The lottery: A popular, cleverly hidden and discriminatory tax?

Winning a lottery is the dream. As they buy their tickets, some can even taste the victory, the easy life, never having to worry about money again. What would you do with $20 million or $100 million or $500 million?

Chris Isidore, writing for CNN Money, tells us the everyday buyer is from the lower social economic class. But as the value of the payout increases, more middle class people purchase a chance at the huge payouts that would make a difference to them.{mosads}

John Wihbey informs us that a 2012 study by the University of Buffalo on the demographics of lottery gamblers, though not definitive, concluded that “increased levels of lottery play are linked with certain subgroups in the U.S. population — males, blacks, Native Americans, and those who live in disadvantaged neighborhoods.”

Lottery World reported the recent lengthening of the odds of winning PowerBall to 292 million to 1. Alex Horton at the Washington Post notes the frenzy over winning MegaMillions – at 302 million to 1 – is “by design.” Horton also informs us more is spent on lotteries than “the combined total of what Americans spent on movies, video games, books, music and sports tickets.”

You would think that this revenue boom has become a treasure trove for good causes that the lottery was originally supposed to fund. However, Aaron Mendelson reports that the funds allocated in California to schools has plateaued in the last 12 years.

So… How much money is spent on the lotteries, and where does the money go? The 2015 US Census report allows us to glean some general information to answer the question.

In 2015 the government lotteries collected $67 billion. They distributed $43 billion in prize money, $21 billion in revenue to the states and $3 billion for administrative and advertising costs. With a cursory glance it appears that 64 percent of the funds go to the players. Not a bad return on investment for the players.

However, of that 64 percent, does a sizable chunk go back to the government? Winners have to pay taxes, and these taxes vary widely across the country. In states like Texas with no state income tax, the Federal Government will take 37 percent of your winnings. In New York City you have to pay Federal, State and City income tax amounting to almost 50 percent of the winnings. Taking 41 percent as an educated median number for the taxes winners have to pay, we arrive at the governments taking back $17.63 billion of the $41 billion winnings. Specifics for each state are available in the US Census report.

Adding the $21 billion and the $17.63 billion gives us a total of about $38.63 billion or about 58 percent of the total collected that eventually goes to the government. With the $3 billion for administration, the players actually receive less than 38 percent, not the 64 percent as it would appear in the cursory review. And we didn’t figure in the sales taxes with spending of the winnings.

Note also that $17.63 billion collected by income taxes is not earmarked for special causes, but is paid into the general fund to be spent as part of the overall federal, state and local budgets. Of course these are rough numbers, but it does give us ballpark for discussion.

There is no doubt that the lottery provides additional funding for good causes such as education, environmental protection and services for the elderly. There also is little doubt that a relative few do benefit from winning the lottery. For an affordable investment of a few dollars, one can become rich beyond one’s wildest dreams. Of course, this is the promise – against long odds – of the lottery marketing initiatives, which build that hope to increase participation.

But the pledge of funding for things like education seems to have leveled off in the last decade, and lottery winners are only an infinitesimal segment of the population.

Reviewing the numbers and the demographics data, does it appear that the lottery has morphed into a freely-paid hidden tax with the greater burden levied on the lower social economic class – “…males, blacks, Native Americans, and those who live in disadvantaged neighborhoods?”

John M. DeMaggio is a retired Special Agent in Charge for the U.S. Postal Service Inspector General. He is also a retired Captain in the U.S. Navy, where he served in Naval Intelligence. The above is the opinion of the author and is not meant to reflect the opinion of the U.S. Navy or the U.S. Government.