Is the lottery helping states hit the economic jackpot?

The lottery system in the United States seems like a very simple way to generate profits on a state level. People willingly donate money to the state government in the very minimal chance that they earn money back. Statistically, the odds of winning the lottery are so low that yields on revenue generated compared to payouts should be highly favorable for the state. However, when you look the numbers closely, it becomes more complicated and less profitable than many realize. It is evident that consumption in the lottery is way less helpful for the government in terms of total contributions to GDP, but are the alternatives too politically unfavorable to make a change to the current lottery system?

Examining the true impact of lottery tickets requires a fair analysis of the negatives as well as the positives. First, the scope of lottery revenue on state governments is relatively small. Americans spent a total of $70.15 billion on lottery tickets in the last year. However, when you break down the percentages, that total becomes a lot smaller. By the numbers, money spent on tickets is broken down into several categories. Sixty percent of the money is paid out in winnings. Another 5% is given out as commission for those stores that sell the tickets with another 9% going towards things like advertising and miscellaneous administrative costs. That leaves around one-fourth of the actual earnings going to the states.

When you see that 26% of lottery sales go to state governments, it is easy to understand why they may be less viable options to help GDP. For example, if you walk into a convenience store and spend $20 on lottery tickets, the state sees $5 of those sales. This one-fourth cap would originally count as a consumption expenditure but would then be transferred over as a government expenditure when that money is used on other government programs. However, if you spent those $20 instead on Skittles, all $20 would count as a consumption expenditure with no profits being taken out of the original purchase. This simple model helps to demonstrate why lottery ticket sales seem profitable in practice but backfire when actually implemented.

Why, then, would state governments ever defend their lottery systems if they are seemingly losing so much revenue from sales? The issue many state governments face is the implementation of appropriate tax policy to counteract the necessary funds needed to fund specific government programs. The lottery system is a perfect loophole to increasing taxes because it is 100% voluntary on the side of the consumer. This 26% revenue gained by state governments is incredibly helpful for projects such as building roads to improving public schools. The total funds given to state coffers is around $18 billion, which is roughly only 2% of total state budgets. This may seem like a drop in the bucket but is an extremely popular way to increase budgets. The alternative of increasing taxes to raise that $18 billion would be a wildly unpopular move for any politician.
It is now evident that the lottery system is a very inefficient way to generate state funding. However, there does not seem to be a clear-cut way to improve the current system to favor an increase in government expenditures. The only way to create incentives in the current lottery system is to increase the prize pool. However, this in turn only makes it more likely that someone will win that large jackpot. It is an effective way to voluntarily get a populace to willingly contribute to the state, but are the benefits worth it at such high costs?

http://www.reuters.com/article/us-usa-powerball-fees-idUSKCN0US2MUhttps://www.jstor.org/stable/1044367?seq=4#page_scan_tab_contentshttp://money.cnn.com/2012/11/27/news/economy/powerball-lottery-sales/https://smartasset.com/taxes/the-economics-of-the-lottery

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6 thoughts on “Is the lottery helping states hit the economic jackpot?

  1. chipdoherty

    Nice post Dion! I didn’t realize how small of a percentage of revenue from the lottery goes into the government’s pocket. One additional benefit to GDP that might be worth noting is the effect on lottery winner’s consumption after receiving their winnings. Though Modigliani might tell us that initial wealth should be spread out throughout our life expectancy, most winners have a natural tendency to consume excessive amounts of goods that greatly benefit GDP.

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  2. lukereynolds33

    Interesting points in this article! I think it is important to note that in addition to infrastructure projects education also benefits from the lottery but I do agree that it can benefit more. Something to think about is would the government actually spend more on education or infrastructure projects if the lottery did not exist? Some reports suggest that non-lottery states are shown to spend more on these two funds and some people believe it is because the state just accepts whatever lottery money they receive and that is all they will spend.

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  3. kathrynmckenzie18

    Interesting post Jack! I wonder, since lottery tickets have increased every year since it began back in the ’60s (even during the Great Recession, when consumption of most other goods greatly declined), if the economy will see greater benefits in the future as the amount of revenue coming in from these sales will likely increase.

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  4. jackmccabe53

    I think this is a really interesting post when you consider the decisions that various states have to make. 26% may not seem like a large amount of money, but in my opinion, any extra money the state can make is probably good for them. Plus us Americas love to gamble…

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  5. seancobb29

    This breakdown of where all the money from lottery ticket revenue actually goes is news to me. I had not idea the state only took 26% of the revenue. I definitely would have guessed that number to be higher. I think you make some very valid point though. The fact that the lottery system is voluntary makes it such a more attractive option for states attempting to generate revenue. I would guess it is actually one of the easiest ways to generate revenue, as I can’t imagine the state governments have to do much more than collect their 26%. I am curious how quickly winnings from the lottery get generated back into the economy. I know historically people tend to spend that money much quicker than one would think…

    Reply

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