Proponents of lotteries mostly use economic arguments to justify their positions. Lotteries provide state governments with a relatively easy way to enhance their revenues without imposing more taxes. Lotteries are also financially beneficial to the many small businesses that sell lottery tickets and to larger companies that participate in merchandising campaigns or provide advertising or computer services. Finally, lotteries provide cheap entertainment to people who want to play, while raising money for the betterment of all.
Lottery opponents also have economic arguments. They contend that the role of lotteries in funding state programs is actually quite small. Lotteries contribute only a small percentage of total state revenues. In addition, they cost money to advertise and operate. Lotteries lure people into parting with their money under false hopes. Opponents contend that those targeted come particularly from lower income brackets and may not be able to afford to gamble.
THE DIVISION OF LOTTERY MONEY. Lottery money can be categorized as sales, prizes, administrative costs, retailer commissions, and state profits. The sales amount is the total amount taken in by the lottery. In general, 50–60% of U.S. lottery sales are paid out as prizes to winners. Administrative costs for advertising, employee salaries, and other operating expenses usually account for 1–10% of sales. On average, retailers collect 5–7% of sales in the form of commissions and approximately 2% as bonuses for selling winning tickets. The remaining 30–40% of sales is profit turned over to the state.
U.S. state lotteries had approximately $45 billion in sales for fiscal year 2003. A fiscal year is defined differently from state to state, but in most states it runs from July 1 to June 30. Thus, fiscal year 2003 is the twelve-month period from June 30, 2002, to July 1, 2003. According to the NASPL national sales were up 6.8% in fiscal year 2003 from the previous year's sales of $42.4 billion. By comparison sales increased by 9% from 2001 to 2002.
According to sales figures reported by the NASPL for fiscal years 2001 through 2003 for each state, the District of Columbia, and Puerto Rico, nine states reported declining sales for 2003 compared to 2002. These states were California, Colorado, Connecticut, Delaware, Illinois, Louisiana, Massachusetts, Minnesota, and Vermont. Delaware had the sharpest decline (6.8%). By contrast four jurisdictions that were operating lotteries in 2002 and 2003 had sales increases in excess of 20%. These were West Virginia (up 27.5%), Puerto Rico (up 26.4%), Florida (up 23.1%), and Missouri (up 21.1%).
According to the NASPL during fiscal year 2003 New York had the highest lottery sales ($5.4 billion), followed by Massachusetts ($4.2 billion) and Texas ($3.1 billion). These three states accounted for 28% of national lottery sales. In total fifteen states had lottery sales in excess of $1 billion during 2003.
According to La Fleur's, total U.S. sales for all lotteries from the time of their inception through fiscal year 2003 add up to $556 billion. About $296 billion was paid in prizes over the same period, and $191 billion was collected by state governments.
The New York lottery has the largest cumulative sales, $57.6 billion since its inception in 1967. It has also achieved the highest profits of any state government (nearly $23 billion). New Jersey had the highest percentage return to any state government from a lottery (41%). Massachusetts has paid out the most in cumulative prizes (nearly $31 billion).
The states allocate their lottery profits in different ways. Table 7.6 describes each state's cumulative allocation of profits from each lottery's inception to June 2002. The list does not include lotteries that began during or after 2002 (South Carolina, Tennessee, and North Dakota).
RETAILER PAYMENTS. According to La Fleur's, the average prize payout from each state lottery's inception to fiscal year 2003 is 53% of cumulative sales. The average state profit is 34%. Thus, administrative costs and retailer payments account for an average of 13% of cumulative lottery sales.
The primary means of retailer compensation is a commission on each ticket sold. In other words, a lottery retailer keeps a certain percentage of the money taken in from lottery sales. Most states also have incentive-based programs for retailers that meet particular sales criteria. For example, the Wisconsin lottery pays retailers a bonus for increasing ticket sales by particular amounts. The state implemented the program in January 2000 in response to declining sales and a drop in the number of lottery retailers. Lottery officials believe that the incentive program is more effective than an increase in retailer commission at increasing sales. The incentive program encourages retailers to ask customers if they would like to buy lottery tickets. Retailers that sell a winning ticket in Wisconsin receive 2% of the value of the ticket (up to $100,000).
