STATE LOTTERY

A game of chance operated by a state government.

Generally a lottery offers a person the chance to win a prize in exchange for something of lesser value. Most lotteries offer a large cash prize, and the chance to win the cash prize is typically available for one dollar. Because the number of people playing the game usually exceeds the number of dollars paid out, the lottery ensures a profit for the sponsoring state.

Lotteries can come in a variety of forms, but there are three basic versions: instant lotteries, general lotteries, and lotto. Instant lotteries offer immediate prizes and consist of such games as scratch-off tickets and pull tabs. A general lottery is a drawing with a payout based on a percentage of the amount in the aggregate wagering pot; because all numbers bet for the particular game are included in the drawing, a winner is guaranteed. Lotto is similar to a general lottery in that the winning number is chosen in a drawing. However, the winning number in a lotto game is chosen by a computer, and the computer may not pick a number or sequence of numbers that is held by a player. If no player has a number that matches the number chosen by the computer, the cash prize rolls over into the next game's drawing. Lotto usually generates more money than other lotteries. A player must match a long sequence of numbers, and this raises the odds against the players, which in turn makes it more likely that the cash prize will increase. Most of the other forms of lotteries are spin-offs of these three basic forms.

More than thirty states have state-run lotteries. These lotteries are administered by state agents and agencies, such as a director of the state lottery and a state lottery board. State legislatures create lotteries and lottery agencies in statutes. These statutes specify details of the game, such as the length of time a winner has to claim a prize after the relevant drawing, the documentation a winner must present to claim a prize, the manner of payment of the prize, and procedures in case a prize is won by a corporation or other legal entity.

Go West, Young Lottery Player

Lotteries are ancient games, long predating the founding of the United States. Their popularity in Europe, and especially in England, helps explain why the first lotteries were held in the American colonies in 1612. The colonies were under the command of the British Crown, which did not permit them to levy taxes. But the British did authorize the Virginia Company of London to hold games for its benefit—at least until the scheme backfired. The lotteries drained the Crown's pockets and helped the upstart colonies, and within a decade, the colonists' own domestic lotteries had replaced them. A century later, the colonists held lotteries to raise funds for the war of independence.

During the eighteenth and nineteenth centuries, lotteries played an important role in building the new nation. Its banking and taxation systems were still in their infancy, necessitating ways to raise capital quickly for public projects. Lotteries helped build everything from roads to jails, hospitals, and industries and provided needed funds for hundreds of schools and colleges. Famous American leaders like thomas jefferson and benjamin franklin saw great usefulness in them: Jefferson wanted to hold a lottery to retire his debts, and Franklin to buy cannons for Philadelphia. Lotteries expanded in the 1800s, prompting Congress in 1812 to authorize them in the District of Columbia. By midcentury, eastern states alone raised over $66 million annually, and lotteries were starting up in the West.

Despite their significance to early U.S. history, lotteries fell out of favor in the late 1800s. Corruption, moral uneasiness, and the rise of bond sales and standardized taxation proved their downfall. Only Louisiana, with a notorious lottery known as The Serpent, still held a state-run game at the end of the century. Congress put a stop to it with the Anti-Lottery Act of 1890 (Act of September 19, 1890, ch. 908, 26 Stat. 465), a federal ban on the use of the mails for conducting lotteries that effectively ended the games for the next seventy years.

New Hampshire swept in the modern era of state-sponsored lotteries in 1964. In 1974 Congress relaxed regulations for the benefit of the growing number of states holding the games (Pub. L. No. 93-583, 88 Stat. 1916 [1975]; H.R. Rep. No. 1517, 93d Cong., 2d Sess. [1974]).

State statutes also specify just how the money generated by the lotteries will be used. Many states direct that the profits should go into the state's general revenue fund, whereas other states earmark the profits for a particular endeavor, such as public school education, care of senior citizens, or economic development.

States Gamble on Gambling

As the ultimate high-odds game, a lottery produces very few winners. Since the rush to legalize government lotteries began in the 1970s, states have capitalized tremendously on the game's drastic odds. Thirty-nine states and the District of Columbia reaped over $42 billion in 2002, more than double the revenues reported just seven years earlier. Supporters tout the game as an easy revenue-raiser and a painless alternative to higher taxes. Opponents attack it as dishonest, unseemly, and undependable. They argue that the social and administrative costs do not actually skirt taxation but instead put the state in the role of con artist. It is also criticized as a regressive tax on the poor.

The case for lotteries is largely about funding state government. Lotteries are frequently publicized as an alternative to raising taxes. Seldom is there much enthusiasm for cutting back on cherished state programs and services, even as federal subsidies to states shrink. Better, say lottery supporters, to offer citizens a choice: play or pay. Unlike paying mandatory income, property, or sales tax, buying lottery tickets is a personal decision. Funding government by lottery is quite different from funding it by taxation: under taxation, states can depend on a set amount of revenue each year from a captive base of taxpayers; under a lottery, revenue projections assume that enough tickets will be sold so that those who choose not to play are free to do so.

Besides casting lotteries as an alternative to taxes, supporters put forth other arguments in favor of lotteries, from the public's love to gamble to the desire to siphon money away from illegal gambling to simply keeping up with the Joneses—i.e., other states that draw residents and dollars across state boundaries.

The U.S. gambling industry may generate as much as $600 billion annually. (The American Gaming Association claims that this figure is high because it measures money wagered rather than actually spent; the organization claims that gambling is a $63 billion a year industry.) The federal bureau of investigation estimates that illegal gambling brings in as much as another $100 billion annually. Supporters argue that both of these figures support the benefit of lotteries—to respond to the public's demand for gambling and to diminish the profits of illegal gambling.

