How the Lottery Affects State Budgets

As a form of gambling, the lottery is one of the most popular activities in the country. Last year, Americans spent upward of $100 billion on tickets. While many states promote lottery games as a way to raise revenue, just how meaningful this money is in broader state budgets, and whether it’s worth the trade-offs to people who lose their hard-earned dollars, is debatable.

The first thing to know about lottery is that winning is improbable, and the odds of winning are very low. Powerball and Mega Millions odds are around 1 in 292,201,338, and scratch-off tickets have even worse odds. In addition, lottery prizes tend to be fairly small, with the exception of some jackpots.

Lottery revenues are a significant part of state government budgets, and they’re especially important for education. But unlike most state taxes, lottery proceeds aren’t transparent to consumers. They’re a hidden tax, and they often benefit low-income people more than the rest of the population.

The state of New Hampshire launched the first state lottery in 1964, and most states soon followed suit. Since then, state-run lotteries have exploded in popularity. They’re a big part of our national culture, and they provide a lucrative revenue stream for states. But they also have their downsides.

Most state lotteries are structured as traditional raffles, with the public buying tickets to a drawing at some point in the future. But innovations in the 1970s led to a rash of different types of lottery games, including instant games and scratch-off tickets. These new games had much lower prize amounts but higher probabilities of winning. This increased accessibility and convenience made the lottery more appealing to many more people.

State politicians often argue that lotteries are a form of “painless” revenue: voters want the state to spend more, and lottery revenues allow the state to do so without raising taxes on ordinary citizens. In fact, however, the underlying dynamic is far more complex. The growth of state lotteries reveals a pattern of state policymaking that is both familiar and disturbing.

In the years after World War II, lottery supporters argued that they would help states expand their array of social services without onerous taxes on the middle class and working classes. This was a reasonable proposition at the time, but it’s now clear that lottery revenues are a small part of the total state budget and largely replace general taxes. That’s why it’s so important to examine the cost-benefit of state lotteries. Here’s one way to do that: Start by comparing the expected value of winning to the ticket price. The expected value of a lottery ticket is the probability that you will win, divided by the cost of purchasing the ticket. The lower the expected value, the less you should pay for a lottery ticket. You can do this by looking at the numbers that repeat, analyzing how many times each number has appeared, and paying special attention to singletons.