Chapter 7
Lotteries

LOTTERY HISTORY
LOTTERY GAMES
HOW LOTTERIES OPERATE
LOTTERY PLAYER DEMOGRAPHICS
GROUP PLAY
WHY DO PEOPLE PLAY LOTTERIES?
THE EFFECTS OF LOTTERIES
THE FUTURE OF U.S. LOTTERIES

A lottery is a game of chance in which people pay for the opportunity to win prizes. Part of the money taken in by a lottery is used to award the winners and to pay the costs of administering the lottery. The money left over is profit. Lotteries are extremely popular and legal in more than a hundred countries.

In the United States all lotteries are operated by state governments, which have granted themselves the sole right to do so. In other words, they are monopolies that do not allow any commercial lotteries to compete against them. The profits from U.S. lotteries are used solely to fund government programs. As of August 2008, lotteries operated in forty-two states and the District of Columbia. In addition, lottery tickets could be legally purchased by any adult physically present in a lottery state, even if that adult did not reside in the state.

According to the North American Association of State and Provincial Lotteries (NASPL), Americans wagered $57.4 billion in lotteries in fiscal year (FY) 2006. U.S. lottery sales were up from $52.6 billion in FY 2005, an increase of 9%.

LOTTERY HISTORY

Early History

The drawing of lots to determine ownership or other rights is recorded in many ancient documents. The practice became common in Europe in the late fifteenth and early sixteenth centuries. Lotteries were first tied directly to the United States in 1612, when King James I (1566–1625) of England created a lottery to provide funds to Jamestown, Virginia, the first permanent British settlement in North America. Lotteries were used by public and private organizations after that time to raise money for towns, wars, colleges, and public works projects.

An early American lottery, conducted by George Washington (1732–1799) in the 1760s, was designed to finance construction of the Mountain Road in Virginia. Benjamin Franklin (1706–1790) supported lotteries to pay for cannons during the American Revolution (1775– 1783). John Hancock (1737–1793) ran a lottery to finance the rebuilding of Faneuil Hall in Boston. Lotteries fell into disfavor in the 1820s because of concerns that they were harmful to the public. New York was the first state to pass a constitutional prohibition against them.

The Rise and Fall of Lotteries

The southern states relied on lotteries after the Civil War (1861-1865) to finance Reconstruction (1865-1877). The Louisiana lottery, in particular, became widely popular. According to the Louisiana Lottery Corporation, in “History of Lottery” (September 2008, http://www.louisianalottery.com/assets/docs/fact%20sheets/HistoryofLotteries.pdf), in 1868 the Louisiana Lottery Company was granted permission by the state legislature to operate as the state's only lottery provider. In exchange, the company agreed to pay $40,000 per year for twenty-five years to the Charity Hospital of New Orleans. The company was allowed to keep all other lottery revenues and to pay no taxes on those revenues. The Louisiana lottery was popular nationwide—93% of its revenue came from out of state. It was also extremely profitable, returning a 48% profit to its operators.

In 1890 Congress banned the mailing of lottery materials. The Louisiana lottery was abolished in 1894 after Congress passed a law against the transport of lottery tickets across state lines. Following its closure, the public learned that the lottery had been operated by a northern crime syndicate that regularly bribed legislators and committed widespread deception and fraud. The resulting scandal was huge and widely publicized. Public opinion turned against lotteries, and by the end of the nineteenth century they were outlawed across the country.

Negative attitudes about gambling began to soften during the early twentieth century, particularly after the failure of Prohibition (1920–1933). The state of Nevada legalized casino gambling in the 1930s, and gambling for charitable purposes became more commonplace across the country. Still, lingering fears about fraud kept public sentiment against lotteries for two more decades.

Rebirth in the 1960s

In “History of the New Hampshire Lottery” (2008,http://www.nhlottery.org/AboutUs/History.aspx), the New Hampshire Lottery Commission notes that in 1963 the New Hampshire legislature authorized a sweepstakes to raise revenue. The state had no sales or state income tax at that time, and it desperately needed money for education programs. Patterned after the popular Irish Sweepstakes, the game was much different from the lotteries of the twenty-first century. Tickets were sold for $3, and drawings were held infrequently. The biggest prizes were tied to the outcomes of particular horse races at the Rocking-ham Park racetrack in Salem, New Hampshire. Nearly $5.7 million was wagered during the lottery's first year.

The New York Lottery states in “New York Lottery'Mission” (October 2, 2008, http://www.nylottery.org/ny/nyStore/cgi-bin/ProdSubEV_Cat_333652_NavRoot_305.htm) that New York introduced a lottery in 1967. It was particularly successful, grossing $53.6 million during its first year. It also enticed residents from neighboring states to cross state lines and buy tickets. Twelve other states established lotteries during the 1970s (Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Rhode Island, and Vermont). Analysts suggest that lotteries became so firmly entrenched throughout the Northeast for three reasons: each state needed to raise money for public projects without increasing taxes, each state had a large Catholic population that was generally tolerant of gambling, and history shows that states are most likely to start a lottery if one is already offered in a nearby state. For example, Ron Stodghill and Ron Nixon report in “For Schools, Lottery Payoffs Fall Short of Promises” (New York Times, October 7, 2007) that Michael F. Easley (1950–), the governor of North Carolina, said before his state established a lottery, “Our people are playing the lottery. We just need to decide which schools we should fund, other states' or ours.”

