Alabama doesn’t have a lottery, but that could soon change, as three gubernatorial candidates are running on the promise to create one to pay for college scholarships. Tennessee is also considering setting up a scholarship program with lottery profits.
States have often created lotteries with the promise that the money from tickets will get used for public benefits, usually education. But as many have found out, that promise is usually elusive.
When New Mexico set up its lottery in 1995, it passed legislation that sent 40 percent of the profits to college scholarships and 60 percent to public schools for construction and equipment. The scholarship program was meant to pay high school graduates’ tuition at a state school if they enrolled full time and maintained their grades. But just a few years later, the demand for the scholarships outstripped the profits from the lottery, the Albuquerque Journal reports. So in 2001, it passed new legislation to designate all of the lottery profits to the scholarships, diverting the money meant for public schools.
And yet even with all of the money going to scholarships, demand has been exceeding lottery profits since 2009. The state’s department of higher education has covered the shortfall with money saved from past years, but it now says without a cash infusion, it will have to reduce tuition payments for the semester. Gov. Susana Martinez (R) has requested $16 million from the general fund to make sure students get full payments. But state lawmakers have yet to come up with a long-term solution, although the Legislative Finance Committee has proposed capping scholarships, increasing the required grade-point average, and requiring students to take more credits.
New Mexico is far from the only state struggling with this problem. Georgia’s HOPE Grant to help students pay for technical college is funded with lottery profits, but they failed to keep pace with the program’s growth, so the state’s General Assembly made significant changes in 2011: no longer paying for the full cost of tuition, ending payment for remedial courses, and increasing the required grade-point average. That led to an immediate decline in students enrolled in the technical college system — a drop of 24 percent between 2011 and 2012 — which has been attributed to changes in the HOPE program.
In general, while lawmakers usually promise that creating a lottery will mean a big boost to education funding, the reality is usually quite different. States with lotteries increase per capita spending on education right after they are enacted, but a study from 1997 found that they end up decreasing overall spending later on. On the other hand, states without lotteries increase their spending over time and end up spending 10 percent more of their budgets, on average, on education compared to lottery states.
Part of the problem is that lottery profits are unstable, hard to predict, and can only rise so much. There are only so many lottery tickets residents will buy, and states can lose business to their neighbors, so the revenue is “a short or medium term quick fix but not a long term solution,” according to Citizens for Tax Justice. And while lottery revenues grow almost every year, thanks in part to the increasing number of states enacting lotteries or new games, “the growth in revenue has been generally downward since 1986,” the Nelson A. Rockefeller Institute of Government reported in 2009. Thus, it notes, “Expenditures on education and other programs will generally grow more rapidly than gambling revenue over time.” That means that creating a lottery can add to long-term budget imbalances, as New Mexico and Georgia are finding out.
The money is also easily fungible. As noted by a National Gambling Impact Study Commission report in the 1990s, “There is reason to doubt if earmarked lottery revenues in fact have the effect of increasing funds available for the specified purpose.” States supposedly earmark the revenues for public services, most commonly education, but they often instead get plugged into other budget holes. Even when revenues come in above expenditures, it’s hard to keep state legislatures from using the extra money for other purposes.
And the money isn’t even typically very much. In a 2007 investigation, the New York Times found that lottery money made up between less than 1 percent to 5 percent of total K-12 education revenue in states that put the profits toward schools. The Rockefeller report found that revenues from all legalized gambling, including lotteries as well as casinos, “racinos,” and others, represented between 2.1 and 2.5 percent of revenues the state raised itself between 1998 and 2007.
The money games could be bringing in is also often diminished by having to pay to keep the games themselves going. Given the administrative and advertising costs, plus the actual payouts to winners, only 34 cents, on average, of every dollar spent on a ticket actually goes to a state’s finances. In New York, which is currently running an ad campaign featuring school children thanking lottery players, just 30 cents of every dollar actually goes toward the schools. As of the 2007 Times article, nearly all of the states with lotteries had increased their payouts to winners as a way to persuade more people to play and lowered the share that funds programs, and the others were considering doing the same.
This news is bad for everyone living in these states, but it’s even worse for low-income residents. Players lose an average of 47 cents of each dollar spent on a ticket. And it’s the poor who get hurt by that figure, as many studies have found that low-income people account for the majority of lottery sales and that sales are highest in the poorest areas. A Duke University study found that the poorest third of households purchase more than half of the lottery tickets sold during a given week. That means lotteries act as an implicit 38 percent tax on the least wealthy, often without giving that money back in the form of better education to those who are paying it.