New Lottery Research Adds To A Growing List Of Concerns

When tested against the criteria for sound tax policy, lotteries fail.

"Lottery revenues ... seem to depend on massive advertising budgets. It's sponsored gambling. Many of us think that's an inappropriate message to be coming from government."

-Bill Lockyer, current State Treasurer of California

Citation: Alicia Hansen, "Gambling with Tax Policy: States’ Growing Reliance on Lottery Tax Revenue," Tax Foundation Background Paper, No. 54, July 2007, accessed at http://www.taxfoundation.org/files/bp54.pdf  (2 July 2007).   (Introduction)   (PDF paper) 

Important points emphasized by author:

• Extensive evidence shows lotteries are regressive, meaning the poor shoulder a disproportionate share of the tax burden.
• The lottery is not economically neutral: it distorts consumer spending by applying an unusually high tax rate to a particular product.
• It is a hidden tax, lacking transparency.
• Lotteries unnecessarily complicate the tax system.
• Lottery revenues do not always benefit the programs for which they are earmarked, and voters may feel deceived when they approve lotteries for education only to find that legislators shuffle funds and their states’ public education systems do not benefit significantly.
• Finally, the use of state-operated gambling monopolies to raise tax revenue poses seri­ous policy questions about government accountability.

Alicia Hansen, staff writer at the Tax Foundation, also authored “Lotteries and State Fiscal Policy,” Tax Foundation, Background Paper, No. 46, 1 October 2004, accessed at http://www.taxfoundation.org/publications/show/65.html . (Exec. Summary)  (PDF report) 

Other notable points:

• Two states started lotteries in the 1960s, 12 in the 1970s, 18 in the 1980s, six in the 1990s and five since 2000 (see Figure 1). Currently, 42 states and the District of Columbia have lotteries (see map on page 4, text on page 5).
• Table 1 (page 6) shows a state-by-state account of lottery approval (agency oversight, dates started, how the lotteries were authorized with percent voting in favor).
• Page 7 contains a table listing lottery revenue uses (i.e. sales, percent prizes, general fund, education, parks, etc).
• Figure 2 (page 10) shows a very interesting graph listing tax collections from states without lotteries, states with lotteries and state tax collections from states that enacted lotteries before 1980 (longer track record). Non-lottery states have lower per-capita state tax collections than states with lotteries. Compare per capita tax collections (FY 2004): Non-lottery States = $2,841; Lottery States = $3,525; States w/ Lotteries before 1980 = $4,066.
• Figure 3 (page 12) shows gross gambling revenues. The three largest sources of gambling revenue are commercial casinos (38.9%), Indian casinos (24.7%) and traditional (non-video) lotteries (23.4). If you include video lotteries with traditional lotteries, overall lottery revenue represents about 27 percent of all gambling revenues.
• Table 2 (page 13) shows lottery sales and profits from FY 2005. This table is extremely useful because it contains each state's lottery sales, profits, ranks by various categories, taxes, etc. Total lottery sales in the U.S. in 2005 were nearly $52.3 billion.
• On Table 2, note the five states with video lottery terminals (VLTs) and the much higher per capita spending (except for Oregon). States with VLTs ranked in the top four out of five states for per capita spending on lottery purchases:
• DE = $823.72
• RI = $1,518.33
• SD = $873.66
• WV = $770.96
• OR = $260.80*

* Exception, lower per capita spending with VLTs in Oregon. Massachusetts is also an exception for traditional non-VLT gambling, with high $700.40 per capita spending on traditional forms of lottery)

• Notice that 10 of the 42 lotteries – or a quarter of all lotteries – showed decline from 2004 to 2005. Lottery revenues are notoriously unstable and should not be sold to the public as subsidies for essential programs like education. Lotteries suffer jackpot fatigue, and they must always be re-invented with new schemes and promotions to maintain their popularity.
• Figure 5 (page 14) shows lottery sales by type of lottery game. Instant lottery tickets represent 49.5 percent of all lottery sales, by far the most popular traditional lottery purchase.
• Table 3 (page 16) contains revenue and expense statistics (for non-VLT states only, FY 2005).
• Hansen's comments on earmarked lottery revenue: "The most common program for which rev­enue is earmarked is education. Twenty-three states earmark all or part of their proceeds for public education, including elementary, secondary, col­lege and vocational education. (page 15)
• "… As will be discussed later, earmarked rev­enue tends to be fungible, and education does not benefit from lottery revenue as much as lottery sup­porters would have voters and lottery players believe…. (page 17)
• … Skeptics say that earmarking is at best ineffective and at worst a misleading political tactic to persuade voters to approve lottery refer­enda and play the lottery. Legislators can simply shuffle funds; lottery revenue allows them to use the money that would have been allocated for educa­tion for other purposes—sometimes referred to as the “lottery shell game…. voters may be misled when they approve lottery referenda or initiatives, and consumers may be misled when they play the lottery and assume that if they do not win, at least the money will benefit public educa­tion.”  (page 28)
• "… Lottery supporters continue to promote lotteries as a way of supporting public education, and voters seem to believe the promise." (page 29)
• Specific earmark-for-education failures (page 29):
• The president of the Montana Education Association stated that it was an “illusion” that lot­tery funds significantly benefited public schools.
• Georgia, which earmarks funds for its HOPE schol­arship program, revealed in 2003 that $1.8 billion worth of lottery proceeds that should have been used for education had instead been spent on other proj­ects …
• And in Florida, a school district budget director recently stated, “When we all voted for the lottery to go to education we thought it would be an enhance­ment but the lottery came in and replaced funding from other areas. It became a replacement.”
• Table 4 (pages 15, 17) "In FY 2004 the amount of money raised by lot­teries did not comprise more than about 6 percent of any state’s own-source (excluding transfers from other levels of government) revenue. (See Table 4) The amount ranged from a high of 6.15 per­cent in West Virginia to a low of 0.22 percent in Montana."

Additional Resources:

Gambling Research e-Library

Full National Gambling Impact Study Commission (NGISC) Report (see various information on lotteries)

NGISC - Cook and Clotfelter Lottery Studies

- Return to Lottery Information Home Page -  

Return to Gambling Information Home Page

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