During the 1980s lottery fever spread south and west. Seventeen states (Arizona, California, Colorado, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Missouri, Montana, Oregon, South Dakota, Virginia, Washington, West Virginia, and Wisconsin) plus the District of Columbia started lotteries. Six more states (Georgia, Louisiana, Minnesota, Nebraska, New Mexico, and Texas) started lotteries during the 1990s. They were joined after 2000 by North Carolina, North Dakota, Oklahoma, South Carolina, and Tennessee. Most people approve of lotteries. More people approve of lotteries than actually buy tickets and participate, although the gap between approval and participation rates seems to be narrowing.

LOTTERY GAMES

Early lottery games were simple raffles in which a person purchased a ticket preprinted with a number. The player might have had to wait for weeks for a drawing to determine if the ticket was a winner. These types of games, called passive drawing games, were the dominant lottery games in 1973. By 1997 they had ceased to exist, as consumers demanded more exciting games that provided quicker payoffs and more betting options.

Nearly all states that operate lotteries offer cash lotto and instant games. Players of lotto games select a group of numbers from a large set and are then awarded prizes based on how many picked numbers offer a second set of numbers chosen in a random drawing. Most lotto tickets sell for $1, and drawings are held once or twice per week to determine the winning numbers. Scratch-off instant games are paper tickets on which certain spaces have been coated with a scratch-off substance that when removed reveals numbers or text underneath that must match posted sequences to win.

Most states offer other numbers games, such as three-and four-digit games. Pull tabs, spiel, keno, and video lottery games are much less common. Pull tabs are twoply paper tickets that must be separated to reveal symbols or numbers underneath that must match posted sequences to win. Spiel is an add-on feature to a lotto game that provides an extra set of numbers for a fee that must be matched to numbers selected in the random drawing to win. Keno is a lotto game in which a set of numbers is selected from a large field of numbers; players select a smaller set of numbers and are awarded prizes based on how many of their numbers match those in the drawn set. Video lottery terminals are electronic games of chance played on video screens that simulate popular casino games such as poker and blackjack. Keno and video lottery games are considered by many to be casino-type games, especially because they can be played every few minutes (in the case of fast keno) or at will (in the case of video lottery terminals), which makes them more controversial and generally less acceptable than more traditional lottery games.

As of 2008, many lottery games were conducted using computer networks. Retail outlets have computer terminals that are linked by phone lines to a central computer at the lottery commission, which records wagers as they are made. The computer network is a private, dedicated network that can be accessed only by lottery officials and retailers. Players can either choose their numbers themselves or allow the computer to select

numbers randomly, an option known as Quick Pick. The computer link allows retailers to validate winning tickets.

Most lotto drawings are televised live. Some states also air lottery game shows in which contestants compete for money and prizes. For instance, The Big Spin, the California State Lottery's thirty-minute game show, has been broadcast since 1985. Contestants, who are chosen through lottery drawings or special promotions, spin a big wheel to win cash prizes in front of a cheering audience.

Lottery winners generally have six months to one year to collect their prizes, depending on state rules. If the top prize, usually called the jackpot, is not won, the amount of the jackpot usually rolls over to the next drawing, increasing the jackpot. Lotteries are often most popular when the jackpot has rolled over several times and grown to an unusually large amount.

Most states allow players to choose in advance how a jackpot will be paid to them—either all at once (the cash lump-sum prize) or in installments (an annuity, usually paid out over twenty or twenty-five years). Either way, in most states taxes are subtracted from the prize.

Scratch Games

In 1974 Massachusetts became the first state to offer an instant lottery game using scratch-off tickets. By 2008 games involving scratch tickets (or “scratchers,” as they are called in some states) were extremely popular. Lottery organizations offer many different scratch games with various themes.

Scratch games run for a specified period, usually for several months to a year. Many scratch tickets allow a player to win multiple times on each ticket. The top prize amounts are often hundreds of thousands of dollars. However, some of the games offer prizes besides money, including merchandise, trips, vehicles, and tickets to sporting events and concerts. For example, in 2006 a Missouri scratch game gave away a seat at a table at the World Poker Tour tournament. The total winnings for such prizes often include payment by the lottery commission of federal and state income taxes on the value of the prizes.

Many lotteries have teamed with sports franchises and other companies to provide popular products as prizes. For example, in June 2008 the New Jersey Lottery Commission announced a scratch game in which a Harley-Davidson motorcycle was the top prize. Many brand-name promotions feature famous celebrities, sports figures and teams, or cartoon characters. These merchandising deals benefit the companies through product exposure and advertising; the lotteries benefit because the companies share advertising costs.

In 2008 most states offered “high-profit point tickets”— scratch tickets priced as high as $30, which are often part of a holiday or themed promotion. (Traditional scratch tickets sell for $1 to $5.) The higher-priced tickets appeal to many scratch players because they offer more valuable prizes and payouts than regular-priced tickets. However, in “‘Zero’ Chance Lottery Tickets Stun Some Players” (CNN.com, July 7, 2008), Jason Carroll and Susan Chun report that in 2008 state lotteries came under fire for continuing to sell the high-priced scratch-off tickets even after the top prize had been won. In fact, Scott Hoover of Washington and Lee University sued the state of Virginia for a breach of contract after he bought a scratch-off ticket called “Beginner's Luck” and later learned the top prizes had already been won.

Most lotteries operate toll-free numbers or Web sites that provide information on scratch-game prizes. Patrons can find out which prizes have been awarded and which remain to be claimed.

