The benefits are overstated, the costs are underestimated, and there are much better ways to fund essential services.
The recent billion-dollar Powerball jackpot — and the photos of red tail lights crossing the state lines to buy tickets — reignited a debate that had been dormant for years: Should Mississippi start a lottery?
In the previous piece, I sought to explain the reasons why Mississippi has held out thus far. I deliberately left the more controversial question — Is it a good idea? — unanswered.
Prior to giving it much thought, instinct probably would have led me to say yes. I want Mississippi to spend more money on things like pre-K and college scholarships, and a lottery is one of the few ways to circumvent our leaders’ allergic reaction to raising taxes. Moreover, the politicians I usually agree with are the ones who are most supportive, and opponents who invoke the Bible, casino profits, or some unholy alliance of the two have never struck me as very persuasive.
However, this 2014 segment from John Oliver on Last Week Tonight started to turn my views around:
I maintained some ambivalence until I began researching the pros and cons for myself. I am now solidly opposed to the introduction of a state lottery. Here’s why:
The economic benefits are oversold
When Governor Ray Mabus first proposed a lottery in 1990, the most compelling argument in its favor was the ability to bring money into the state. The best case in 2016 is the necessity of keeping money from going elsewhere. But before we can say it’s worth trying to stop, we have to figure out how much Mississippi losing. I’ve come up with some ballpark estimates.
A national gambling survey found that people in non-lottery states spend one-third as much per capita on lottery games as residents of lottery states. The lotteries of Louisiana, Arkansas, and Tennessee took in an average of $150 per person in 2014. If the relationship holds, then for every Mississippi resident, about $50 a year is spent on out-of-state lotteries. There were 2,992,333 Mississippians at last estimate, so we can project that roughly $150 million was exported across state lines in the past year. (A few lucky Mississippians probably came back with prizes, decreasing the net expenditure, but we’ll leave that aside to produce an upper-bound estimate.)
The departed $150 million could, in theory, have been spent on goods and services in the state of Mississippi. If so, it would have added 0.15 percent to the state GDP and, if all were subject to the 7 percent sales tax, 0.17 percent to the state budget. Larger than a drop in the bucket but still nowhere close to a torrent.
Of course, lottery proponents also care about the opportunity cost: How much potential revenue are we leaving on the table? Let’s look next door for some estimates. Arkansas is relatively new to the lotto, having started in 2009, and is similar to Mississippi in population and per capita income. In the 2015 fiscal year, Arkansas residents and visitors spent $409 million on lottery games. Of that, $281 million was paid out in prizes and $55 million went towards overhead and marketing. The state received the remaining $72 million.
It’s likely that Mississippi could raise a similar sum, at least until Alabama relented and joined the game. You can certainly do a lot of things with $72 million — Arkansas funded 34,000 partial college scholarships this year — but it’s not game-changing.
Under the best case scenario, lottery revenue would add a little more than 1 percent to the state’s discretionary budget or around 2 percent to K-12 and higher education. Under the worst case scenario, state spending wouldn’t increase by a penny. Instead, state leaders would use the $72 million windfall to replace other forms of tax revenue.
States from California to Oklahoma to North Carolina (as documented in Oliver’s segment) have been accused of supplanting existing spending with lottery dollars. Given Mississippi’s political climate, there is reason to be concerned that a lottery would devolve into a similar shell game.
The ongoing debate about raising revenue for highway spending offers a useful parallel: the governor and legislative leaders have conditioned a hike in the gas tax (which falls hardest on the poor and middle class) upon an equal or greater cut in corporate or income taxes. In other words, they refuse to increase state spending, but they are happy to make low- and middle-income Mississippians pick up a larger share of the tab. I see little reason to believe they wouldn’t do the same with a lottery.
Advocates generally insist on funneling proceeds into a special fund that cannot be used for other purposes, but in reality, there is no such thing. Mississippi was supposed to deposit its 25 annual checks from the 1990s tobacco litigation into an inviolate fund that would accrue interest to pay for public health programs in perpetuity. Within five years, the legislature had begun diverting the checks into the general fund and leaving IOUs in its place. Now, nearly 18 years later, the tobacco fund is dry, and there is no pretense of reimbursement.
The personal costs are underestimated
Lotteries are often promoted as a win-win: the state gets new revenue to spend on education without raising taxes, while its citizens get a popular form of entertainment. A few lucky souls even get life-changingly rich!
That’s an impressive feat of marketing considering that the definition of a lottery is a game that almost everybody loses almost every time. Even compared to other forms of gambling, the house is remarkably stingy. Lotteries pay out about 50 percent, far less than bingo (74 percent), horseracing (81 percent), slots (89 percent), or blackjack (98 percent).
Proponents mitigate concerns about the personal toll by appealing to the principles of liberty and fairness: after all, nobody is forced to participate, and statistics show that lottery players — and winners — are distributed evenly across the socioeconomic spectrum.
These arguments, while facially true, paper over some critical considerations. Even though it’s been shown that rich and poor people play the lottery at roughly the same rate (about half of the adults in lottery states) the games they choose and the amounts they spend are quite different.
