NJ Applies Retroactive Tax To Lottery Winners

When New Jersey Governor Corzine and the legislature were scrambling to find ways to fill the holes in their budget, it was clear that they wanted to utilize “sin” or “vice” taxes as much as possible. Unlike income taxes which affect everyone, sin taxes only affect people who engage in certain behaviors. The behaviors considered “sinful” vary from state to state but generally include drinking and smoking. New Jersey, however, added another vice to the list: gambling.

Yes, gambling. But not the Atlantic City quarter slots kind of gambling (yes, I said quarter slots can you tell that I’m not a risk taker?).

A more sinful, sinister kind of gambling: playing the lottery.

Beginning in 2009, New Jersey will begin taxing lottery winnings – something the state has never done before – at a maximum rate of almost 11%. I know what you’re thinking: “taxgirl, beginning in 2009? Aren’t you a little late to the party? It’s July.”

Yes, I know it’s July. The law took effect July 1 but lottery winners are taxed on the winnings retroactively to January 1. That has some lottery winners furious.

But players dollar scratch cards can relax a little: only prizes of more than $10,000 will be affected. Tax rates will begin at 1.4% and increase to 10.8% depending on the amount of winnings. Other tax provisions based on filing status, etc., will apply.

While lottery winners are outraged over the new law, including recent winners of the Mega Millions jackpot, the state is fairly confident that the law will stay “as is.” The reality is that lottery winners make up a small percentage of the state’s voters taxpayers and it’s not a cause that many citizens will rally around. The state is betting (pun completely intended) that a tax increase on the beneficiaries of what’s considered a stroke of luck will not earn much sympathy from taxpayers who are already concerned about their own tax burdens.

What do you think? Fair or no?