Second-Chance Games

Sometimes even nonwinning lottery tickets have value. Most state lotteries run occasional second-chance drawings—and even third-chance drawings—in which holders of nonwinning tickets for particular games can still win cash or prizes. For example, the New York Lottery held a second-chance drawing during the summer of 2006 in which holders of nonwinning Subway Series scratch tickets could win Mets and New York Yankees tickets and merchandise. The grand prize winner in Florida's $100,000 Hold 'Em Poker second-chance drawing in December 2007 won a seat at a World Poker Tour tournament with a buy-in of $10,000, a week's accommodation at the tournament site, additional spending money, and tickets to the tournament finals. Winners of quarterly second-chance drawings in Nevada may be awarded either $2,500 in cash or thirty $10 scratch-off tickets.

Video Lottery Games

Video lottery games are highly profitable computer games that are played on video lottery terminals (VLTs). They are monitored and controlled by a central computer system overseen by a state's lottery agency. VLTs were operated in nine states in 2008: Delaware, Louisiana, Montana, New Mexico, New York, Oregon, Rhode Island, South Dakota, and West Virginia. Three of these states, Rhode Island, Delaware, and West Virginia, launched the first multistate, progressive video lottery game in 2006 (a progressive jackpot is one that increases with each game played). Known as Ca$hola, the game begins with a $250,000 jackpot.

VLTs in Louisiana, Montana, and South Dakota are owned by private entities. Those in Rhode Island are leased by the state to private operators. VLTs in the other states are owned by state lottery commissions. In Delaware, New York, and Rhode Island, VLTs are only allowed at racetracks. Except in New York, profits from

the VLTs are split between the racetracks and the state lotteries. The VLTs in New York were challenged in court because the state's constitution requires that lottery proceeds benefit education programs. Some VLT revenue was going to racetracks, so the courts declared the diversion of lottery revenue unconstitutional. In 2005 the state legislature amended the law. Under the new legislation the money for the racetrack owners comes out of the state's general fund and all the money gathered from the VLTs goes to education.

In Iowa, VLTs were introduced in 2003, and eventually nearly six thousand VLTs were bringing in over $1.1 billion in revenue. However, according to the Cedar Rapids Gazette Online (July 15, 2006), calls to the state's hotline for gambling problems rose 17% in 2005, largely because of VLTs, and the state legislature shut down the VLT program in May 2006.

Video lottery games have become controversial because many people consider them hard-core gambling. They allow continuous gambling for large sums of money, as opposed to lotto play, which features drawings only once or twice a week. Opponents of video lottery games contend that they are much more addictive than traditional lottery games because of their availability and instant payoffs. They also contend that the games have a special appeal to young people, who are accustomed to playing video games.

Multistate Games

POWERBALL. During the 1980s lottery officials realized that multistate lotteries could offer higher payoffs than single-state lotteries because the costs of running one game could be shared. The Multi-State Lottery Association (MUSL) was formed in 1987 as a nonprofit association of states offering lotteries. It administers a variety of games, the best known of which is Powerball. In this lotto game each ticket has six numbers: five numbers are selected out of fifty-five numbers, and then a separate number, the Powerball, is selected out of forty-two numbers. The odds of winning the jackpot are about 146 million to 1. Drawings have been held twice weekly since the first drawing on April 22, 1992. The largest jackpot ever paid out, in February 2006, was $365 million. It was split evenly among eight coworkers in Lincoln, Nebraska.

As of August 2008, MUSL(http://www.musl.com/musl_members.html) had thirty-one members. Each member state offered at least one MUSL game, and twenty-nine member states, the District of Columbia, and the U.S. Virgin Islands offered the Powerball. Each member keeps 50% of its own Powerball ticket sales; the rest is paid out in prizes.

MEGA MILLIONS. Mega Millions is a popular multi-state game that is offered in twelve states. Players choose six numbers from two separate number pools: five numbers from 1 to 56, and one number from 1 to 46. All six numbers must be chosen in the drawing to win the jackpot. The odds of winning the jackpot are about 175 million to 1. Drawings are held twice weekly.

Mega Millions was originally known as the Big Game. The first Big Game drawing took place on September 6, 1996. It became popular and soon offered jackpots of more than $50 million. Its largest jackpot was won in May 2000—two winners, one in Michigan and one in Illinois, split $363 million.

However, Big Game sales lagged during FY 2001, so game operators renamed it Mega Millions and increased the initial jackpot to $10 million, twice what it had been for the Big Game. Ticket sales increased dramatically. In 2005 the minimum jackpot was raised to $12 million when California joined the lottery. The biggest Mega Millions jackpot was in March 2007—$390 million was split between a couple in Woodbine, New Jersey, and another person in Dalton, Georgia.

HOW LOTTERIES OPERATE

In 2008 most lotteries were administered directly by state lottery boards or commissions. The lotteries in Connecticut, Georgia, Kentucky, Louisiana, and Tennessee were operated by quasi-governmental or privatized lottery corporations. In most states enforcement authority regarding fraud and abuse rested with the attorney general's office, state police, or the lottery commission. The amount of oversight and control that each legislature has over its lottery agency differs from state to state.

Even though lotteries are a multimillion-dollar business, lottery commissions employ only a few thousand people nationwide. Lottery commissions set up, monitor, and run the games offered in their states, but the vast majority of lottery sales are by retail outlets that contract to sell the games.

