Wednesday, Nov 2, 2011, 11:06 AM

Rigged: The Shame of State-Run Lotteries

Lotto Ticket.jpgHere’s a riddle: At the grocery store, what product is sold by the government, used by half of all Americans, and yields more than $50 billion in revenue a year? It’s not milk, eggs, or bread. And stamps don’t make that much money, or the post office wouldn’t be in such trouble.

No, it’s lottery tickets, and they’re arguably worse for you than the fattiest junk food in the store. But debates on state-run lotteries are rare, because craven state-level politicians of both parties depend on the revenue. And because of the way this industry works, what that really means is that the state depends not on the casual player, but on addicted gamblers. State-run lotteries—and scratch-off tickets and the like—are wrong because of two simple factors: who plays the lottery, and how they are encouraged to play.

Lotteries’ revenue is consistent with the Pareto principle, which in this context states that 80 percent of total profit often comes from roughly the top 20 percent of consumers. For most businesses, this is intuitive and unproblematic. A bookstore depends on avid readers, a stereo shop on audiophiles, and so on. But when it comes to vices—especially state-sponsored vices—we need to be more squeamish.

A widely-cited 1999 Duke study determined the demographics of this top 20 percent, and the results are disturbing. African Americans comprised 25.4 percent of the heaviest players, even though they make up only 12.2 percent of the country. High school dropouts were 20.3 percent, but 12.3 percent of the country. Those with household incomes under $10,000 are 5 percent of citizens, but 10 percent of the heaviest players. The practical impact? Lottery players who were high school dropouts spent $700 a year on the lottery on average. Those with yearly household incomes under $10,000 spent nearly $600. These are the players on which lotteries rely.

State governments encourage this level of gambling with marketing campaigns unlike that of any other government service. Residents of New York in the 1990s will still remember the slick, “Hey, You Never Know” ad campaigns. My own grocery store’s lottery kiosk is a shining blue, with the giant (and slightly desperate) marquee “Lots Of People Win.”

Governors and legislatures defend these lotteries with disingenuousness at best and shameful self-interest at worst. Many lotteries “earmark” the funds toward popular programs—education the most prominent example. But while studies have found that earmarked funds do increase education funding, it’s virtually never at the amount advertised. Lawmakers anticipate the revenue increase and divert funds from the earmarked program to others.

An argument familiar to those in states that have recently legalized lotteries is that “the state next door is taking our money.” The reasoning goes that, if an adjacent state has a lottery, that state will “take” the home state’s revenue. This is persuasive at first blush, but it’s really a race-to-the-bottom technique masquerading as pragmatism. In reality, the amount of funds lost to people who live near the border and play in other states is small enough that it could be raised in countless ways.

Indeed, possibly the saddest aspect of most state lotteries is that the revenue really is not vital. It’s simply preferred because it’s yet another way (with fees, surcharges, and other gimmicks) of raising money without “raising taxes.” In fact, the National Conference of State Legislatures found that lottery proceeds constituted only 0.95 percent of net state revenue in 2006—“less than the revenue from motor vehicle license taxes.”

Truthfully, for lawmakers whose goal is to extract as much money as possible, no alternative will be preferable to what’s in place. But alternatives do exist: return to an illegal lottery; legalize and tax lotteries; or split the difference by allowing lotteries that provide solely for charities or other efforts in the public good.

Criminalizing lotteries would return us to the status quo until the mid-1960s. In those days, people with gambling itches often played in underground “numbers games.” UCLA Professor Mark Kleiman has argued that these games caused much less harm than modern government lotteries do. Black markets can’t advertise on television or erect kiosks in grocery stores, and therefore would not take in anywhere near the sum state-run lotteries do. Many liberals, though, have become uncomfortable criminalizing activities whose only victim is one’s wallet (although this is the policy toward casinos in most states).

A second option, then, would be to legalize all lotteries and tax them as we do most other vices. Practically, this would probably have the least impact on consumers. Prices would probably drop, because the states’ monopolies allow them to charge prices with massive profit margins, which a private market would undercut. States could then tax these private lotteries to make up the revenue. Allowing a citizen to purchase a vice disincentivized through taxation is far preferable to the government actually selling that product.

Finally, a third option would be to carve out exemptions for charities or non-profits. For instance, the Heart & Stroke Foundation of Ontario runs a $2 million lottery. An idea with a similar motivation has been advocated by Stephen Dubner of Freakonomics fame: the “no-lose” lottery. Implemented in Michigan, the idea is that you deposit money in a participating bank or credit union, which then uses the combined interest to pay out lottery-like prizes, even though the player didn’t actually spend anything. Why hasn’t this been implemented more? It’s illegal in most states, because it would be competition.

Lotteries are bitter policy pills, because while it’s unlikely they’ll be repealed absent a major scandal, it’s not an exaggeration to say that no political ideology should support them. Conservatives and libertarians are against government programs, and especially against raising more revenue. It’s hard to imagine a principled conservative thinking a state monopoly whose sole purpose is to generate money is a good idea. Progressives, on the other hand, are adamant that protection of the poor and minorities is a responsibility of government, and that revenue should be raised by progressive means. But lotteries are terribly regressive, and actually rely on money from disadvantaged groups. Even though collecting revenue is important, we should remember that money is a means, common welfare the end—not the reverse.

Photo Credit: Dex1138

 

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L. F. File:

An alternative you are missing is similar to the Freakonomics one but state run. This would be similar to the Premium/Lottery Bond systems run in the U.K. and other countries (see: http://www.nsandi.com/savings-premium-bonds)

Many advantages are obvious:

-- if lotteries were made illegal as previously a Lottery bond would provide legal competition that would have the advantage of marketing and advertising.

-- it encourages savings

-- much wider participation - Premium bonds are a recommended part of a rational investment portfolio by financial advisers in the U.K.

-- would also compete well with neighboring state lotteries (though the best system I think would be a national one.)

Tax exempt winnings would be necessary for the best chances of success but hopefully the obstacles to this could be overcome.

It is hard to see how a proposal for a Lottery bond issue in the U.S. could not attract bipartisan support. It would be fought hard by commercial lottery interests but perhaps public opinion could prevail.

lff

Nov 5, 2011, 8:06 AM

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