UNCLAIMED LOTTERY WINNINGS. It is estimated that unclaimed lottery winnings add up to hundreds of millions of dollars each year. In early 2004 the California lottery
Cumulative distribution of state lottery proceeds as of June 30, 2003
(in millions of dollars)
Health and welfare
Protection and safety
Economic Development Fund
Inspection and regulation
Local Transportation Assistance Fund
County Assistance Fund
Clean Air Fund
Court Appointed Special Advocate Fund (unclaimed prizes)
State General Fund
Capital Construction Fund
Division of Parks and Outdoor Recreation
Conservation Trust Fund
Great Outdoors Colorado Trust Fund
General Fund (to benefit education, roads, health and hospitals, public safety, etc.)
Education Enhancement Trust Fund
Capital outlay and technology for primary and secondary schools
Public schools (K-12)
Illinois Common School Fund (K-12)
Build Indiana Capital Projects Fund
Teachers' Retirement Fund
Police & fire Pension Relief Fund
License Plate Taxes
Property Tax Fund
Job creation/economic development
Iowa Plan (economic development)
CLEAN Fund (environment and agriculture)
Gambler's Treatment Program
Economic Development Initiatives Fund
Correctional Institutions Building Fund
County Reappraisal Project (FY 88–90)
Juvenile Detention Facilities Fund
State General Fund (FY 1995–2003)
Problem Gambling Grant Fund
Post-secondary & college scholarships
Affordable Housing Trust Fund
Literacy programs & early childhood reading
Outdoor Heritage Fund
Subdivisions (for one year only, FY 1984–85)
Cities and towns
Environmental and Natural Resources Trust Fund
Game & Fish Fund
Natural Resources Fund
Other state programs
General Revenue Fund (1986–1993)
Study of socioeconomic impact of gambling
Solid Waste Landfill Closure Fund
New Hampshire (1964)
New Jersey (1970)
Education and institutions
New Mexico (1996)
Public school capital outlay
Lottery Tuition Fund
SOURCE: Adapted from "NASPL: Where the Money Goes," in NASPL: Where the Money Goes, North American Association of State & Provincial Lotteries, 2004, http://www.naspl.org/benefits.html
New York (1967)
Natural resource programs
Rhode Island (1974)
South Carolina (2002)
Education Lottery Fund
South Dakota (1989)
Capital Construction Fund
Property Tax Reduction Fund
Foundation School Fund
General Fund (FY 1989–98)
Direct aid to public education K-12 (FY 1999–present)
Literary Fund (primarily for school construction additions and renovations)
Debt set-off collection
Seattle Mariners Stadium
King County Stadium and Exhibition Center
Literacy programs: 27,000 new children's books
Local food banks: 27,000 new children's books
West Virginia (1986)
Bonds covering profit areas
• Public benefit such as property tax relief
Total – US
turned over more than $15 million from an unclaimed lotto jackpot to educational programs in the state. According to the California lottery more than $530 million in unclaimed prizes have been forwarded to public schools since 1985.
Unclaimed winnings are allocated differently by each state. Some states require by law that unclaimed winnings be returned to the prize pool. This is the case with the New York lottery. Other states allocate such funds to lottery administrative costs or to specific state programs. For example, the Texas lottery turns over unclaimed prizes to funds that benefit hospital research and payment of indigent health care.
STATE BUDGETS. Lottery revenues make up a very small portion of state budgets. One study (Charles T. Clotfelter et al., State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission, 1999) found that lottery revenues comprise anywhere from 0.67% to 4.07% of their states' general revenue. The average portion was approximately 2.2%. This compares with an average of 25% each for general sales taxes and income taxes.