Retailers

According to the NASPL (2008, http://www.naspl.org/index.cfm?fuseaction=content&PageID=9&Page Category=31), over 191,000 retailers sold lottery tickets in the country in 2008. California had the most retailers (19,000), followed by Texas (16,281) and New York (15,900). Half of all lottery retailers were convenience stores. Other outlets included various kinds of stores, nonprofit organizations (churches and fraternal organizations), service stations, restaurants and bars, bowling alleys, and newsstands.

Retailers get commissions on lottery sales and bonuses when they sell winning tickets. They also get increased store traffic and media attention, especially if they become known as “lucky” places to purchase lottery

tery tickets. Some state lottery Web sites list the stores where winners purchased their tickets. For example, in “Lucky Retailers” (April 6, 2006,http://www.calottery.com/SecondaryNav/RetailLocations/LuckyRetailers/), the California State Lottery notes that one retailer in Port Hueneme, California, sold six winning million-dollar-plus tickets between 1987 and 1994.

Lottery tickets are often impulse purchases, so retailers sell them near the checkout. This also allows store operators to keep an eye on ticket vending machines to prevent play by underage customers. Because convenience stores increasingly offer pay-at-the-pump gasoline sales— transactions that are likely to decrease in-store traffic— lottery officials in Minnesota and several other states are contemplating ways to sell and print tickets at the gas pumps. In fact, a patent (U.S. Patent 6364206,http://www.patentstorm.us/patents/6364206.html) was issued in 2002 that would enable lottery ticket transactions at gas pumps. In 2008 the New Jersey Lottery Commission was considering selling lottery tickets in mass-merchandise stores, such as Target and Home Depot.

LOTTERY PLAYER DEMOGRAPHICS

Jeffrey M. Jones of the Gallup Organization states in One in Six Americans Gamble on Sports (February 1, 2008,http://www.gallup.com/poll/104086/One-Six-Americans-Gamble-Sports.aspx) that in 2008, 46% of adults had purchased a lottery ticket within the previous year. Many state lottery commissions conduct demographic studies to get a better picture of lottery players, largely because they want to better target them in marketing campaigns. The findings in two states provide some insight into lottery players.

Texas

In Demographic Survey of Texas Lottery Players 2007 (December 5, 2007,http://www.uh.edu/cpp/txlottery.pdf), the University of Houston's Center for Public Policy states that only 38% of Texans played the lottery in 2007, which was the lowest level since the lottery began in 1992. (See Figure 7.1.) People with an income of $75,000 to $100,000 were the most likely to play (50%), whereas people with an income of less than $12,000 were the least likely to play(28.6%). (See Table 7.1.) Men were more likely than women to play the lottery (41.5% and 36.1%, respectively). Older people were more likely than younger people to play the lottery, and people who were employed at least part time (45.2%) were more likely than retired people (33.2%) or unemployed people (17.1%) to play the lottery. These figures suggest that a worsening economy may be partially responsible for the drop in lottery players in 2007.

The amount of money various demographic groups spent on the lottery differed greatly, however. Young people, Native Americans, males, and individuals with

less education were likely to spend the most on the lottery. (See Table 7.1.) The most popular game was Lotto Texas; about 85% of people who played lottery games played Lotto Texas, and over one-third (34.6%) of those purchased tickets at least once a week. Individuals spent the most money on scratch games, with the average player spending $33.27 per month on such games.

South Carolina

According to the South Carolina Education Lottery, in Player Profile Study 2006 (September 2006,http://www.statelibrary.sc.gov/scedocs/L917/000391.ppt), 54% of those polled had played the South Carolina lottery in 2006. About 51% of females surveyed had played the lottery, as opposed to 49% of males. A higher percentage of African-Americans (62%) had played the lottery than whites (50%). Of all age groups, a higher percentage of people between thirty-five and fifty-four had played the lottery (58%) than any other age group.

Seventeen percent of players said they played the lottery more than once a week (“frequent players”), 13% said they played about once a week (“regular players”), and the rest said they played one to three times a month (“occasional players”) or less (“infrequent players”).

In South Carolina, high-school educated, middle-aged men in the middle of the economic spectrum were more likely to be “frequent players” than any other demographic group.

The South Carolina survey also reported where and when South Carolinians purchased their tickets. In 2006 people usually purchased tickets at a gas station or convenience store that sells gas (91%), as opposed to a grocery store (12%) and a convenience store without gas (8%). Most players purchased their tickets on the weekdays (44%), versus the weekend (32%), or both (18%). Sixty percent claimed to purchase their tickets after four in the afternoon. The most popular game was Powerball, which was played by 43% of those polled. Scratch tickets came in a close second (41%).

GROUP PLAY

Groups of people frequently pool their money and buy lottery tickets, particularly for large jackpots. Group wins are beneficial to the lotteries because they generate more media coverage than solo wins and expose a wider group of friends, relatives, and coworkers to the idea that lotteries are winnable. However, pooling arrangements, even those between only two people, can lead to disagreements if a group actually wins a jackpot. Several such groups have ended up in court, but given the number of winners every year, such cases are relatively rare.

