The Good and Bad of National Lotteries

Lotteries are a big business, and rapidly growing bigger. Lottery ticket sales in the U.S. increased 17% to $94.9 billion in fiscal 2021, accounting for about 0.5% of the U.S. Gross Domestic Product (GDP), trade publication La Fleur estimates. Instant gratification draws more dollars than huge jackpots, with instant games accounting for two-thirds of lottery spending and drawings the rest. But the national Mega Millions and Powerball lottery games grew much faster than the industry as a whole, with Mega Millions up 44% to $4 billion in sales and Powerball revenue rising 31% to $3.8 billion.

The nationwide lottery games' large top prizes are their primary lure, and when repeated failures to hit the jackpot push its amount toward $1 billion or more, the resulting avalanche of free media publicity only adds fuel to the players' frenzy, and ticket sales.

Not at all coincidentally, both Powerball and Mega Millions have repeatedly altered their rules to make winning their top prize even more of a crazy long shot, increasing the frequency of mammoth jackpots in the process. After all, the lotteries operate on behalf of the vast majority of U.S. states, which have bills to pay. In Powerball's case, about 35% of ticket revenue goes back to the states, with retail commissions and administrative costs accounting for another 15%.

That means Powerball players as a whole only win half of what they spend. Overall, lottery games throughout the U.S. paid out two-thirds of their receipts in prize money in 2020. The truth is that raising money for the participating states is the only reason these games exist: the state governments' gain is lottery players' aggregate loss (but these revenues are used to fund infrastructure programs and public education). States, on average, have only paid out around 60% of lotto ticket revenues to winners (compared to the 90% of bets paid out at casinos), which makes playing for any purpose other than entertainment a terrible proposition. For the sake of comparison, horse racing tracks return about 80% of the money wagered to the bettors, on average.

Key Takeaways

  • Lotteries are a huge business; sales grew 17% to nearly $95 billion in 2021.
  • The odds of winning the Powerball and Mega Million jackpots are one in 292.2 million and one in 302.6 million, respectively.
  • Those odds have steadily lengthened over the years as the lotteries repeatedly changed the rules to ensure attention-grabbing jackpots.
  • Lotteries allow governments to raise revenue without increasing taxes, though there is controversy about whether they actually boost public spending.
  • Critics contend they impose a disproportionate burden on the poor, especially among the minority of players accounting for the bulk of lottery sales.

Lottery Odds and Trends in the U.S.

Powerball was launched in 1992 by 15 state lotteries, and the Multi-State Lottery Association that controls the game now includes the lotteries of 45 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. When Powerball last made hitting its jackpots harder in 2015, lengthening the odds to 1 in 292.2 million per drawing, "delivering the big jackpots that players want" was a stated motivation.

Mega Millions was called the Big Game at launch in 1996, and most recently changed the rules to make its jackpots larger in 2017. The game is controlled by the lotteries of 12 U.S. states: California, Texas, New York, Illinois, Ohio, Georgia, Michigan, New Jersey, Virginia, Washington, Massachusetts, and Maryland. The odds of hitting a Mega Millions jackpot in a drawing are 1 in 302.6 million.

The odds of winning something in a Mega Millions drawing are 24:1, and 24.9:1 for Powerball. Neither lottery's site mentions that if you do win a prize, it is overwhelmingly likely to total no more than $4. The odds of winning a lot in a lottery drawing were a lot higher between 2005 and 2010 for the Multi-State Lottery Association's computer security chief at the time and some of his associates, according to the guilty plea he entered in 2017 admitting to rigging the software generating winning numbers for the lottery games run by multiple states in the association.

U.S. lottery sales weakened in 2015, the year the man was first charged, but other factors may have been at play, from a sluggish economy to the spread of casino gambling and sports betting. States have responded by increasing the size of the Mega Millions and Powerball jackpots, and by catering to players' growing appetite for instant games priced at $25 per ticket and higher. Some have also taken their lottery sales online.