TAXES AND OTHER WITHHOLDING FROM LOTTERY WINNINGS. Lottery winnings over a certain value are taxable as personal income. All prizes awarded greater than $600 are reported by the lotteries to the Internal Revenue Service. In general, the lottery agencies subtract taxes prior to awarding large prizes. For example, the New York lottery withholds federal, state, and local income taxes on prizes greater than $5,000. The lottery withholds 25% for federal taxes and 7.7% for state taxes from prizes greater than $5,000 won by U.S. residents. An additional 4.45% is withheld if the winner is a New York City resident. Non-U.S. residents face even higher tax withholding rates.
In addition, the New York lottery is required by law to subtract past-due child support payments and collect repayment of public assistance from prizes of $600 or more.
In June 2002 the South Carolina lottery launched a new online game called Carolina 5. The game was unique because the $100,000 jackpot featured prepaid taxes. This was the first online game to offer a tax-free jackpot.
Lottery proponents often advocate lotteries for their economic benefits to education. Some lotteries dedicate a portion of their profits toward K–12 or higher education. Concerns have been raised, however, that these profits are not additional dollars for education but simply replace general fund dollars that would have been spent on education anyway.
In April 2004 mathematics professor Donald Miller of Saint Mary's College in Indiana argued in a USA Today article that educational spending per student gradually decreases once a state starts a lottery ("Schools Lose Out in Lotteries," April 15, 2004). The finding is based on examination of data from 1965 to 1990 for twelve states that enacted lotteries for education during this time. According to Miller, average pre-lottery spending increased each year by approximately $12 per student in these states. Post-lottery spending showed a huge increase in the immediate years following lottery initiation. On average the states increased their education spending by nearly $50 per student. However, the increase fell sharply in following years and eventually lagged behind states without lottery-generated education funds. Miller blames the problem on legislators using lottery funds "to replace rather than add to existing sources of education funding."
A 1999 study conducted by researchers at Duke University for NGISC calls earmarking lottery proceeds for education "an excellent device for engendering political support for a lottery." However, the study noted that it was doubtful that earmarked lottery revenues actually increase the funds available for specific programs. Some lottery funds earmarked for education just replace other funding sources. This is not true of programs initiated solely with lottery money, like Georgia's HOPE scholarship program.
THE HOPE SCHOLARSHIP. Begun in 1993, the Georgia lottery funds three educational programs:
The HOPE scholarship program
A voluntary pre-kindergarten program
Grants to train teachers in advanced technologies and capital outlay projects for educational facilities
HOPE stands for Helping Outstanding Pupils Educationally. HOPE scholarships and grants are available to Georgia residents who enroll in certain programs at public and private institutions in the state. Students must have at least a B grade average to qualify for HOPE money in the first place and to maintain their eligibility in subsequent years. Most recipients are recent high school graduates who pursue college degrees.
At public colleges, the HOPE Scholarship pays for tuition and fees and provides a $300 book allowance per academic year. Room and board expenses are not covered. At private colleges, the HOPE Scholarship provides $3,000 per academic year to full-time students, plus students can qualify for the Georgia Tuition Equalization Grant (GTEG) of $900 per academic year. Part-time students attending private colleges are eligible for $1,500 per academic year, but do not qualify for the GTEG.
During its first ten years of operation the lottery provided approximately $2.5 billion to the HOPE scholarship program, $2.1 billion to the pre-kindergarten program, and $1.8 billion to the remaining programs.
As of August 2004 more than 800,000 students have received HOPE scholarships. HOPE is the country's largest state-financed merit-based aid program and is credited with significantly increasing the attendance of instate residents at Georgia colleges. Similar programs include Kentucky's Educational Excellence Scholarship and New Mexico's Lottery Success Scholarship.
Think of lottery winnings just like other income—except you don't have to work for it.
—Charles T. Clotfelter et al., State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission, April 23, 1999
Lotteries are undeniably a cultural and social phenomenon. They are operated on every continent around the world with the exception of Antarctica. In the United States, lotteries enjoy unprecedented popularity in the gambling realm. They are legal in forty states and generally considered a benign form of entertainment with two enormous selling points. First, they seem to offer a shortcut to the "American Dream" of wealth and prosperity. Second, they are a voluntary activity that raises money for the public good in lieu of increased taxes. Lottery opponents generally base their objections on religious or moral reasons. Some people consider all forms of gambling to be wrong, and state-sponsored lotteries may be particularly abhorrent to them.