Some states have formalized group play. For example, the California State Lottery started the Jackpot Captain program in 2001 to help “group leaders” manage lotto pools. Lotto captains have access to a special Web site that gives them tips on organizing and running group play. They can download and print forms that help them track players, games, dates, and jackpots. As an incentive, lotto captains can participate in special drawings for cash and prizes. According to state lottery officials, far more people enrolled to be captains than was expected. The lottery described them as hard-core players who promote lottery games, recruit new players, and provide valuable feedback about lottery promotions. The most recent captains program was rolled out by Rhode Island in April 2008. The state began offering the PowerBall Group Play Program that allows group play captains access to a special group play page and a group play tool kit.

WHY DO PEOPLE PLAY LOTTERIES?

A lottery is a unique gambling event because it costs only a small amount of money for a chance to win a large jackpot. Even though the odds are extremely long, the huge jackpot is the main selling feature. Rollover jackpots spur ticket sales. As more people buy tickets, the jackpot grows, whereas the odds of winning decrease. However, this does not deter people from buying tickets—sales actually increase under these circumstances.

Mark D. Griffiths and Richard T. A. Wood of Nottingham Trent University examine in Lottery Gambling and Addiction: An Overview of European Research (1999, https://www.european-lotteries.org/data/info_130/Wood.pdf) why people continue to play the lottery despite the long odds. Among the most common reasons are the lure of a large jackpot in exchange for a small investment; successful advertising; publicity about jackpot winners; ignorance of probability theory; televised drawings; overestimating the positive outcomes and underestimating the negative ones; the credibility of government backing; and players' belief in their own luck. However, perhaps the most important finding by Griffiths and Wood concerns

the role of entrapment. According to the researchers, many people select the same numbers week after week. As time goes by and their numbers are not selected, they do not become discouraged. Instead, they think their chances of winning are getting better. Often, players experience near misses, in which two or more of their numbers come up in the jackpot drawing. This only convinces them that they are getting closer to the big win. They become increasingly entrapped in playing their numbers and fear skipping even one drawing. According to Wood and Griffiths, this mind-set has its roots in a common myth that the probability of winning increases the longer a losing streak lasts.

Emily Haisley, Romel Mostafa, and George Loewenstein of Carnegie Mellon University find in “Subjective Relative Income and Lottery Ticket Purchases” (Journal of Behavioral Decision Making, vol. 21, no. 3, July 2008) that people who perceive themselves as poor are more likely to buy lottery tickets and are more likely to buy more lottery tickets than people who do not perceive themselves as poor. The researchers find that buying lottery tickets sets up a vicious cycle for poor people: it exploits individuals' desires to escape poverty, but it also contributes to their inability to improve their financial situation.

THE EFFECTS OF LOTTERIES

Economic Effects

Proponents of lotteries usually use economic arguments to justify their position. They point out that lotteries provide state governments with a relatively easy way to increase their revenues without imposing more taxes. The games are financially beneficial to the many small businesses that sell lottery tickets and to larger companies that participate in merchandising campaigns or provide advertising or computer services. In addition, lottery advocates surmise, the games provide cheap entertainment to people who want to play, while raising money for the betterment of all.

Lottery opponents also have economic arguments. They contend that lotteries contribute only a small percentage of total state revenues and, therefore, have a limited effect on state programs. Lotteries cost money to operate and lure people into parting with their money under false hopes. In addition, opponents contend that those targeted by lotteries come particularly from lower income brackets and may not be able to afford to gamble.

THE DIVISION OF LOTTERY MONEY The sales amount is the total amount taken in by the lottery. This sales amount is then split between prizes, administrative costs, retailer commissions, and state profits. In general, 50% to 60% of U.S. lottery sales are paid out as prizes to winners. Administrative costs for advertising, employee salaries, and other operating expenses usually account for 1% to 10% of sales. On average, retailers collect 5% to 8% of sales in the form of commissions and approximately 2% as bonuses for selling winning tickets. The remaining 30% to 40% is profit turned over to the state.

According to the NASPL, U.S. state lotteries had approximately $57.4 billion in sales for FY 2006. National sales were up 9% over the previous fiscal year's sales of $52.6 billion. Every state reported sales were higher in 2006 than in 2005.

The NASPL's data show that during FY 2006 New York ($6.8 billion) had the highest lottery sales, followed by Massachusetts ($4.5 billion) and Florida ($4 billion). These three states accounted for 27% of national lottery sales. Seventeen states had lottery sales of more than $1 billion during FY 2006.

The states took in $17.1 billion in profits from the lottery in FY 2006. The states allocate their lottery profits in different ways. Table 7.2 shows each state's cumulative allocation of profits from each lottery's inception to June 2006. A total of $234.1 billion has been given to various beneficiaries since the beginning of lotteries in each state. New York topped the list with $30 billion in profits allocated to education since 1967. California followed with $18.5 billion to education, and New Jersey, $15.6 billion.

RETAILER PAYMENTS According to the U.S. Census Bureau (March 17, 2008,http://www.census.gov/compendia/statab/cats/state_local_govt_finances_employment.html), $27.7 billion was given out as prizes in state lotteries in 2004. That was 61% of the total lottery revenue in that year. Administrative costs, including retailer compensation, made up approximately $2.7 billion (6%) of total revenue, whereas average state profit was $15 billion (33%).

The primary means of retailer compensation is a commission on each ticket sold. In other words, a lottery retailer keeps a certain percentage of the money taken in from lottery sales. Most states also have incentive-based programs for retailers that meet particular sales criteria. For example, the Wisconsin lottery pays retailers a bonus for increasing ticket sales by particular amounts. Lottery officials believe the incentive program, which encourages retailers to ask customers if they would like to buy lottery tickets, is more effective than an increase in commission. Retailers that sell a winning ticket of $600 or more in Wisconsin receive 2% of the value of the ticket (up to $100,000).

