How Significant Are Lottery Costs to State Budgets?


The lottery is an enormously popular form of gambling, one in which people invest billions every year despite the fact that they have very low odds of winning. Many of them, if they do win, will pay massive taxes and often go bankrupt within a few years. That’s not to say that lotteries are evil, but their costs merit scrutiny. This article will examine those costs, and try to assess how significant they are in state budgets.

The genesis of lotteries lies in the peculiar exigencies of early America, which Cohen describes as “defined politically by an aversion to taxation.” As states sought to maintain their existing social safety nets while avoiding any resemblance to a sales or income tax, they turned to lottery games, which could float a sizeable sum without enraging voters. This made them “budgetary miracles, the chance for states to make revenue appear seemingly out of thin air.” Harvard and Yale were financed with them; the Continental Congress used one to help finance the Revolutionary War; and, like most things in America at that time, they got tangled up with the slave trade.

In the nineteenth century, when state governments began to expand their services, they struggled to find new sources of revenue, and this is where lotteries came in handy. Unlike a traditional income or sales tax, a lottery is an excise tax on gambling, but it does not require an individual to be present at the drawing to be eligible to win; this is why it’s called a “lottery” rather than a “tax.” Because it’s not an income or sales tax, it doesn’t have the same connotations of immorality and moral perversity that accompany those two other types of taxes.

Lotteries are also different from other forms of gambling because they’re not purely commercial ventures; they’re social arrangements that rely on chance to determine winners and losers. This makes them more susceptible to ethical concerns, such as whether the disutility of a monetary loss is outweighed by an entertainment value or other non-monetary benefit for a specific individual.

If that’s the case, then the lottery is a legitimate enterprise. But, in a world where most people do not have much disposable income to begin with and are struggling to build emergency savings or pay off credit card debt, it’s not clear that the lottery’s perks outweigh its costs for many Americans.

Rich people do play the lottery, and they’ve won some huge jackpots (like the quarter-billion dollars won by three investment managers in Greenwich, Connecticut). But they buy far fewer tickets than do poor people, and their purchases represent a smaller percentage of their annual incomes. On the other hand, people who make less than fifty thousand dollars a year spend thirteen percent of their income on tickets. This is a large and troubling amount of money to gamble away, especially when you consider how much money the average American loses in the process.