Massachusetts residents have long been the most enthusiastic lottery players, spending $933 per capita annually, $307 more than residents of any other state and more than three times the national average of $288 per capita, based on U.S. Census Bureau figures for 2020. The state's lottery system has long been among the most successful, pioneering instant tickets and progressive jackpots in the 1970s. Only five states—Alabama, Alaska, Hawaii, Nevada, and Utah—still abstain from running a lottery after Mississippi approved one in 2018.

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The number of claimed Mega Millions jackpots of more than $300 million.

The Benefits of National Lotteries

Lotteries have long promoted their contributions to public services, which in many states are earmarked for education, to secure political support. They often present this funding as supplemental to the expected legislative appropriations. Critics note it's impossible to know what would have been funded by other means if lottery funds were not available, and whether they secure additional services or simply let governments raise less through taxation.

A recent history of U.S. lotteries attributes their growing popularity during the 1980s to widening economic inequality, backed by newfound materialism asserting anyone could get rich with sufficient effort or luck. Popular anti-tax movements increasingly led lawmakers to seek out alternatives to raising taxes, and lottery games fit the bill.

Some view replacing taxes with alternative revenue services as an inherent benefit rather than a necessary accommodation. After all, no one forces the lottery players to part with their money, as the state does with taxpayers.

Governments have long imposed sin taxes on vices in an effort to raise revenue, with the added justification that the resulting increase in the costs of such activities may discourage them. And while gambling can turn into a socially harmful addiction, its ill effects are nowhere near as costly in the aggregate as those of alcohol or tobacco, two other vices governments use to raise revenue.

People adopt vices because they provide pleasure, and lottery gambling is no exception. For nearly everyone, the sole benefit of playing is the excitement of scratching an instant ticket, or the fantasy of a life-changing jackpot win in the next drawing. Lotteries may be a terrible proposition financially, but they're certainly defensible as relatively harmless entertainment.

Individual states decide how the money raised from lottery tickets is spent.

The Trouble With Lotteries

Many studies have found lottery play imposes a disproportionate financial burden on lower-income players, and some have suggested those with lesser means tend to play more as well in terms of ticket purchases relative to disposable income. However, polling also suggests that lower-income respondents play the lottery less frequently than those with more resources.

Those findings are not necessarily contradictory, since a relatively small proportion of lottery players accounts for most of the sales. Those with lower incomes who gamble may do so more heavily relative to their incomes because they derive more value from dreams of wealth and the sense that, in this pursuit at least, their chances are as good as anyones.

How Many Countries Have National Lotteries?

In addition to the U.S., over 100 countries on all inhabited continents have some form of a national lottery.

What Are the Main Types of National Lottery Games?

Most national lotteries feature some sort of number-picking game (similar to Keno), where players must choose a series of numbers that are then randomly drawn. Other common games include scratch-off tickets and instant-win games.

When Did National Lotteries Begin?

The origins of lotteries can be traced back centuries ago. In the Old Testament, Moses was instructed to take a census of the people of Israel and then divide the land among them. Meanwhile, Roman emperors reportedly used lotteries to give away property and slaves.

Lotteries were later brought to the United States by British colonists. The initial reaction was mainly negative, particularly among Christians, with ten states banning them between 1844 to 1859.

Are Lottery Winnings Taxed?

Yes. Lottery winnings are taxed as ordinary income by the IRS and by most states. Large winnings will thus be taxed at the highest income tax bracket. The exceptions are the states without an income tax along with California and Delaware, which do not tax state lottery winnings. Often lump-sum awards are taxed less favorable than annuity payments. Even if you win a vacation, home, boat, or car, you will be taxed on the fair market value of those prizes.

The Bottom Line

Those who wish to gamble have lots of choices these days, from the increasingly ubiquitous casinos and sports books, to horse tracks and financial markets. It would be hard to argue that lotteries are unique in exposing players to the hazards of addiction. The question is whether governments should be in the business of promoting a vice, given the relatively minor share of budget revenue lotteries generate. Legislatures in the overwhelming majority of U.S. states have already provided their answer.

Article Sources
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