The Hidden Taxes of the Lottery


In the United States alone, people spend billions on lottery tickets every year. They do so for a variety of reasons, from the fanciful belief that they will win big to the more practical desire to support public services such as education and road construction. In fact, winning the lottery is a very rare event, and people should consider the odds of winning before they buy a ticket. The truth is that winning the lottery is a form of gambling, and it comes with some serious drawbacks.

Despite the popularity of lotteries, few Americans understand how they work. To keep ticket sales high, the state must pay out a respectable percentage of the total sales in prize money, which reduces the amount that is available for the ostensible purpose of the lottery: raising funds for government purposes such as education. This makes the lottery less transparent than a normal tax, and most consumers are unaware of the implicit tax rate they pay when they buy a ticket.

The author of this article, James Cohen, argues that the modern incarnation of the lottery began in the nineteen-sixties when growing awareness of all the money to be made by gambling collided with a crisis in state funding. Faced with soaring population, inflation, and the costs of the Vietnam War, many states found themselves struggling to balance their budgets without raising taxes or cutting important public services. In this climate, the idea of a painless form of taxation through a lottery became popular.

Advocates of legalizing the lottery argued that, since people were going to gamble anyway, governments might as well collect the profits and use them for good. This argument had some merits, but it did not address the underlying issue: namely that lottery revenue would disproportionately benefit rich people while putting burdens on low-income voters.

A few years ago, lottery advocates shifted gears. Instead of arguing that a state’s lottery revenues could float the entire budget, they began to focus on a single line item that was popular and nonpartisan—usually education but sometimes elder care or aid for veterans. This approach helped to make campaigning for lottery legalization much easier. Voters were told that a vote for the lottery was not a vote for gambling but for veterans or education.

Lottery commissions have essentially adopted this strategy as their default message. The result is a confusing mix of messages that obscures the regressivity of lottery play. Lottery marketers try to sell tickets by promoting the idea that playing the lottery is a fun experience and even a civic duty, an argument that is coded to encourage people to buy tickets even though they know that it is a bad bet. They also promote the idea that the lottery is a good alternative to higher taxes, which is also misleading. The truth is that the lottery is not a good substitute for taxes because it does not raise enough money to cover a state’s spending needs, and it diverts dollars from other worthy causes.