Why States Should Think Twice Before Expanding Lottery Revenues

In a booming economy, lottery revenues are a tempting source of state revenue. The problem is that lottery funds tend to come from a few very rich people, leaving the middle class and working class struggling with high taxes, especially on income and property. That is why states should think twice before expanding their lotteries.

Lotteries are games of chance in which players win a prize by matching numbers or symbols to those printed on paper tickets. The term derives from the ancient practice of drawing lots to determine distributions of land, slaves, and other goods, although the earliest recorded lotteries were probably private. The oldest known examples are keno slips from the Chinese Han dynasty, dating to 205 and 187 BC. By the fourteenth century, it was common in Europe to hold private lotteries to fund everything from building town fortifications to providing charity and welfare assistance. In England, Queen Elizabeth I chartered the first national lottery in 1567, designating its profits for “reparation of the Havens and strength of the Realme.” It quickly spread to the United States where it was used for a variety of purposes, including settling the colonies, and helped finance such famous American colleges as Harvard, Dartmouth, Yale, King’s College (now Columbia), and William and Mary.

The United States has the highest per capita participation in the world, with more than 50 percent of adults buying a ticket at least once a year. But the lottery’s true moneymakers are a minority of players—low-income and less educated, nonwhite and male—who buy tickets at much higher rates than the rest of the population. The average player making over fifty thousand dollars a year spends one per cent of his or her income on tickets; those who make less than thirty-five thousand dollars annually spend thirteen per cent.

As a result, the lottery is highly regressive. Rich people do play, of course—three asset managers from Greenwich, Connecticut, won a quarter of a billion dollars in the Powerball lottery in 2014—but they also buy fewer tickets. Moreover, because they spend a smaller percentage of their income on lottery tickets, the effect on their net worth is less dramatic.

But there is one message that the lottery industry has been failing to send: the odds of winning are not nearly as astronomical as they seem. When it comes to picking winning numbers, no set of numbers is luckier than any other. Even so, the fact that a jackpot is smaller than expected makes some people less averse to buying a ticket.

The other message that lottery companies are relying on is that, regardless of how much they lose, people should feel good about buying a ticket because it raises money for the state. But that’s a bad message to rely on, because it obscures the regressivity and encourages people to take lottery playing lightly. It’s similar to the notion that sports betting is a good thing because it raises money for the state—another false claim that obscures the regressivity.