A Poor Bet

When he leaves the office for the day, my father, who works as an attorney in East Tennessee, stops in a gas station to buy a Coke. Often he waits in line at the cash register behind truckers, construction workers, and other blue-collar employees, who work much harder than him for less pay. Rather than investing their hard-earned money, many of them come straight from the job site to the gas station to buy lottery tickets.

The same unfortunate display can be witnessed in the 43 states that sponsor lotteries as a source of revenue. Massachusetts, which participates in two multi-state lotteries and administers several intrastate games, raised a whopping $903 million in fiscal year 2010 from about $4.4 billion in ticket sales. This represents an increase over recent years, when profits were already well above the national average. Based on data from the North American Association of State and Provincial Lotteries and U.S. Census estimates, the commonwealth sold $725 worth of lottery tickets per capita in fiscal year 2008, turning the sixth highest nationwide profit of $140 per capita.

The Massachusetts State Lottery, like those of other states, produces an enormous amount of revenue because of its monopoly status: The government administers the public lottery and prohibits private lotteries. This lack of competition explains why the state is able to retain about 21 percent of the money from ticket sales. In other words, if you buy a lottery ticket in Massachusetts, you pay your share of the prizes and operating costs, plus 26 percent of that amount in the form of an implicit tax to the state government.

But you won’t find this tax printed on the receipt.  That’s because Massachusetts, like other states, doesn’t acknowledge that the lottery tax is, well, a tax. Proponents of lotteries claim the money that accrues to the government from ticket sales shouldn’t be considered a “tax,” which is a mandatory payment to the government, since purchasing lottery tickets is voluntary.

If the revenue derived from the lottery isn’t a tax, it’s a very good imitation. Proceeds from the Massachusetts Lottery are distributed among cities and towns to be used as general revenue, benefiting citizens at large—not just those who purchase tickets.  While playing the lottery is indeed voluntary, so is the purchase of any product, including luxury goods, on which Massachusetts levies a general sales tax of 6.25 percent. The government’s refusal to label the lottery tax a “tax,” then, amounts to a political ploy to keep people from realizing they are paying a tax.

Semantics aside, the problem with this method of fundraising is that it disproportionately affects the poor. While little data is available for Massachusetts specifically, virtually all the academic literature on lottery taxes concludes that they are regressive, meaning the poor pay a greater share of their income than the wealthy. Studies often find that the poor actually pay more than the rich as a dollar amount. Duke University’s Dr. Philip J. Cook, the leading researcher on Congress’s National Gambling Impact Study Commission in the late 1990s, remarked that the implicit tax on lotteries is “the most regressive tax we know.” The commission estimated that in 1997, high school dropouts spent four times as much on lottery tickets as college graduates, blacks spent five times as much as whites, and players making less than $10,000 spent more than any other income group at an estimated $597 per year—almost six percent of their income. A 2008 Carnegie Mellon study found that about half of households making under $25,000 a year play the lottery, among which the annual per capita expenditure is greater than $550.

Bolstering these data is the inordinate number of lottery outlets in poor neighborhoods.  In a 2004 analysis of the Powerball game in neighboring Connecticut, Emily F. Oster ’02, then a Harvard graduate student, concluded that at a jackpot of $10 million, the poorest 20 percent of zip codes would contribute about 25 percent of sales, and the richest 20 percent about 20 percent of sales. Oster found that regressivity decreases as prize amounts increase and extrapolated that a jackpot of $806 million would likely be needed to make the implicit tax progressive. The record for the two multi-state lotteries is $390 million; the vast majority of jackpots are a fraction of this, and the prizes for all but one of the intrastate games are less than $1 million.

While lack of research precludes a definitive answer, circumstantial evidence indicates that the implicit tax on the Massachusetts lottery is highly regressive. Communities might raise the same amount of money by increasing property taxes. Alternatively, the state could increase the income tax or the sales tax and transfer the proceeds to cities and towns. Any of these options would be far less regressive than the lottery tax. What’s more, they would spread tax incidence over the entire population rather than requiring a fraction of disproportionately poor citizens to finance government services for everyone. In conjunction with this, the state could earn a one-time profit by selling the public lottery to the private sector, and allow competition from other firms to reduce ticket prices.

Above all, the lottery debate needs a dose of transparency. Policymakers should make the lottery tax explicit, and acknowledge that there are legitimate concerns about its redistributive consequences. Only then will reform be possible.

Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Wednesdays.