The NGISC final report of 1999 complained about the appropriateness of state governments pushing luck, instant gratification, and entertainment as alternatives to hard work, prudent investment, and savings. Such a message might be particularly troubling if it is directed to lower-income people.
Because online lottery tickets are so widely circulated, lottery officials in several states have decided to use them as a means to spread critical information. The Amber Alert message system is used around the country to notify the public via television, radio, and electronic billboards about abducted children. Lotteries in several states have all agreed to use the message system to alert ticket buyers about abducted children.
UNDERAGE PLAY. The legal minimum age to play the lottery varies by state from eighteen to twenty-one. However, numerous studies have shown that children and adolescents are buying lottery tickets. A 1999 Gallup poll on gambling found that 15% of adolescents age thirteen to seventeen had purchased a lottery ticket in the previous year.
Similar findings are reiterated in other surveys. Dr. Martin Lazoritz and his colleagues interviewed 1,051 Florida teens over the phone about their gambling habits. (Parental permission for the interviews was obtained first.) The Florida researchers reported at the October 2002 meeting of the American Academy of Child and Adolescent Psychiatry that 18.5% of Florida adolescents (age thirteen to seventeen) surveyed had purchased a lottery ticket at some time in their lives. In addition, 12.5% of the respondents had purchased a lottery ticket during the previous year. (The results also appear in the study Teen Gambling: Evidence from the University of Florida's Statewide Epidemiological Study.)
The NGISC reported in 1999 that 47% of seventh-graders in Massachusetts had played the lottery. The commission developed seven advertising recommendations for lottery officials to discourage underage play:
The legal minimum age should be posted at lottery points of sale.
Lottery advertising should not be directed primarily toward minors.
Lottery advertising should not contain symbols or language primarily intended to appeal to those under the legal minimum age.
Animated characters used in lottery advertising should not have any association with television programs and movies geared toward children.
Celebrities who would primarily appeal to minors should not be used in lottery advertising.
Lottery advertisements should not picture people that are or appear to be minors.
POVERTY AND RACE/ETHNICITY. One of the most common criticisms leveled against state lotteries is that they unfairly burden the poor—they are mostly funded by low-income people who buy tickets, but benefit higher-income people for the most part. In economics terminology, a tax that places a higher burden on lower-income groups than higher-income groups (in terms of percentage of their income) is called a "regressive" tax. Although the lottery is not really a tax, many people consider it to be a form of voluntary taxation because the proceeds fund government programs. In 1999 Dr. Philip Cook testified to NGISC that "the tax that is built into the lottery is the most regressive tax we know."
Cook and his colleague Dr. Charles Clotfelter examined this issue at length in their book Selling Hope: State Lotteries in America (Cambridge, MA: Harvard University Press, 1989). The researchers found that lottery players with annual incomes of less than $10,000 spend more on lottery tickets ($597 per year) than any other income group. They also found that high school dropouts spend four times as much as college graduates, and that African-Americans spend five times as much as Caucasians. The NGISC final report expressed serious concern about the heavy reliance of lotteries upon less-educated, lower-income people. It also mentions that an unusually large number of lottery outlets are concentrated in poor neighborhoods.
In response to these claims, the president of the NASPL made the following points at a presentation in July 1999 to the National Conference of State Legislatures:
The NGISC report does not provide any evidence that lotteries target their marketing to poor people.
Marketing to poor people would be unwise on the part of lotteries from a business and political standpoint.
People often buy lottery tickets outside of the neighborhoods in which they live.
Many areas associated with low-income residents (for example, inner cities) are visited or passed through by higher-income shoppers and workers.
High-income residential neighborhoods have relatively few stores and gas stations, making them less likely to have lottery outlets.
In 2001 researchers at the Vinson Institute of Government Studies at the University of Georgia reviewed a number of nationwide and state studies on the relationship between income and lottery participation and found that "the regressivity finding remains largely consistent throughout the literature" (Joseph McCrary and Thomas J. Pavlak, Who Plays the Georgia Lottery?, 2002). Researchers cite a common belief among lower-income people that playing the lottery is their only chance to escape poverty.
