Das Tor News

The United States Lottery: Harmless Fun or Regressive Tax?

By Lauren Herber, Co-Editor

Photo courtesy of abc13.com
Photo courtesy of abc13.com

Here at Thunderbird, we students are taught about the importance of not just business principles in general, but smart business: how to make smart decisions under uncertainty, how to make a smart strategic plan for your business, and how to use intelligence and research to create the most effective marketing campaign. From finance to global theory, the mantra “work smarter, not harder” is a critical, often unspoken element of our education. With last week’s billion-dollar Powerball bonanza, I was struck by how many people not only purchased Powerball tickets, but who truly believed that they would be the winners of the grand prize. This got me thinking: what is it about the lottery that causes many people to throw smart decision-making out the window? Because playing the lottery is by no means a smart, sound decision if your end goal is wealth maximization. Yet millions of people play the lottery every day—not just when the Powerball reaches a staggering billion-dollar payout. Don’t get me wrong—playing the lottery can be harmless and fun; I would be lying if I said I didn’t experience a few minutes of blind hope last Wednesday that my ticket would have the winning numbers, and that I would be America’s newest millionaire. What interests me more is the thought process behind the misguided belief that playing the lottery frequently is a sort of “investment,” a viable opportunity for building a huge amount of capital in a short amount of time with little to no effort.

Photo courtesy of www.knowla.org
Photo courtesy of www.knowla.org

Today, 44 states (and Washington, D.C.) in the U.S. have lotteries, but this has not always been the case; U.S. lotteries have had quite the rocky history. Gambling in the United States has origins as far back as colonial times. Each of the 13 original colonies had lottery systems, and lotteries in this time were used as more than just a form of entertainment—they were a source of revenue to help fund the colonies. As a result, playing the lottery became a kind of civic responsibility, as they were used to fund schools, roads, bridges, and other public works. However, a spike in evangelical reform in the 1800s (which denounced lotteries and gambling on moral grounds), combined with several lottery scandals, led to lotteries being banned in many states. This scarcity led to a thriving black market of illegal lotteries fueled by bribery and corruption. One such corrupt lottery was the Louisiana Lottery Company, a state lottery that operated nationally and sold tickets across state borders. The extensive bribery of both state and federal officials in the Louisiana lottery led to its eventual demise as well as the 1895 banning of ticket sales across state borders, effectively terminating all lotteries nationwide. The draw of “free tax money,” however, was too strong to resist for long. In 1964, New Hampshire began the revival of the state lottery. The state’s positive experience inspired other nearby states like New York and New Jersey to re-implement their lotteries as well, eventually leading to the reestablishment of 44 U.S. states’ lottery systems.

Lotteries are operated independently by each jurisdiction (with the exception of some games, such as Mega Millions and Powerball, which span larger geographic areas and serve as de facto national lotteries). Thus, as you can imagine, lotteries play a significant role in state economies. In promoting the lottery, states often argue that the lottery benefits the local economy because much of the money poured into lottery systems is eventually put toward the public good, into projects such as public education and the upkeep of local parks. Many state legislators view the lottery as players voluntarily spending their money for the public good as opposed to the general public being taxed. State revenues typically experience a dramatic surge immediately after the lottery’s introduction, but this boom, unfortunately, does not last long: revenues tend to level off relatively quickly and can even eventually decline. To combat this, state lotteries constantly introduce new and improved games, such as the scratch-off ticket, which was the first “instant game” in which players immediately know whether the won or lost, heightening the level of adrenaline and anticipation. This keeps revenues from declining.

The lottery, however, may not be as innocent and fun as state-funded advertisements make it seem. Many critics aren’t sure that lottery revenues even go where state legislators say they will go. Although legislators claim that the proceeds from the lottery benefit the public good, critics point out that it is unclear where the money actually goes. For example, while a percentage of a state’s lottery proceeds may be earmarked for public education, what often happens is that the state reduces the amount that it would have normally spent on the program by the amount of money coming from the lottery. The “savings” then remain in the general fund and are spent on whatever the legislature chooses. Some states, like Georgia, have tried to increase transparency and eliminate confusion by using their lottery revenues in less conventional ways. For example, instead of putting lottery revenues toward the general fund of “public education,” Georgia uses its lottery earnings to create scholarships to send its students to pre-kindergarten and college. Though highly lauded throughout the country, adjustments like Georgia’s are extremely difficult to make, and legislators often feel that they are stuck between a rock and a hard place: getting rid of the state lottery (which some are in favor of) or re-allocating the money à la Georgia would require the state to make up the funds in the areas that the lottery currently supplies, which would likely require severe tax hikes or public program cuts.

Photo courtesy of www.pressherald.com
Photo courtesy of www.pressherald.com

Another concern that many have regarding the lottery is its effects on poverty. The lottery has been proven to draw people into gambling and promote addictive gambling behavior. Additionally, the lottery is conceived by many critics to be a regressive tax (a tax that takes an increasing percentage of income as income decreases) because of the disproportionate amount of revenues that it draws from lower-income groups. Studies have shown that, while there is not necessarily a direct link between income and frequency of lottery usury, lower-income groups spend a larger proportion of their incomes on the lottery. Because losses of income that would be negligible in more affluent sociodemographic areas are insurmountable for poorer individuals, the lottery has a much more dramatic effect on lower-income areas. This is largely because of the nature of lottery advertisements, which have been accused of aggressive advertising practices that target lower-income groups. Because lotteries are state entities, they are exempt from the Federal Trade Commission’s truth-in-advertising standards. As a result, lottery advertising is deceptive and contains misleading information about the odds of winning, thus taking advantage of already addicted users and encouraging the “magical thinking” (read: blind hope and naïveté) of people who are not yet frequent users.

Photo courtesy of www.adforum.com
Photo courtesy of www.adforum.com

A widely-cited example of this targeted advertising comes from one of Chicago’s poorest neighborhoods, which hosted a billboard declaring: “How to go from Washington Boulevard to Easy Street – Play the Illinois State Lottery.” The location and message of this advertisement reveal that it is both misleading and targeted towards lower-income individuals. See also the advertisement to the left. The ad touts the phrase, “What will you think about when you don’t have to think about money?” which clearly targets potential users with unstable or worrisome financial situations. Misleading advertising strategies lead lower-income groups to place more belief in their chances of winning, which risks their playing for misplaced motives. In other words, poorer individuals tend to play for money, whereas upper- and middle-class individuals are more likely to play the lottery for fun. This misguided hope has led to increased lottery sales during times of economic hardships, such as recessions, in which blind desperation drives individuals who can’t afford it to spend more money trying to win big. With lower-income individuals most likely to be daily players, the targeted ad campaigns of state lotteries have put into motion a vicious cycle: lotteries exploit lower-income individuals’ desire to escape poverty while directly inhibiting them from stabilizing and improving their financial situations.

Lottery lobbyists present the lottery as a benefit to the public good. Lottery critics paint a picture of a scheming government that exploits its poorest citizens by playing up their most unrealistic hopes. Tension between the state’s desire to increase revenues and its duty to protect the public welfare is at an all-time high. With the disappearance of the United States middle class and the growth of the wage gap, one can’t help but wonder if the lottery plays a larger role than we might expect in the substitution of a hardworking mentality for a “get rich quick without trying” mentality.

One thought on “The United States Lottery: Harmless Fun or Regressive Tax?

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.