UNCLAIMED LOTTERY WINNINGS Unclaimed lottery winnings add up to hundreds of millions of dollars each year, and each state handles them differently. Some states, such as New York, require that unclaimed winnings be returned to the prize pool. Other states allocate such funds to lottery administrative costs or to specific state programs. For example, in Texas unclaimed prizes go to funds that benefit hospital research and payment of indigent health

The California State Lottery (November 22, 2005,http://www.calottery.com/Media/Education/Unclaimed/) turns the money over to educational programs—more than $580 million between 1985 and 2007.

TAXES AND OTHER WITHHOLDING FROM LOTTERY WINNINGS Lottery winnings are usually taxable as personal income. All prizes greater than $600 are reported by the lotteries to the Internal Revenue Service. In general, the lottery agencies subtract taxes before awarding large prizes. For example, the New York Lottery in 2008 withheld federal, state, and local income taxes on prizes greater than $5,000. The lottery withheld 25% for federal taxes and 6.85% for state taxes. An additional 3.65% was withheld if the winner was a New York City resident. Non-U.S. residents faced even higher tax withholding rates. In addition, the New York Lottery is required by law to subtract past-due child support payments and collect repayment of public assistance from prizes of $600 or more.

Education

Lottery proponents often advocate lotteries for their economic benefits to education. Some lotteries dedicate all or a portion of their profits toward K–12 or higher education. However, opponents often argue that these profits do not provide additional dollars for education but simply replace general fund dollars that would have been spent on education anyway.

Donald E. Miller of Saint Mary's College argues in “Schools Lose out in Lotteries” (USA Today, April 14, 2004) that educational spending per student gradually decreases once a state starts a lottery. He examined data for twelve states that had enacted lotteries for education between 1965 and 1990. According to Miller, before lotteries were set up average education spending in those states increased each year by approximately $12 per student. In the years immediately following the initiation of the lotteries, the states increased their education spending on average by nearly $50 per student. However, the increase fell sharply in following years and eventually lagged behind states without lottery-generated education funds. Miller suggests that legislators use lottery funds “to replace rather than add to existing sources of education funding.”

Stodghill and Nixon note that in 2006 only 1% to 5% of public education money came from lotteries. Most of the money raised by lotteries is spent on marketing, prizes, and retail commissions. In addition, as more lotteries are created, they are competing for players, leading lotteries to increase the size of their prizes, which shrinks the percentage of money that goes to education. Miller finds that as money from the lottery simply replaces other funds, schools gain no additional funding.

THE HOPE SCHOLARSHIP The Georgia Lottery Corporation (2008,http://www.galottery.com/gen/education/hopeScholarship.jsp) notes that HOPE scholarships and grants are available to Georgia residents who enroll in certain programs at public and private institutions in the state. Students must have at least a 3.0 grade point average to qualify for HOPE money and have to maintain their eligibility in subsequent years. Most recipients are recent high school graduates who pursue college degrees.

In “Georgia's HOPE Program” (2008,http://www.gacollege411.org/finaid/scholarshipsandgrants/hopescholarship/default.asp), the Georgia Student Finance Commission explains that at public colleges the HOPE scholarship pays for tuition and fees and provides a $300 book allowance per academic year. Room and board expenses are not covered. In 2008 the HOPE scholarship provided $3,500 per academic year to full-time students (who can also qualify for the Georgia Tuition Equalization Grant of $900 per academic year). Part-time students attending private colleges were eligible for $1,750 per academic year. Georgia students who earned a General Education Diploma could receive a one-time $500 award that could be used toward tuition or books at a public or private college in Georgia. Between 1993 and 2008, $3.8 billion had been awarded to 1.1 million Georgia college students.

The HOPE scholarship program is one of the country's largest state-financed merit-based aid programs and is credited with significantly increasing the attendance of in-state residents at Georgia colleges. Similar programs include Kentucky's Educational Excellence Scholarshiphttp://www.kheaa.com/website/kheaa/kees?main=1)

and Florida's Bright Futures Scholarship http://wwwfloridastudentfinancialaidorg/ssfad/bf/).

Social Effects

According to the NASPL, in “Lottery History” (2008, http://www.naspl.org/index.cfm?fuseaction=12&PageCategory=content&PageID=11), lotteries operate on every continent except Antarctica. In the United States lotteries enjoy unprecedented popularity. They are legal in forty-two states and are generally considered a benign form of entertainment with two enormous selling points: they seem to offer a shortcut to the “American Dream” of wealth and prosperity, and they are a voluntary activity that raises money for the public good in lieu of increased taxes. Opposition to lotteries is generally based on religious or moral reasons. Some people consider all forms of gambling to be wrong, and state-sponsored lotteries may be particularly abhorrent to them.

The National Gambling Impact Study Commission (NGISC) complains in Final Report (June 1999,http://govinfo.library.unt.edu/ngisc/reports/fullrpt.html) about the appropriateness of state governments pushing luck, instant gratification, and entertainment as alternatives to hard work, prudent investment, and savings. Such a message might be particularly troubling if it is directed toward lower-income people.

