How Does the Lottery Affect State Budgets?

Lottery is a popular way for state governments to raise money. People spend billions of dollars on tickets each year and states are quick to trumpet the money they bring in as a source of good things for state budgets. But how meaningful that revenue is in broader terms, and what the trade-offs are for consumers who lose their ticket money, merits some scrutiny.

The drawing of lots to determine ownership or other rights has been recorded since ancient times, but modern lotteries first appeared in the 15th century. The oldest surviving documents describe public lotteries for town fortifications and aiding the poor in towns in the Low Countries, where they were first widely promoted.

In the immediate post-World War II period, many states began a lottery to finance a variety of projects without increasing taxes on working and middle classes. These lotteries became especially prominent in the Northeast, where they raised a considerable amount of money for state budgets. They were based on the idea that state government could run like a business and make money by offering prizes to paying participants.

To keep ticket sales healthy, most lotteries pay out a substantial percentage of their revenue in prize money. This reduces the percentage of revenue that is available for state budgets, which are supposed to be used for education and other public goods. Consumers aren’t clear on this implicit tax rate because the money is viewed as “extra” money, not a normal part of state spending. In an effort to promote their games, lotteries often team up with sports teams or other companies to offer popular products as prizes. This merchandising helps the companies increase product awareness and provides the lottery with a way to advertise itself without having to invest in costly advertising campaigns.

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