The public demand for gambling is so great, say supporters, that states that do not offer lotteries lose potential revenues to neighboring states that do. When New Hampshire instituted its state lottery in 1964, it was the only legal lottery in the country. It sold more tickets outside the state than in New Hampshire. The pattern has been repeated ever since. States without lotteries see gambling money disappear into neighboring states, which fund their programs with it, necessitating a local lottery as a defensive mechanism.

Critics of lotteries attack the notion of lotteries substituting for taxation. Operating the games can require relatively high administrative overhead. In the early 1990s, the national average was 6 percent of revenues, and the highest rate was 29 percent in Montana. Costs result chiefly from the need to advertise constantly. Fickle players can always stray into competing states for tickets, satisfy gambling urges at casinos, or lose interest. For this reason, lottery revenues are far less dependable than tax revenues, and states can easily find themselves spending more and earning less than projected.

Some states have learned this lesson the hard way. Maryland, for example, faced a budget crisis in the early 1990s after heavily promoting a lottery game called El Gordo, anticipating $8 million to $10 million in revenues. When players failed to buy enough tickets, the state's profit after expenses was only $73,626. California experienced another kind of problem in fiscal year 1991–92, as drooping lottery sales forced it to exceed the 16 percent limit on administrative expenses specified by law. The shortfall led to a dispute over what to do with the interest earned on the state lottery fund, and reformers had to act to ensure that it would be used as intended. They passed Chapter 1236, which requires that all interest be used to benefit public education.

Such problems lead critics to another complaint: states exaggerate the benefits of lotteries. In education, lottery proceeds may provide little help. The Educational Research Service (ERS), a think tank, has argued that lotteries are actually insignificant. Because lottery revenues are occasionally substituted for regular funding, ERS maintains, this unstable source of revenue yields no more for schools than they would have received otherwise, with an additional drawback—taxpayers, reassured that ticket sales are footing the bill, balk at the idea of raising taxes when shortfalls occur. Critics also scoff at claims that lotteries hurt illegal gambling. Most studies have found only inconclusive evidence that they have any effect at all on crime syndicates, and law enforcement agencies report that illegal gambling remains as healthy as it was before states reenacted lotteries.

Two popular moral arguments are advanced against lotteries. The first attacks the notion of voluntary taxation. Far from being the boon that the word voluntary suggests, critics say, the lottery is a form of regressive taxation that hurts those least able to afford it. (Taxes are considered regressive when they put a disproportionate burden on different taxpayers; a sales tax, which everyone pays at the same rate regardless of their personal wealth, is one example.) The evidence shows that the poor and working classes play lotteries the most. Some people say that preying on the illusory hopes of the poor is an unseemly way to avoid taxing the more affluent.

The second moral objection is to the hidden social costs. Opponents of gambling have long held that players run the proven risk of addiction. In general, governments legislate against and spend money, warning citizens about high-risk behaviors. But in the case of lotteries, they do the reverse: lottery advertising encourages playing often, and games are frequently redesigned to bring players back for more. No state blatantly tells its citizens to spend more than they should; yet no state stops anyone from going overboard, and it is doubtful that any could do so. The scope of the problem of compulsive lottery playing is difficult to measure, but commonly cited estimates in the 1990s indicated lottery players accounted for 9 percent of all compulsive gamblers nationwide. A few states, such as New Jersey, have run hotlines for addicts. Others have considered doing so. A spate of crimes associated with compulsive lottery playing—from embezzlement to bank holdups—captured newspaper headlines in the mid-1990s and prompted further hand-wringing by state officials, but little action.

Although the debate would go on, state lotteries were expected to continue. Their sheer profitability makes them alluring to legislators who would rather not propose higher taxes, and the chance of winning big keeps players hooked. In all likelihood, the success of most states ensures that the rest will eventually join the bandwagon. Critics continue to fault lawmakers for relying on high-risk gambling, conning hapless players, plowing huge sums back into the games, and ignoring the resulting social costs. Yet, unlike arguments against lotteries a century ago, these complaints have mostly fallen on deaf ears, and lotteries have been skillfully transformed in the public eye from a vice into a form of entertainment. Jackpots, as every lottery player knows, speak louder than words.

cross-references

Gaming; Taxation.

States must be careful to observe the dictates of the statute that creates the lottery or lotteries. Other kinds of gaming that are not strictly limited to chance are not allowed under state lottery statutes. Indeed, most states make gambling a criminal offense and provide exceptions only for state lotteries and gaming by Native American tribes. A state may not, for example, sponsor a game that involves wagering against a house, such as a dice game, blackjack, or shell games. In Western Telcon, Inc. v. California State Lottery, 13 Cal. 4th 475, 917 P.2d 651, 53 Cal. Rptr. 2d 812 (1996), the Supreme Court of California ruled that a keno game offered by the California State Lottery (CSL) was not authorized under proposition 37, the 1984 initiative measure that created the state lottery. In keno, players try to match between one and ten numbers to a set of twenty numbers that are selected at random. Players pay a nominal fee for the opportunity to receive a large payoff. Keno, according to the court, did not meet the statutory definition of lottery because it was a game that persons played against the CSL, which, as banker, bet against each participant that the participant would not correctly guess the numbers to be drawn. This kind of game did not offer a prize by chance. Instead, the CSL could win all the bets and never have to pay a prize, or it could lose all the bets and pay a prize to each participant. This kind of gaming was too similar to a banking game, and the court noted that "the voters, in Proposition 37, did not establish a state gambling house, but a state lottery."

State lotteries often are planned to augment or even supplant other sources of state revenues, such as taxes. Whether they can actually achieve this objective depends on the lotteries' ability to attract players.