POVERTY, RACE, AND ETHNICITY One of the most common criticisms leveled against state lotteries is that they unfairly burden the poor—that they are funded mostly by low-income people who buy tickets, but benefit mostly higher-income people. In economics terminology, a tax that places a higher burden on lower-income groups than higher-income groups (in terms of percentage of their income) is called regressive. Even though the lottery is not really a tax, many people consider it to be a form of voluntary taxation because the proceeds fund government programs. The economist Philip J. Cook, one of the coauthors of the NGISC's Final Report, states “the tax that is built into the lottery is the most regressive tax we know.”

The NGISC expresses serious concern about the heavy reliance of lotteries on less-educated, lower-income people. It also mentions that an unusually large number of lottery outlets are concentrated in poor neighborhoods.

Joseph McCrary and Thomas J. Pavlak of the Vinson Institute of Government Studies at the University of Georgia review in Who Plays the Georgia Lottery?: Results of a Statewide Survey (2002, http://www.ncalg.org/Library/Studies%20and%20White%20Papers/Lotteries/Georgia%20Lottery.pdf) a number of nationwide and state studies on the relationship between income and lottery participation. The researchers find that “the regressivity finding remains largely consistent throughout the literature.” McCrary and Pavlak cite a common belief among lower-income people that playing the lottery is their only chance to escape poverty.

In“ThePoorPlayMore”(Chicago Reporter, October 2002), Leah Samuel analyzes the lottery sales in Illinois since 1997 by comparing lottery sales figures around the state with income and demographic data from the 2000 census. The ten zip codes with the highest lottery sales for the previous six fiscal years were all in Chicago. The residents of all ten zip codes had average incomes of less than $20,000 per year, compared to the city average of $24,000 per year. Eight of the zip code areas had unemployment rates more than the city average of 10%. Residents of half of the zip code areas were populated by at least 70% African-Americans. Samuel finds that average lottery sales per capita in the city's mostly African-American zip codes were 29% to 33% higher than in mostly white or Hispanic zip code areas. The zip code with the highest lottery sales in the state, 60619, coincided with predominantly African-American and Latino low-income communities on the city's south side. Residents of that zip code spent nearly $23 million on lottery tickets during FY 2002. Samuel also finds that residents in poorer communities spent a larger portion of their income on lottery tickets than did people in more affluent neighborhoods. Lottery spending during FY 2002 was $224 per person in zip codes that were at least 70% African-American and $173 per person in zip codes that were at least 70% white.

Robert Gebeloff and Judy DeHaven report similar findings in “Who Really Pays for the Lottery” (Star-Ledger [Newark, New Jersey], December 6, 2005). Gebeloff and DeHaven gathered data on lottery sales in New Jersey by zip code and compared that data to income and population data for each zip code from 2000 to 2004. The results clearly show that those who lived in poorer areas bought far more lottery tickets than those living in wealthy ones. People who resided in zip codes where the average income was less than $52,151 spent an average of $250 per year on the lottery, whereas those who lived in zip codes with an average salary of $117,503 to $141,132 spent an average of $115 on lottery tickets per year. Residents of extremely wealthy neighborhoods—where the average salary was more than $141,132—spent $89 on lottery tickets each year. In addition, less wealthy neighborhoods had more lottery retailers per capita. The ratio of lottery retailers per 5,000 people was 4 to 1 in low-income areas, compared to roughly 1.5 to 1 in wealthy neighborhoods.

Haisley, Mostafa, and Loewenstein back up these studies, finding that people who perceive themselves as poor are more likely to buy lottery tickets than other people. Poor people see the lottery as a way to improve their financial situation. The researchers determine that poor people spending money on the lottery is a factor in their inability to improve their relative finances.

RACE AND ETHNICITY OF LOTTERY BENEFICIARIES McCrary and Pavlak report that African-Americans and less-educated people are more likely to be active lottery

players than whites and more-educated people. Proceeds from the Georgia lottery fund only education programs. If these programs provide more benefits to the poor than to the wealthy, it could be argued that this compensates for the regressive nature of the state lottery.

However, Ross Rubenstein and Benjamin Scafidi, in “Who Pays and Who Benefits: Examining the Distributional Consequences of the Georgia Lottery for Education” (National Tax Journal, vol.52, no.2,June2002), and Christopher Cornwell and David Mustard, in The Distributional Impacts of Lottery Funded Merit-Based Aid (1999), criticize Georgia's lottery for providing more benefits to white households than to minority households. Cornwell and Mustard claim that counties with the highest incomes and white populations receive significantly more HOPE scholarships.

In HOPE Scholarship: Joint Study Commission Report (2003,http://www.cviog.uga.edu/hope/report.pdf), the Vinson Institute of Government Studies argues that a county-by-county comparison of HOPE scholarship recipients is not appropriate because other factors affect these statistics—for example, whether a particular county contains a college or university. However, the institute does conclude that minorities in Georgia are “slightly less likely” than whites to get a HOPE scholarship.

The Vinson Institute reports that lottery play was inversely related to education level. In other words, people with fewer years of education played the lottery more often than those with more years of education. It also finds that lottery spending per person was highest in counties where African-Americans made up a larger percentage of the population.

Regarding the HOPE scholarship program, the Vinson Institute indicates that white students received a disproportionately high amount of the funds, compared to African-American students. In 1999 white students made up 66% of the freshman class in Georgia, but accounted for 74% of all HOPE scholars. By contrast, 26% of all freshmen were African-Americans, yet they accounted for only 21% of HOPE scholars. The Vinson Institute notes that this disproportionate relationship was true for every year examined, back to 1994. However, the institute states that the gap narrowed substantially over that time.

