Last week, the winning Mega Millions ticket-holder received the third-largest jackpot in U.S. history, minting a new billionaire in Florida. Well, technically if the winner opts for the lump-sum payment the net payout would be less than $500 million after paying federal taxes. Still, it’s not chump change. The Mega Millions and Powerball lotteries are designed to create large payouts. Last November a $2.04 billion jackpot was won by a single ticket, and since 2012 there have been twenty-five jackpots in excess of $500 million – an average of more than two hundred-million-dollar winners each year.[i]
States run lotteries for a very simple reason: they are a politically palatable way to raise a lot of money. People don’t consider them a tax because they are voluntary, and they like the idea that they could win a life-changing amount of money. And people are going to gamble anyway, right? The states might as well make some money on it. And boy do they make a lot of money. Total ticket sales in the U.S. exceeded $107 billion in 2022 and $105 billion in 2021, nearly doubling since 2009.[ii] Approximately 60% of ticket sales are paid in prizes to winners, leaving about 35% (after administrative and advertising fees) to the 45 U.S. states that run lotteries. According to Statista, states earned over $30 billion in revenues in 2021.[iii] That might not seem like a lot in a $23 trillion economy, but it really adds up at the state level. Lotteries raise a lot of money for the states that run them, and a few people have a chance at overnight riches. Where’s the harm? Let me count the ways. I don’t think you could design a worse way for the government to raise revenue.
Lotteries are highly regressive
Lottery money comes largely from the lowest income earners. The people least able to afford to, spend the most money – not only per capita, but as a percentage of their incomes. The poorest one-third of households buy one-half of all lottery tickets[iv] and, according to the New York Times, “people with a household income of less than $10,000 a year who play the lottery spend $597 a year on tickets.”[v] Let’s take Florida as an example. With one of the largest populations, it’s no surprise that Florida is at the top of the lottery revenue leader board. In 2022, Florida lottery sales totaled just over $9.3 billion, but Florida has one of the higher payouts in prize money (about 71%).[vi] [vii] After administrative fees, Florida nets about $2.23 billion. Given that the state’s overall budget for 2022 was $112 billion, lottery revenues accounted for about 2% of revenues. At the margins, 2% here and 2% there adds up. Florida prides itself on having no income tax (a reason so many people move there), and is currently running a substantial budget surplus – so much so that they are looking to cut taxes further. That means the state continues to suck money from its poorest residents via the lottery even though it doesn’t need the money to finance current expenditures. States like Florida attract wealthy residents thanks to no state income tax, while the poorest citizens help fund the state’s public schools (Florida’s lottery revenues are transferred to the Educational Enhancement Trust Fund).
Lotteries depress economic growth
Across the country, in 2022 more than $100 billion was sucked out of local economies – money that normally would have been spent at grocery stores, gas stations, and restaurants. Florida’s lottery website claims the majority of the money from the lottery “goes back into Florida's economy in the form of prizes to players.”[viii] But the funds don’t go back to the same communities that coughed up the money. Instead, the mega-payouts transfer needed resources to a single individual who is not likely to put the money back into the economy any time soon. This exacerbates inequality, which aside from being unfair, is also a long, slow road to economic suicide (see my post on how inequality depresses economic activity).
Lotteries are morally questionable
Lotteries are a form of gambling run by state governments. I have no problem with adults who choose to gamble, but it’s hard to argue that gambling builds character. Shouldn’t government policies promote thrift, industry, and the value of hard work? Do we really want the government to peddle fantasies about getting rich overnight? You could argue that people are going to gamble anyway, so the state might as well make some money off it. Of course, based on that logic, states could run saloons and strip clubs to make money, but that would belie the fundamental purpose of government. In the preamble to the Constitution, the founders stated that the government’s role was, among other things, to promote the general welfare. How is the general welfare served by relying on a highly addictive activity like gambling to fund essential services?
Can we make the lottery less harmful?
Realistically, lotteries are here to stay. State governments rely on them, and people like them. But a couple of changes could address some of the most economically detrimental aspects of the lottery.
First, all states should do what Florida claims to do: put most of the money back in the local economy – but not in one lump sum to a single winner. They should spread the wealth around by giving out many more jackpots in smaller amounts. Lotteries like Powerball and Mega Millions deliberately keep the odds of winning at astronomically high levels to create huge jackpots that spur buying frenzies. More, smaller jackpots might not create the same excitement, but if people start seeing frequent payouts of a few hundred thousand to a few million, they might be as likely to play.
Second, states should ensure that all winners of lotteries above a certain threshold (say, $100,000) should get some type of financial counselling. Billion-dollar jackpots can often do more harm than good to the winners. According to the National Endowment for Financial Education, 70% lottery winners go bankrupt within a few years.[ix] Any jackpot that radically changes the economic circumstances of the winner can leave them worse off unless they learn how to properly conserve their new-found wealth.
As part of the financial counselling, states (and the federal government) should provide tax incentives for using lottery winnings to start a business or pay for college (or fund college savings plans for children). That way the money that is being returned to the local community will actually be used to build a healthy economy, not create isolated cases of extreme wealth.
States need to raise revenue to fund their governments and provide services to their citizens. But the process of raising revenue should be done in a way that benefits all citizens and encourages healthy economic growth. Lotteries fail on both counts. If we can’t get rid of them, let’s at least reform them.
[i] https://www.madisontrust.com/information-center/the-25-biggest-us-lottery-jackpots-all-time/
[ii] https://www.statista.com/statistics/215265/sales-of-us-state-and-provincial-lotteries/
[iii] https://www.statista.com/statistics/249128/us-state-and-local-lottery-revenue/
[iv] https://www.desiringgod.org/interviews/how-the-lottery-preys-on-the-poor
[v] https://smartasset.com/taxes/the-economics-of-the-lottery
[vi] https://www.statista.com/statistics/388238/sales-of-lotteries-by-state-us/
[vii] https://www.yahoo.com/lifestyle/22-states-love-playing-lottery-110012669.html#:~:text=Florida&text=With%20%247.09%20billion%20in%20lottery,of
[viii] https://www.flalottery.com/whereMoneyGoes#:~:text=The%20majority%20of%20Florida%20Lottery,the%20lowest%20in%20the%20nation.
[ix] https://www.news4jax.com/features/2023/01/12/rip-up-the-winning-ticket-5-reasons-why-winning-lottery-can-destroy-lives/#:~:text=According%20to%20the%20National%20Endowment,of%20winners%20and%20their%20families.