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Why Powerball Is A Terrible Way For States To Raise Money

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"Why Powerball Is A Terrible Way For States To Raise Money"

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Two winning tickets for this week’s $587.5 million Powerball lottery were sold, one each in Missouri and Arizona. Of course, state governments will be receiving a share of the pot via the taxes imposed on lottery winnings.

Missouri state budget director Linda Luebbering said the revenue would have a “good, positive effect” for her state. About 35 percent of the money dedicated to lotteries eventually winds up back in state coffers.

Many states use lotteries as a way to raise money, often dedicating the revenue to education. However, research has found that states using lotteries to boost their education spending actually end up putting less money into classrooms than states that simply budget appropriately for their schools:

The educational “bonus” appears to be nonexistent. Miller and Pierce (1997) studied the short- and long-term effect of education lotteries. They found that lottery states did indeed increase per-capita spending on education during the lottery’s early years. However, after some time these states actually decreased their overall spending on education. In contrast, states without lotteries increased education spending over time. In fact, nonlottery states spend, on average, 10 percent more of their budgets on education than lottery states (Gearey 1997).

The Nelson A. Rockefeller Institute of Government actually found that “new gambling operations that are intended to pay for normal increases in general state spending may add to, rather than ease, state budget imbalances.”

Lotteries are also extremely detrimental to the poor, acting as, in essence, a regressive tax, with about a 38 percent tax rate (a rate usually reserved for the very richest Americans). “Lotteries are the worst expected return of just about any gambling you can do,” said economist Victor Matheson, who estimates that “where slots pay 95 cents to the dollar in terms of prizes and a good Black Jack player can earn as much as 98 cents, lotteries pay a mere 50- to 60-cent return per dollar.” According to the Bloomberg News “Sucker Index,” residents of Georgia do the most damage to their own finances through the lottery.

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