Analysis of Georgia's lottery-funded prekindergarten program provided completely different results. The Vinson Institute finds that the rate of enrollment in the prekindergarten program was higher in lower-income areas of the state than in affluent areas. It concludes that this particular lottery program is more beneficial to poorer people, African-Americans, and those who regularly play the lottery than to other groups in the state.

In “State Lotteries: Their Effect on Equal Access to Higher Education” (Journal of Hispanic Higher Education, vol. 3, no. 1, 2004), Randall G. Bowden of Saint Leo University finds that minority and low-income students do not have proportionate access to higher education in lottery states.

COMPULSIVE GAMBLING AND COGNITIVE DISTORTION The vast majority of states operate lotteries, and as a result, they are easily accessible to large numbers of people. Surveys show that lottery play is the most popular and widely practiced form of gambling in the United States. However, does the combination of easy and widespread access and general public acceptance mean that lottery players are more likely to develop serious gambling problems?

Dean Gerstein et al. conclude in Gambling Impact and Behavior Study: Report to the National Gambling Impact Study Commission (April 1, 1999,http://cloud9.norc.uchicago.edu/dlib/ngis.htm) that there is a significant association between lottery availability and the prevalence of at-risk gambling within a state. At-risk gamblers are defined as those who gamble regularly and may be prone to a gambling problem. However, the researchers find that multivisit lottery patrons had the lowest prevalence of pathological and problem gambling among the gambling types examined.

Gerstein et al. also warn that the patron database used in their analysis was small, meaning that the findings may not apply universally. They note that lottery players who do have a problem may be less able to recognize it because lottery players tend to undercount their losses. Lottery players generally lose small amounts at a time, even though these small amounts may eventually total a large amount. In other words, a casino gambler who loses thousands of dollars in a day might be more likely to admit having a gambling problem than a lottery player who loses the same amount over a longer period.

In “Underlying Cognitions in the Selection of Lottery Tickets” (Journal of Clinical Psychology, vol. 57, no. 6, 2001), Karen K. Hardoon et al. study undergraduate students to examine cognitive misconceptions of lottery gamblers. Sixty students were given the South Oaks Gambling Screen, which is used to determine the probability that a person has a gambling problem. (See Chapter 2.) All the students were shown sixteen lotto tickets, each marked with a different sequence of six numbers. The sequences were random (e.g., 1, 13, 19, 34, 40, 47), pattern (e.g., 5, 10, 15, 20, 25, 30), long sequence (e.g., 1, 2, 3, 4, 5, 6), or nonequilibrated or unbalanced (a series not covering the whole range of possible numbers, usually limited to either high or low numbers, such as 3, 5, 9, 12, 15, 17). The students were then asked to choose the twelve tickets they would most like to play in the lottery and to rank those tickets from best to worst. Random sequences were by far the most popular: more than half of the tickets selected by the students as their first, second, third, and fourth favorite

choices contained random sequences. The second most popular choice was the pattern sequence.

The students were also asked to explain the reasoning behind their selections. Randomness was the reason given 78% of the time. The presence of significant numbers (e.g., a birth date) was the second most popular reason (69.5%).

Hardoon et al. point out that all the students' choices were irrational because every ticket has an equal chance of winning. However, those students who regularly played the lottery or participated in other gambling activities were more likely to display bias when choosing their favorite tickets. In other words, they had stronger opinions about what was “winnable” than did infrequent players and those who did not gamble. The probable pathological gamblers were found to have more illusions about control than all other participants. Hardoon et al. conclude that there was “some level of cognitive distortion” demonstrated by all the gamblers in the study.

THE FUTURE OF U.S. LOTTERIES

New State Lotteries?

As of August 2008, only eight states did not have lotteries: Alabama, Alaska, Arkansas, Hawaii, Mississippi, Nevada, Utah, and Wyoming. Hawaii and Utah permit no types of gambling and seem unlikely to amend their constitutions. A lottery in Nevada is very unlikely because of the tremendous growth of casino gambling there. Alaskan politicians have shown minimal interest in a lottery. Though many state lottery bills have been introduced in the Alabama and Mississippi legislatures, most of them died in committee and the rest were soundly defeated on the floor. For several years members of the Wyoming legislature have been pushing a bill to allow the sale of Powerball tickets. The latest bill was defeated in the Wyoming House of Representatives in February 2007. In Arkansas lottery supporters sponsored a petition drive in 2008 that enabled a proposed constitutional amendment that would allow a lottery benefiting education to appear on the ballot in the November 4, 2008, general election.

Jackpot Fatigue

A major problem facing the lottery industry is called “jackpot fatigue.” Lottery consumers demand higher and higher jackpots so they can stay excited about lotto games. However, individual states cannot increase jackpot sizes without either greatly increasing sales or decreasing the portion of lottery revenue going to public funds. The first option is difficult to achieve and the second is politically dangerous. Jackpot fatigue has driven increasing membership in multistate lotteries, such as Mega Millions and Powerball.

Pressure for Increased Revenue

Even as they cope with jackpot fatigue, many lotteries also face pressure to increase the amount of profit going to government programs. Several states are considering decreasing their lottery payout to raise much needed funds. Opponents argue that cutting prize payouts will reduce sales, thereby making it nearly impossible to increase state revenues.