion expected to shift from taxable entertainment to the lottery. Large cities such as Dallas have a 2% sales tax share and even more to lose.

However, those estimates may be conservative, since Texas expects its lottery to grow to $1.6 billion a year by 1996. Lottery experts say the nation's third most populous state could expect to run a $2 billion-a-year program, like those in California, Florida, and New York.

If that happens, the loss to local government could double the $8.6 million now forecast.

Still, most local officials are not yet concerned that a lottery could benefit the state at the expense of their hard-pressed budgets.

"We haven't really had the opportunity to run any numbers on that," said Debra Forte, finance director of Euless, Tex., and president-elect of the Government Finance Officers Association of Texas. "As things progress, we'll be forced to look at it."

When the Texas Municipal League met last week in Fort Worth, none of the officials present were worried about local budget fallout from the lottery.

"I don't know of a single city official who has even raised a concern about the lottery," said Frank Sturzl, executive director of the league. "If it was on their mind, they would have said something."

Nationally, advocates for local government say they have never studied the effect on local revenues of the country's $20.6 billion in lottery spending. In some states, the lottery is supported by local government because they share in any profits. For instance, in Colorado, where cities count on sales taxes for up to 65% of their revenues, there are no complaints eight years after the state lottery began.

One reason may be that the state has given local government in excess of $100 million for parks programs since the lottery began, including $16 million last year alone.

Lottery advocates say there is little protest because any impact is slight and nearly impossible to measure.

"Undoubtedly there i some loss because of the way that disposable entertainment dollars are spent, but I think it is negligible," said Bill Bergman, executive director of the North American Association of State and Provincial Lotteries. "People will still go to the movies. They don't make a decision of whether to play the lottery or go to the movie."

There is no disagreement over how profitable lotteries are. Since New Hampshire started the first program in 1964, Mr. Bergman said that lotteries have generated $58 billion for states. This year alone, lotteries are expected to have total revenues of $20.6 billion with profits of $7.8 billion in 33 states and the District of Columbia.

When lawmakers passed the $60.1 billion two-year, all-funds budget this fall they did so without implementing an unpopular income tax. But balancing the budget required higher taxes and fees, including a projected $461 million expected from a new lottery.

If voters turn down the lottery, something that recent popularity polls indicate is unlikely, state officials say they will balance the budget with a 2.3% spending cut.

"If the lottery goes donw, then there will be an across-the-board reduction of $461 million," Mr. Hamilton said. "We've encouraged people to make contingencies just in case."

Also, the Legislature could come back in special session to rebalance the budget with a combination of selective spending cuts or revenue increases.

While taxpayers may be happy that a lottery helped avoid the need for a state income tax, Wall Street analysts have their doubts about relying on generally uncertain gaming revenues.

George Leung, managing director for state ratings at Moody's Investors Service, said that states have generally only dedicated lottery funds for nonrecurring expenses or to enhance programs like education.

If Texas has earmarked its money for the general fund and not for any specific program, could that affect the state's double-A rating? "It depends on how they structure the use of the lottery revenues," Mr. Leung said. "A very conservative approach is most desirable."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.