Killer Kane

Here's a description of the 1939 movie serial Buck Rogers which often ran on New York television when I was younger.

A pilot [Buck Rogers] and his young passenger crash-land on a mountaintop and are put into suspended animation by a strange gas. They awake 500 years later to discover that the Earth is now ruled by a tyrannical despot called Killer Kane, and they lead a fight to overthrow him.

After only a month in office, Pennsylvania's new Democrat Attorney General Kathleen Kane is giving Republican Governor Tom Corbett a bad case of hemorrhoids. First, she negotiated an agreement with Florida to close the “Florida loophole,” which had allowed Pennsylvanians who were denied permits to carry concealed weapons to obtain them from Florida. Then she announced the appointment of a special prosecutor to investigate Corbett's handling of the Jerry Sandusky case while he was Attorney General. Critics have alleged that Corbett delayed prosecuting Sandusky until after he was elected Governor in order to avoid a backlash from Penn State football fans. On Thursday, she thwarted Corbett's plan to privatize the state lottery by invalidating his agreement to turn over its management to Camelot, a British firm.

Camelot had pledged to bring the state $34 billion in revenue in 20 years, largely by allowing internet gambling and introducing the game of keno, a lottery-type game sometimes referred to as “bingo on steroids.” But the state lottery, now managed by state employees, made over $1 billion in profit last year, so the guaranteed gain in revenue under the Camelot contract is only 70%. Couldn't the current lottery employees bring in that much extra revenue if they were allowed to offer keno? For its part, Camelot celebrated the new deal by opening its U. S. corporate headquarters in Delaware to ensure that it would not have to pay Pennsylvania income tax.

Ms. Kane gave three reasons for declaring the Camelot contract illegal:

• Signing the contract was “an unlawful extension of executive authority” by the Governor.
• The state law which created the lottery does not authorize the development of “monitor-based games such as keno.” A monitor-based game is one which is played at a computer terminal and does not require human intervention.
• A provision by which the state is required to compensate Camelot for “indirect expenses” is too broad and undefined.
  
  

It's hard to predict how this will be resolved. It may depend on the court's interpretation of statutory language. Kane's second reason resonated most strongly with me. This seems to be a substantial escalation in the state's ability to take advantage of its citizens. The plan is to put computer gambling terminals in bars, restaurants and convenience stores all over Pennsylvania. This differs from present casino gaming since you don't have to go to a casino; you can play at the corner store. It differs from the lottery in that you can play almost continually, rather than the current twice a day. And most importantly, it's keno, a game which has proven popular and addictive.

While the rules governing keno in Pennsylvania have not been announced, in Maryland, the house edge in keno—the extent to which the odds favor the state—is 42.5%. The expected value of a dollar spent on keno is $1 minus the house edge, or 57.5 cents. This can be compared to a house edge of 15% for slot machines, 5.26% for roulette, and only .46% for video poker.

Current state lotteries also offer very poor odds for the player. They pay out about 55% in prizes—very similar to keno. Operating expenses consume 12% of the funds, and the remaining 33% go to the state. Clotfelter and Cook, whose book, Selling Hope, is the definitive work on state lotteries, refer to this 33% as an implicit tax, since it is essentially a tax on playing the game. It is higher by percentage than state taxes on liquor and cigarettes.

If the odds of winning are bad, why are lotteries so popular? One theory is that people who should know better treat games of chance as if the outcome were partially determined by skill, and fall victim to an illusion of control over their outcomes. Another theory is that people have difficulty calculating their odds, but advertising showing happy winners encourages them to visualize being a winner. Since the availability of winning is increased, people overestimate its likelihood. However, the most important attraction of keno may be large prizes. Studies of multistate lotteries have shown that participation goes up as the jackpot increases.

Who plays the lottery? Surveys show that about 60% of adults in lottery states play, spending an average of $75 a year. But 5% of citizens account for 54% of total sales and spend almost $4000 a year, suggesting that gambling addicts disproportionately support the system. Expansion of gambling will increase the need for state services to help these people and their families. Men are more likely to gamble than women. As education goes up, gambling goes down. Most importantly, studies consistently show that lower-income people spend a higher percentage of their income on state lotteries than middle class or rich people. Therefore, gambling is a regressive tax, a tax that increases the already large disparity between the rich and the poor.

State lottery profits are often earmarked for specific purposes, such as education, or, in Pennsylvania, services for senior citizens. This can be a way of manipulating the public to accept a policy they might otherwise question. For example, when Governor Corbett announced the Camelot agreement he said that expansion of gambling was necessary because in 17 years, one in four Pennsylvanians will be over 60, and the state needs a larger and more reliable funding stream for them.

However, Clotfelter and Cook have found that earmarking lottery funds for a specific purpose seldom results in any change in the amount of money the state actually spends for that purpose. If the lottery brings in more money than anticipated, the money goes into the state's general fund, rather than providing a windfall for education, senior citizens, or whatever the earmark is. However, there is a potential danger should lottery proceeds be lower than expected, since it may give the state legislature an excuse to cut back on spending for the earmarked purpose.