In October 2002 the Chicago Reporter published a report on its analysis of lottery sales in Illinois since 1997. The story "Illinois Lottery: The Poor Play More" compared lottery sales figures around the state with income and demographic data from the 2000 census. The ten zip codes with the highest lottery sales for the past six fiscal years were all in the city of Chicago. The residents of all ten zip codes had average incomes of less than $20,000 per year, compared to the city average of $24,000 per year. Eight of the zip code areas had unemployment rates in excess of the city average of 10%. Residents of half of the zip code areas were populated by at least 70% African-Americans. The newspaper found that average lottery sales per capita in the city's mostly African-American zip codes were 29% to 33% higher than in mostly white or Latino zip code areas.
The zip code with the highest lottery sales in the state, 60609, coincides with predominantly African-American and Latino low-income communities on the city's south side. Residents of that zip code spent nearly $23 million on lottery tickets during fiscal year 2002. The newspaper also found that residents in poorer communities spent a larger portion of their incomes on lottery tickets than did people in more affluent neighborhoods. Lottery spending during fiscal year 2002 was $224 per person (or $1.57 for every $100 of income) in zip codes that were at least 70% African-American and $173 per person (or $0.46 for every $100 of income) in zip codes that were at least 70% Caucasian.
In Georgia the Vinson Institute reported that African-Americans and less-educated people are more likely to be active lottery players than Caucasians and more-educated people. Proceeds from the Georgia lottery fund only education programs. If these programs provide more benefits to the poor than to the wealthy, it could be argued that this compensates for the regressive nature of the state lottery.
Studies performed by Ross Rubenstein and Benjamin Scafidi ("Who Pays and Who Benefits?" National Tax Journal, June 1, 2002) and by Christopher Cornwell and David Mustard (The Distributional Impacts of Lottery Funded Merit-Based Aid, Athens, GA: University of Georgia, August 2001) have criticized Georgia's lottery for providing more lottery benefits to white households than to minority households. Cornwell and Mustard claim that counties with the highest incomes and white populations receive significantly more HOPE college scholarships.
Researchers at the Vinson Institute argue that a county-by-county comparison of HOPE scholarship recipients is not appropriate because there are other factors that affect these statistics—for example, whether a particular county contains a college or university. However, they did conclude that minorities in Georgia are "slightly less likely" than whites to get a HOPE scholarship while in college.
In late 2003 the latest findings of the Vinson Institute regarding the lottery were published in "The Georgia Lottery: Assessing Its Administrative, Economic, and Political Effects" (Review of Policy Research, Winter 2003). The researchers examined census data, polls, and other statistics from lottery inception through 1999. They found that lottery play was inversely related to education level. In other words, people with fewer years of education played the lottery more often than those with more years of education. The study also noted that lottery spending per person was highest in counties with larger percentages of African-American populations.
Regarding the HOPE scholarship program, the researchers found that white students received a disproportionately high amount of the funds compared to African-American students. In 1999 white students comprised 66% of the freshman class in Georgia, but accounted for 74% of all HOPE scholars. By contrast, African-Americans comprised 26% of all freshmen, but accounted for only 21% of HOPE scholars. The authors note that this disproportionate relationship was true for every year examined, back to 1994. However, they noted that the gap narrowed substantially over that time.
Analysis of Georgia's lottery-funded prekindergarten program provided completely different results. The Vinson Institute found that the rate of enrollment in the prekindergarten program is higher in lower-income areas of the state than in affluent areas. The researchers conclude that this particular lottery program is more beneficial to poorer people, African-Americans, and those who regularly play the lottery than to other groups in the state.
In another study published in the January 2004 issue of Journal of Hispanic Higher Education a researcher from Saint Leo University in Florida found that minority and low-income students did not have proportionate access to higher education in lottery states ("State Lotteries: Their Effect on Equal Access to Higher Education").
