Public Finance and the Lottery

Apr 30, 2024 Gambling


In a lottery, people buy tickets to win prizes ranging from a few dollars to houses or cars. The winners are chosen by a process that depends entirely on chance. Lotteries have been popular in many societies and cultures throughout history, and they continue to play a role in many countries today. But there are some important concerns about this form of public finance. This article discusses two of those concerns: 1) Does the lottery promote gambling, leading to negative consequences for poor people and problem gamblers? 2) Does it divert state resources from more pressing needs?

In the United States, lottery sales and profits have grown rapidly since the first modern state-run lottery began in New Hampshire in 1964. Other states followed suit in the 1970s, with a concentration of new lotteries in the Northeast and the Rust Belt, where residents were particularly receptive to the idea of winning money without paying taxes. In the late twentieth century, as America went through a period of tax revolt, lotteries became a popular alternative to raising taxes.

Lottery advocates argue that the money raised through lotteries is not merely “painless revenue,” as some critics have charged, but rather is money that citizens are voluntarily spending to benefit society. But the truth is that this argument is flawed. In reality, lottery revenues are responsive to economic fluctuations: They increase as unemployment rises and poverty rates soar, while declining when incomes fall and the economy is recovering. Lottery revenues also tend to skew toward the middle class, with lower-income neighborhoods disproportionately lacking in participation.

The argument that the lottery is a “tax on stupid people” is also flawed. While it may be true that some players don’t understand how unlikely they are to win, and even enjoy playing anyway, it is also true that the lottery is a response to economic pressures. Lottery spending increases when incomes drop and unemployment soars, and when state budgets shrink, and it decreases as taxes rise and employment picks up.

In addition, because the lotteries are run as private corporations with a focus on maximizing revenues, advertising necessarily focuses on persuading people to spend money on them. This approach distorts state budgets and, in some cases, leads to the creation of state-sponsored gambling machines that operate at cross-purposes with the overall public interest. Moreover, because states often have fragmented oversight of their lotteries, the general welfare is rarely taken into account in the development of lottery policy. The Council of State Governments reported in 1998 that most states had no coherent “gambling policies” or “lottery policies,” and most had not established a commission to oversee them. As a result, many state officials find themselves at cross-purposes with the public. A recent study by the Institute for Policy Studies found that few states have a coherent national “gambling policy.” Most of the state governments that do have one have adopted it piecemeal, and the authority to regulate them is split between the legislative and executive branches of government and further fragmented within each department.