I have no moral objection to gambling. However, most theories of government propose that the state has a responsibility to make its citizens' lives better. It's hard for me to see the Camelot contract as fulfilling that purpose. Maybe Killer Kane is doing us all a favor.

Damned If They Do . . .

A month ago, when I commented on Pittsburgh's property reassessment controversy, there was some evidence from a small sample of three streets that the new values still favored the wealthy and discriminated against the poor. Rich Lord of the Pittsburgh Post-Gazette has done a more complete analysis of the reassessments, and the results are as I suspected.

For non-Pittsburghers, let me back up a step. Allegheny County property had not been reassessed since 2002. Failure to do regular reassessments discriminates against low income residents, whose property values are usually stable or declining, while giving a tax break to higher income residents living in areas where property values are on the rise. A coalition of low income homeowners filed suit to force a reasseesment and won. Judge Stanton Wettick ordered that 2012 taxes to be based on the new values. These new values were sent to Pittsburgh homeowners in December, causing much wailing and gnashing of teeth. When Allegheny County Executive Rich Fitzgerald argued that there was not enough time for the appeal process to run its course, Wettick backed down and gave county residents another year of the old values.

The problem is that the new values are also regressive. A regressive tax is one in which the tax rate goes down as the real value of the property subject to taxation increases. Therefore, the burden of taxation falls more heavily on the poor than the rich. Lord found that the reassessment systematically overestimated the value of low-priced land and buildings, while underestimating the value of higher-priced properties.

Lord analyzed 2099 “arms-length” sales that took place in 2011. An arms-length sale is one in which the buyer and seller have no prior relationship to one another. If a prior relationship exists, as when a home is sold to a relative, the sale price may not reflect the true market value of the property. The reassessed values were divided by the sale prices of these same properties to yield a percentage. So, for example, a score of +50% means that the reassessed value of the property is 50% higher than the sale price, as when a home that sold for $50,000 is assessed at $75,000. Here are the percent differences, aggregated by to the sale prices of the properties.

Sale price	% difference between assessment and sale price
$5,000 to $19,999	+295%
$20,000 to $39,999	+134%
$40,000 to $74,999	+56%
$75,000 to $99,999	+17%
$100,000 to $149,999	-3%
$150,000 to $249,999	-17%
$250,000 to $999, 999	-31%

As Lord points out, the houses that sold for between $100,000 and $150,000 are pretty accurately assessed, but the more valuable properties are underassessed. The greatest unfairness, however, occurs among the low-value properties, which are assessed at much more than they are worth. However, an undervalue of 30% on a $500,000 property is worth a lot more money to the owner and a lot more tax revenue to the county than an overvalue of 30% on a $50,000 property.

Click here for a more complete table, showing how these percentages differ by wards within the city. In the interest of full disclosure, I should note that I live in Highland Park (Ward 11), and as would be predicted from the table, our home is assessed at less than we paid for it in 2009.

The reaction to the P-G study of Wesley Graham, the county's acting chief assessment officer, is instructive. He complained that they had not verified that all 2099 sales were between independent parties. Presumably, there could have been some undetected sweetheart deals among the properties with lower sale prices. I must confess, I'm also concerned about including extremely low-end properties in the analysis. Some sellers may have been trying to unload run-down properties by selling them at below market value. However, even if we disregard the top two rows of the table, the figures are still quite persuasive.

Mr. Graham also said that the reassessment values meet industry standards for fairness and consistency. It's not clear from the article what percentage of deviation from the sale prices the industry considers acceptable. Regressive property taxes may be more common than is generally acknowledged. Many years ago, I had a sociology professor who told our class that tax assessment was one of the most important but overlooked ways in which poor people get screwed in this country. He argued that tax assessments are almost always regressive, or as he put it, the assessment curve is always flatter than the curve describing the real value of the properties. (I remember this well because I had a summer job working for a tax assessor at the time.) The people who profit from this are not only people with expensive homes, but also the owners of commercial property, which is almost always undervalued. Does anyone know of any good national studies of this problem?

Why are property values almost always regressive? Dominic Gambino, former manager of the Office of Property Assessments, said, “It's very hard to catch those quickly appreciating properties.” He didn't explain why the P-G could catch them while the county couldn't. One of Mr. Graham's comments may have been closer to the truth. He said assessors are “a little gun-shy about putting on the value that they're seeing” on high-end properties. Could it be that they know that affluent people are more likely to appeal their assessments than poorer people?

The Post-Gazette also reported some anecdotal evidence that suburban assessments, which have not yet been posted on the web, are also regressive. For example, property values in low income communities like Braddock and Duquesne appear to have increased more than those in wealthier suburbs like Monroeville and Plum.

Chris Briem has pointed out that, in spite of their bias, the new values are more accurate than the 2002 figures. Whether the county uses the old assessments or the new ones, however, it looks like the poor will always be shortchanged.