COMPULSIVE GAMBLING AND "COGNITIVE DISTORTION." All state lotteries have programs in place that encourage responsible play. Messages are included in promotional materials, advertisements, public service announcements, and even on lottery tickets. Some states publicize toll-free numbers or Web sites that offer help to problem gamblers.
Still, some people and organizations believe any type of gambling can be harmful, even lottery play. The Naples, Florida, office of the Salvation Army, an evangelical Christian charity, refused a $100,000 donation from Florida Lotto winner David L. Rush in December 2002. A spokesperson for the head of the office, Major Cleo Damon, explained that "there are times when Major Damon is counseling families who are about to become homeless because of gambling." Major Damon expressed concern that taking lottery winnings would constitute "talking out of both sides of his mouth." Two other charities, Habitat for Humanity and the Rotary Club of Marco Island, accepted large donations from Rush's lottery winnings in the same time period.
The vast majority of states operate lotteries, meaning they are easily accessible to large numbers of people. Surveys, including one conducted by the Gallup Organization in December 2003, have shown that lottery play is the most popular and widely practiced form of gambling in the United States. But does the combination of easy and widespread access and general public acceptance mean that lottery players are more likely to develop serious gambling problems?
The Gambling Impact and Behavior Study: Report to the National Gambling Impact Study Commission was conducted by NORC of the University of Chicago in 1999. The NORC study concluded that there is a significant association between lottery availability and the prevalence of at-risk gambling within a state. At-risk gamblers are defined as those who gamble regularly and may be prone to a gambling problem. However, the study found that multivisit lottery patrons had the lowest prevalence of pathological and problem gambling among the gambling types examined.
These researchers also warned that the patron database used in this analysis was small, meaning that the findings may not apply universally. They note that lottery players who do have a problem may be less able to recognize it because lottery players tend to undercount their losses. Lottery players generally lose small amounts at a time, even though these small amounts may eventually total a very large amount. In other words, a casino gambler who loses thousands of dollars in a day may be more likely to admit to having a gambling problem than a lottery player who loses the same amount over a longer period of time.
In July 2001 The Wager, a report of the Harvard Medical School and the Massachusetts Council on Compulsive Gambling, described a study published by Canadian researchers on the cognitive misconceptions of problem lottery gamblers. Sixty-three college students at McGill University in Montreal were screened to determine their participation in gambling activities. Those with some gambling experience were given the South Oaks Gambling Screen, or SOGS test. This is a common series of questions used to determine the probability that a person has a gambling problem. Those with a SOGS score of 0–2 are considered not to have a gambling problem. A SOGS score of 3–4 indicates a probable problem gambler, and a SOGS score of 5 or more indicates a probable pathological gambler.
All of the students were shown sixteen lotto tickets, each marked with a different sequence of six numbers out of forty-nine numbers total. All sequences followed one of these configurations:
Random (for example: 1, 13, 19, 34, 40, 47)
Pattern (for example: 5, 10, 15, 20, 25, 30)
Long sequence (for example: 1, 2, 3, 4, 5, 6)
Nonequilibrated or unbalanced (a series not covering the whole range of possible numbers, usually limited to either high or low numbers—for example: 3, 5, 9, 12, 15, 17)
The students were asked to choose the twelve tickets they would most like to play in the lottery and to rank these tickets from best to worst. Results indicated that random sequences were by far the most popular. More than half of the tickets selected by the students as their first, second, third, or fourth favorite choices contained random sequences. When choosing a favorite lottery ticket, the second most popular choice was the pattern sequence, followed by the nonequilibrated sequence and the long sequence.
The students were also asked to explain the reasoning behind their selections. Randomness was the reason given 78% of the time. The presence of significant numbers (for example, a birthdate) was the second most popular reason, named 69.5% of the time.
The researchers point out that all of the students' choices were irrational because every ticket has an equal chance of winning. However, those students who regularly play the lottery or participate in other gambling activities were more likely to display bias when choosing their favorite tickets. In other words, they had stronger opinions about what was "winnable" than did infrequent players and those who did not gamble. The probable pathological gamblers were found to have more illusions about control than all other participants. The authors concluded that there was "some level of cognitive distortion" demonstrated by all of the gamblers in the study.
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