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Do Taxpayers Benefit from Lotteries?

2 min readBy: Alicia Hansen

An article on the Maryland Lottery appeared on the Lottery Post Web site today. The article discusses recent lottery winners, the state’s largest win, and the amount of money raised by the lottery:

Last fiscal year, the Maryland Lottery generated more than $501 million for the state’s general fund. These earnings benefited government-funded services and programs such as education, public health, human resources and public safety.

There is nothing unusual about this article, other than the title: “Maryland Lottery helps taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers hit jackpot.”

Would any news outlet publish an article with the title, “Sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. helps taxpayers hit jackpot?” How about, “State income tax provides windfall for Maryland taxpayers”? Not likely.

The logic (or lack thereof) behind this headline is that lottery tickets are purchased voluntarily, and therefore lottery revenue is not tax revenue; rather, it helps taxpayers by allowing the state to keep rates of “real” taxes lower.

The problem with this argument is that although a lottery ticket is a voluntary purchase, the portion of the ticket price that the state keeps (32 percent in Maryland in FY 2006) is not voluntary. Once a consumer decides to buy a lottery ticket, she must pay the full ticket price. It works the same way with books, wine, or tobacco. When someone buys a bottle of wine, that purchase is entirely voluntary, but the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. portion of the price is not optional. A consumer making a voluntary purchase must pay the entire price of the item, taxes and all.

Lottery revenue does not simply materialize out of thin air, as the above article seems to imply; in order for the state to profit from a lottery, people must purchase lottery tickets, and those people (who are disproportionately low-income) will have a little less money in their wallets afterward. Many of the taxpayers who “hit the jackpot” by benefiting from state-provided services have already lost a considerable amount of money playing the lottery.

While state governments do not label their portion of lottery revenue a tax, they should. Once the revenue is collected, it is used to fund state programs that are unrelated to the provision of lotteries. It works just like an excise tax.

Marylanders who do not purchase lottery tickets may benefit from others’ ticket purchases, just as those who don’t buy wine benefit from the excise taxes paid by wine drinkers. But the only Marylanders who “hit the jackpot” on the state lottery are the few who actually win large sums of money. For everyone else, the lottery is a tax like any other.