austininvestmentpros

The lottery is the most popular form of gambling in America. It raises some $100 billion a year, making it the single largest source of state revenue. But it’s also a regressive tax, disproportionately affecting low-income families. And it’s not clear how much of that revenue is actually spent on public goods, or even if the states really do use it for those purposes.

The idea of distributing property or other assets by lot dates back to ancient times, with several instances in the Bible and, later, during Roman emperors’ Saturnalian feasts where prizes were handed out by the cast of lots (either dice or pieces of wood with their names engraved on them). In the 17th century, it became common in the Netherlands for publicly organized lotteries to collect money for a wide range of public uses, including assistance to the poor, paving streets, constructing wharves, and building colleges (Harvard, Dartmouth, Yale, King’s College, William and Mary, Union and Brown all have a lottery history).

Today’s state lotteries, however, are not run as public services but as a form of private gambling, with government sanctioning, licensing, and regulation. They usually employ one of two strategies to increase revenue and keep the public on board: a) promoting the games as “fun,” obscuring their regressivity; or b) presenting them as a kind of painless tax.

In the latter case, the message is that a ticket bought at the gas station or in the convenience store is not just another crass consumer choice; it’s a small contribution to saving kids. This line of reasoning has helped to make lotteries a widely accepted form of state income in the United States. But a closer look at the data shows that these revenues are unlikely to significantly expand or improve states’ public services.

The way state lotteries have been structured largely follows a predictable pattern: legislators legislate a state monopoly for them; establish a public corporation to run them, as opposed to allowing private firms to license the rights to operate them in return for a share of profits; begin operations with a modest number of relatively simple games; and then, driven by constant pressure for more revenue, progressively add new games. This expansion has been accompanied by increasingly aggressive promotion, with the games becoming more complex and involving higher ticket prices. As a result, the revenue has not increased as rapidly as expected. In fact, it has remained flat for the past five years.