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Wyoming residents no longer have to cross the border to purchase Powerball tickets. On Aug. 24, Wyoming became the 44th state to legalize a lottery. Proponents laud these games as an easy source of funds for schools and other public services. However, lotteries are often a bad bet: Revenues are relatively modest but their problems can be large.
New Hampshire established the first state lottery in 1964, and the games soon spread throughout the Northeast. By 1978, every state between Maryland and Maine had a lottery. In the 1980s, lotteries went West, as 18 more states, from Virginia to California, authorized lotteries. Most holdouts were in the South, but three Southern states authorized lotteries in the 1990s, and five more in the 2000s. Today, only six states have no lottery—Nevada, Utah, Mississippi, Alabama, Alaska, and Hawaii (see map).
Lottery legalization is driven by two related arguments. First, supporters argue that if a state’s residents are going to play the numbers somewhere then they ought to play in “our” state. Wyoming Gov. Matt Mead promised his state’s games would "keep Wyoming dollars in Wyoming." Second, proponents claim lotteries will generate revenue windfalls for starved public services like education. During North Carolina’s legislative debate, pro-lottery groups argued a lottery would fund new school construction.
Twenty-four of the 43 states with lotteries have dedicated most of their cumulative lottery revenues to education, and, of those, 14 have earmarked 100 percent. These revenues either support elementary and secondary education, a college scholarship fund, or a mix of both. Some states explicitly cite education benefits in slogans marketing their lotteries:
- Ohio: Take a chance on education. Odds are, you'll have fun!
- New York: Raising Billions to Educate Millions
- South Carolina: Big Fun, Bright Futures
Other states dedicate revenue to everything from game and fish funds (Minnesota) to publicly funded stadiums (Washington), while some simply direct money to general funds. And, as Charles Strutt, executive director of the Multi-State Lottery Associate, argued in the New York Times, lotteries can raise funds without raising taxes.
However, although lotteries generated over $21 billion for states in 2011, that was only 1 percent of total own-source revenue (i.e., not counting federal transfers). Revenues ranged from just under $10 million in North Dakota (0.5 percent of own-source revenue) to over $3 billion in New York (1.6 percent). That’s in part because less than a third of lottery sales went to state revenue in 36 of the 43 states with lotteries in 2012. The remaining two-thirds of sales went to prizes, retailer commissions, and administration expenses (including advertising).
At best, lottery revenue can only modestly increase spending on education and other programs. Even though North Carolina dedicates nearly all lottery revenue to elementary and secondary education, the $500 million the state raised in 2011 provided just 4 percent of the state’s total K-12 education spending. That’s typical: In the states that dedicate all lottery revenue to K-12 education, that revenue never covered more than 5.5 percent of total spending in 2011. However, states also may simply replace rather than supplement existing funds.
As such, it’s not an effective barrier against more significant economic or policy changes. In 2010, North Carolina’s lottery revenue increased by $23 million to $484 million. However, the state decreased its education spending (not counting federal transfers) by $2.3 billion. The spending cut was larger than the increase in federal education aid (via the Recovery Act) that year. In 2010 and 2011, North Carolina’s total K-12 education spending declined more than the national average—despite constant lottery revenues.
More troubling is who plays the games. Lottery players are mostly poorer residents. And lottery outlets are typically placed in in minority neighborhoods. Furthermore, Stateline reported that 51 percent of lottery sales were from instant games such as scratch-off tickets and electronic games in 2012. Instant games are even more regressive than traditional lotto games such as Powerball.
Wyoming, like North Dakota, approved a lottery but banned scratch-off and electronic games, stopping the leakage of Powerball players without encouraging instant gaming. This is a better approach than states like Arkansas, which recently pushed instant games with pictures of catfish and hush puppies to gin up business.
Playing the lottery can be fun. But politicians selling lotteries as a panacea for education spending are just as disingenuous as lotto advertisements promising big wins. And states pushing instant and electronic games on their poorest residents are doubling-down on a bad bet.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.