In 1964, New Hampshire introduced the first modern state lottery. Today, 44 states, the District of Columbia and two territories all run sweepstakes (lottery) games. State governments now rake in about $70 billion a year from lotteries with profit margins of about 33%. (Casino operators tend to run profit margins in the single digits, but that also accounts for their physical locations and operations.) We’ll take license with the title of an old Waylon Jennings song, but the teachable moment for our readers is serious: lotteries act as a tax on those who are bad at math!
The average return on a $1 lottery ticket is 52 cents, which equates to a negative 48% return on the lottery ticket investment. Not surprisingly, many studies show the public’s perception of those odds is much higher. The National Gambling Impact Study Commission found that expected returns for a lottery ticket were significantly higher for those without a college degree than for those with similar demographics who hold a degree. While there is nothing inherently wrong with buying the occasionally lottery ticket as entertainment, viewing a ticket with a one-in-millions chance of winning as a substitute for saving and investing is a terrible choice.
While there is considerable collective handwringing over the concentration of wealth in the nation’s top 1%, the fact that states prey on their poorest to buy a losing lottery ticket is universally glossed over. Multiple research papers have shown that the poorest third of Americans buy almost two-thirds of all lotto tickets. States know this and advertise aggressively in poor neighborhoods. In fact, a marketing plan for Ohio’s lottery once recommended scheduling advertising campaigns to coincide with the distribution of “government benefits, payroll and Social Security payments.” No, you can’t make that up.
With the high profit margins realized by states on lottery sales and the fact most lottery tickets are purchased by those that can least afford them, the states face a conflict of interest when it comes to lotteries. Here in Colorado, the lottery touts the fact that it distributes over $125 million per year for the public good. Entities receiving lottery profits include the state’s Conservation Trust Fund, Division of Parks & Wildlife, the Great Outdoors Colorado Trust Fund and the State Public Schools. By emphasizing the beloved Colorado outdoors and schools as recipients of lottery funds, the state deflects any criticism of the harm its gaming activities do to society.
State governments spend billions of dollars on nutrition and housing programs for the poor, while simultaneously encouraging them to shift their spending to the state’s gambling monopoly. A research paper from the National Bureau of Economic Research (the economists who decide when the economy is in expansion or recession) noted that lottery players finance their tickets by cutting spending on necessities. Analyzing spending habits after states introduce lotto games finds that households in the bottom third of incomes shift about 3% of their food expenditures and 7% of their rent/mortgage payments to finance lotto ticket purchases. The $70 billion in annual lottery revenues for the states is very close to what the government spends on food stamps. Coincidence or irony? We’ll let you decide.