The Importance of Lottery Revenue in State Budgets

In 2021, Americans spent upward of $100 billion on lottery tickets, making it by far the most popular form of gambling in America. State and national lotteries are one of the few industries that generate large amounts of revenue annually, which is a big reason why governments promote them so heavily. But just how meaningful that revenue is in broader state budgets and whether it’s worth the trade-off of people losing money deserve scrutiny.

The history of lotteries is a classic example of how public policy is made incrementally, without an overall vision or plan. States often establish their lotteries in response to specific concerns, such as the need for additional revenues or the impending closure of a public service. But the initial success of a lotteries is often followed by a period of rapid expansion and then a steady decline in sales, as the public becomes bored with the same offerings year after year.

Lottery revenue is often used to fund everything from education to law enforcement. But, critics argue, the money is often not as beneficial as it seems. Specifically, lotteries are criticized for promoting addictive gambling behavior and acting as major regressive taxes on low-income populations.

Generally, state lotteries are established through legislation that creates a monopoly for the state and establishes a government agency or corporation to run it. Typically, they start with a few relatively simple games and then — prompted by constant pressure for additional revenue — progressively expand their portfolio of games, especially scratch-offs, to keep people coming back.

In addition to these direct expenses, the vast majority of lottery revenue is siphoned off for advertising. This is the reason you see lottery ads on every street corner and in practically every gas station or convenience store. Retailers also receive from five to eight percent of their ticket sales, which gives them an incentive to sell tickets.

As a result of the way these policies are developed, most lottery players are middle-class and higher income residents. In fact, a study from the 1970s found that “low-income individuals participate in lotteries at levels significantly less than their percentage of the population.”

It’s no surprise that most people who win the lottery spend the money quickly. The average jackpot is over $200 million, which is enough to buy a couple of Ferraris or a few dozen houses. But there are also plenty of stories of winners going broke and struggling with addiction.

The main reason for this is that winning the lottery is a huge gamble. Most people don’t understand the odds and are influenced by all sorts of irrational gambling behavior, such as believing in lucky numbers and buying tickets at certain stores and times of day. Those who have won the lottery tend to be very careful with their money and spend it responsibly, but they aren’t immune from the dangers of gambling. Those who haven’t won, however, are often seduced by the allure of instant riches and end up regretting their choices.