The wealthy are more likely to buy a ticket for a multimillion dollar Powerball jackpot, while the poor gravitate toward daily drawings and instant scratch-off games that invite gambler’s fallacy (“I’m due on the next one…”) and addiction. Lottery directors’ dirty secret is that they generate most of their profits from high-frequency games and the players they hook: 82 percent of revenue comes from the top 20 percent of customers. The poverty rate among these “core” gamblers is double that of the general population. Players who earn less than $10,000 spend an average of $597 a year on lottery games, compared to $289 for those who make more than $100,000. If you buy the argument that lotteries are a form of “voluntary tax,” the poor are paying rates more than 30 times as high as the wealthy.
People also play for different reasons. Wealthier players will buy a lottery ticket for the anticipatory thrill it provides, but researchers have found that the poor are more likely to buy tickets out of economic desperation. Those findings are consistent with statistics that showed lottery sales rising alongside unemployment during the 2008 recession, as well as studies that have found that counties with high poverty rates account for the largest share of lottery revenue.
Many critics sneer at the poor who gamble with their money, but it can be quite rational for people who are systematically locked out of opportunity to pin their hopes on random chance, no matter the odds. A 2006 survey found that 21 percent of Americans — and 38 percent of those earning less than $25,000 — thought that winning the lottery was the most feasible way to amass several hundred thousand dollars in savings. While some of the respondents may be guilty of imprudence, the dismal data on upward mobility suggest that a fair number of them are probably correct.
For the economically marginalized in Mississippi, where someone born into poverty has only a slim chance of escaping through traditional means, a lottery may look like an avenue for mobility. But for the vast majority, it would be nothing more than a pernicious mirage. Even a winning ticket doesn’t guarantee better outcomes: 70 percent of lotto winners end up losing the money within a few years, and billions of dollars in prizes go unclaimed annually.
Proponents counter that the educational programs funded by lottery revenue would open up new opportunity, and in some cases, they are correct. But many times the benefits flow up the economic ladder. Georgia’s merit-based HOPE scholarship is a prime example. Funded by the lotto, the scholarship pays in-state tuition for any student with high GPA or ACT/SAT score. But since high school achievement is strongly influenced by factors like family wealth and teacher quality, students from middle- and upper-income families with access to better schools are more likely to take advantage. There are strong arguments for keeping top academic performers in state, regardless of income, but the poor shouldn’t bear a disproportionate share of the cost.
It’s a terrible way to finance government
Under an ideal scenario, a lottery would generate an influx of cash that the state’s leaders spend wisely and faithfully on things such as universal pre-K and low-income scholarships that the state cannot (or will not) fund currently, and those programs would go on to make a meaningful difference in the lives of Mississippians and raise the state’s long-term economic trajectory. Even under those circumstances, a lottery would still be a bad idea.
Ultimately, it doesn’t matter how well the funds are spent. A state-run gambling ring will always be a seedy way to finance public services. Luckily, there is a much better alternative: Taxes.
Lotteries pass themselves off as an expedient tax substitute, but in many ways, they invert — and pervert – the accepted norms of our tax code. Whereas progressive taxation redistributes resources from the privileged few to the many, lotteries redistribute from the many to the lucky few. At most, a third of the money taken out of Mississippians’ pockets would be recouped by the state. And for every person who strikes it big, hundreds of thousands have to lose — many of whom are least able to afford it.
It’s true that states also profit when people drink and smoke, but so-called “sin taxes” on alcohol and tobacco serve the complementary purpose of deterring such behavior. When it comes to lotteries, where states hold monopoly power, policymakers actively encourage more of their citizens to gamble away more of their money. The inducement is everywhere. Lotteries are among the U.S.’s biggest advertisers — $500 million a year and counting — but they hold a convenient exemption from the federal truth-in-advertising statute. That’s why you’d be hard-pressed to find an ad that accurately states the diminished after-tax, lump-sum MegaMillions payout, much less one that features losers instead of winners. Marketers also micro-target certain demographics: lotto advertisements are ubiquitous in low-income neighborhoods, and some states have timed them to coincide with the delivery of Social Security checks and tax refunds.
When other revenue streams start to falter, states often turn to lotteries to squeeze more money out of their citizens. That means adding more high-yield (i.e. addictive) games, such as video slots, Keno, and scratch cards. It also means tinkering with the odds, which is how Powerball was able to engineer a record jackpot last week and generate a colossal amount of free advertising.
States also employ psychology to lure players. One of the hot innovations in government is the “nudge” theory, whereby policymakers structure choices in a way that generally induce a desired behavior while still preserving liberty. Applied with care and good faith, nudges can blunt some of our most irrational impulses and guide us toward better decision-making, such as saving for retirement and using energy more efficiently. Lotteries operate on the same principle, but they are designed with the opposite intent. Some states have started selling lottery tickets through mobile apps, gas pumps, and ATMs – all nudges designed to overcome willpower and increase sales. Even if you’re a libertarian who believes that tax collection is an unjust form of state coercion, surely you don’t think that deception and manipulation are better methods.
As I mentioned in the intro, there was a time when I thought that a lottery might be a pragmatic way to work around our leaders’ anti-tax dogma. I’m no longer interested in working around it. If there are worthy investments that the state cannot afford with existing revenue, we should insist that the legislature raise taxes in a thoughtful and transparent manner — not try to disguise them as a game.
Featured image obtained through Creative Commons license from Flickr user Daniel Oines.