Christmas may have passed, but today many lottery players were still hoping for Santa to bring them one last gift: the $200 million Mega Millions lottery jackpot.
The lucky winner(s) will have to pay 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. on the winnings, but probably won’t give any thought to the other type of lottery tax: The lottery revenue kept by state governments and used for services like public education or parks is actually implicit tax revenue.
In FY 2010 lotteries generated over $58 billion in consumer spending. This translated to a profit for state coffers of over $17 billion. (Lottery sales had dropped slightly in FY2009, probably due to the recession, but they’re on the way back up in 2010.) Slightly over half the money spent is returned to players as prizes. Part of the remainder covers operating costs-including vendor commissions, equipment, administration and advertising-and the rest is transferred to state coffers. States call their portion “profit” but it is actually implicit tax revenue.
Lottery proponents argue that a tax is a mandatory payment, and playing the lottery is voluntary, so lottery revenue cannot be tax revenue. But they’re confusing the purchase of a product with the payment of the tax on the product. Purchasing a lottery ticket is voluntary, but the tax portion of the ticket price is not, just as a sales or 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. is compulsory on a voluntary purchase of alcohol, clothing or books. Lottery revenue is a poorly designed tax, failing the tests of sound tax policy. Policymakers, however, often fail to recognize or acknowledge that the revenue is a tax, preferring to label it “miscellaneous revenue.”
We can calculate a particular state’s implicit lottery tax rate the same way an excise tax rate is calculated. The chart below presents total sales figures and implicit tax rates for most states’ lotteries (states with video lottery terminals are omitted) in FY 2010.
Lottery Finances, FY 2010
| Lottery Jurisdiction | Sales (millions) |
Profit (Implicit Tax Revenue) (millions) |
Implicit Tax Rate* |
|---|---|---|---|
| Arizona | $551.50 | $141.90 | 34.60% |
| Arkansas | $383.70 | $82.70 | 27.50% |
| California | $3,086.16 | $1,055.18 | 52.00% |
| Colorado | $501.20 | $112.90 | 29.10% |
| Connecticut | $996.85 | $285.50 | 40.10% |
| Delaware (a) (c) | $684.50 | $275.50 | (c) |
| D.C. (d) | $232.00 | $66.00 | 39.80% |
| Florida | $3,900.50 | $1,247.00 | 47.00% |
| Georgia | $3,645.00 | $883.90 | 32.00% |
| Idaho | $147.00 | $36.50 | 33.00% |
| Illinois | $2,209.30 | $657.88 | 42.40% |
| Indiana | $739.10 | $188.80 | 34.30% |
| Iowa | $256.26 | $57.91 | 29.20% |
| Kansas | $243.66 | $69.03 | 39.50% |
| Kentucky | $772.50 | $214.30 | 38.40% |
| Louisiana | $372.39 | $134.08 | 56.30% |
| Maine | $216.73 | $52.20 | 31.70% |
| Maryland | $1,712.04 | $510.61 | 42.50% |
| Massachusetts | $4,423.00 | $903.50 | 25.70% |
| Michigan (d) | $2,347.90 | $704.20 | 42.80% |
| Minnesota | $498.97 | $122.25 | 32.50% |
| Missouri | $971.05 | $256.04 | 35.80% |
| Montana | $47.03 | $10.61 | 29.10% |
| Nebraska | $130.58 | $32.35 | 32.90% |
| New Hampshire | $233.89 | $66.08 | 39.40% |
| New Jersey | $2,605.16 | $924.16 | 55.00% |
| New Mexico | $143.60 | $43.60 | 43.60% |
| New York (a) (c) | $7,818.32 | $2,666.38 | (c) |
| North Carolina | $1,421.33 | $430.79 | 43.50% |
| North Dakota (d) | $24.42 | $6.33 | 35.00% |
| Ohio | $2,486.00 | $728.60 | 41.50% |
| Oklahoma | $199.93 | $69.97 | 53.80% |
| Oregon (a) (c) | $1,027.68 | $516.70 | (c) |
| Pennsylvania | $3,065.72 | $915.74 | 42.60% |
| Rhode Island (b) (c) | $702.40 | $344.65 | (c) |
| South Carolina | $1,007.16 | $272.43 | 37.10% |
| South Dakota (b) (c) | $260.99 | $116.91 | (c) |
| Tennessee | $1,138.00 | $288.90 | 34.00% |
| Texas (d) | $3,750.00 | $1,100.00 | 41.50% |
| Vermont | $97.48 | $21.64 | 28.50% |
| Virginia | $1,435.00 | $430.00 | 42.80% |
| Washington | $491.02 | $121.35 | 32.80% |
| West Virginia (a) (c) | $1,358.00 | $568.90 | (c) |
| Wisconsin (d) | $481.58 | $143.10 | 42.30% |
| Total U.S. | $58,816.60 | $17,877.07 | 43.70% |
* The implicit tax rate measures the tax revenue (profits) as a percentage of the value of the lottery ticket (prize money plus administrative costs). The implicit tax rate does not take into account federal or state income tax on winnings.
(a) Includes net VLT sales (cash in less cash out).
(b) Include gross VLT sales (cash in).
(c) States with video lottery terminals (VLT) do not all report video lottery sales the same way; therefore, the figures for these states are not strictly comparable to other states with or without video lottery terminals (see notes (a) and (b)).
(d) Estimated FY 2010 sales and profits
Source: North American Association of State and Provincial Lotteries; Tax Foundation calculations.
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