The old joke about lotteries being a “tax on people who can’t do math” is said often enough, but not nearly as often as people buy lottery tickets. Recently-released Census Bureau data shows that states collected nearly $105 billion in lottery ticket sales in 2024, more than doubling the amount collected in 2008.
But why do states even run lotteries to begin with?
Lotteries are not often thought of as being part of tax policy, but they are as much a line-item on most states’ balance sheets as other taxes. Across the 45 states that operate them, lotteries brought in just under $30 billion in net revenue after accounting for payouts ($70 billion) and advertising ($5 billion).
This revenue, and the fact that it is usually specifically “earmarked” for education, parks, property tax relief, and other politically-popular initiatives, explains how state-run lotteries have become so ubiquitous and accepted. But when one takes off the rose-colored glasses, lotteries are a bizarre business for states to be in.
Lotteries Are a Regressive Tax
When we stop thinking of lottery revenue as money generated out of thin air and start thinking of it as the proceeds from a regressive, predatory tax, it becomes a great deal harder to justify. Lotteries gain political acceptance because politicians highlight the use of the revenue and obscure where it comes from.
Imagine if, instead of a lottery, states announced a program to fund education through a system of fees. The lower your income level and educational attainment, the higher your fee would be. Most Americans would find such an idea to be a non-starter.
But that is what a lottery does. A 2024 study by The Economist found that people living in the poorest 1% of American zip codes spent 4 times as much ($600 on average) as those living in the wealthiest 1% of zip codes ($150). A 2018 study of Texas lottery players found that the median player with a graduate degree spent nearly six times less on the lottery than those without a high school diploma, and four times less than those without any secondary education.
Not only that, lower-income Americans play lotteries worse, being more likely to select popular (instead of random) number combinations or change their lottery spending based on jackpot sizes.
Lottery advertising tends to highlight messages of hope and possibility, but the possibility of a lottery win that truly changes one’s economic circumstances is, statistically, near zero. As state entities, lotteries are exempt from FTC rules against deceptive advertising, and would probably violate these rules if they were not.
The fact is that most lottery players, particularly those who are most harmed by them, have a poor understanding of the odds that they are faced with. One Penn Wharton analysis estimated that lottery spending would be 43% lower if players better understood the math.
Gambling Shouldn’t Be the Government’s Business
This is not meant to be a moral position on the act of gambling. Some people simply find gambling entertaining, even recognizing the likelihood that they will lose money. The recent rise of sports betting has threatened state governments’ traditional monopoly on gambling activities, but this means that people who enjoy gambling for its entertainment value have other options.
But there is an ocean of difference between allowing private entities to offer a certain type of service and tasking official state entities with promoting and providing it. Lottery winnings are taxable federally and in most states that operate them, a fact that is often surprising and confusing to lottery players since the payout itself is coming from the government. This further obscures the cost/benefit calculation being made by lottery players.
“Earmarking” Lottery Revenue for Politically-Popular Programs Is Meaningless
Designating lottery funds for popular spending items like teacher pay or property tax relief often acts as the spoonful of sugar that helps voters swallow the other questionable public policy impacts of state-run lotteries. But this too is a mirage.
Imagine, for example, a state spends $10 billion on education. A lottery that raises $500 million could increase that spending to $10.5 billion, but more likely it would simply allow state policymakers to take $500 million of other revenue that would have gone toward spending and spend it on something else.
This means that even lottery revenue that is “dedicated” to funding a certain program does not necessarily increase the amount of funding available to that program. More likely, after the music stops in the game of budgetary musical chairs, it is truly impacting the funding available to a completely unrelated initiative.
Conclusion
Separated from the smoke and mirrors, state-run lotteries have little reason to exist. They raise less than 1% of total state revenues, and what revenue is raised comes disproportionately from low-income, economically disadvantaged individuals. Moreover, they broadly fail to meaningfully impact the funding available to the state programs they are sold as supporting.
But beyond that, there is nothing that state-run lotteries do that could not be done just as adequately by a private institution. And any time that is the case, state policymakers should be asking themselves why they are in that business in the first place.