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.

chapter 7
LOTTERIES

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

In the United States all lotteries are operated by state governments that 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 2004, lotteries operated in forty states and the District of Columbia. (See Figure 7.1.) This means that at that time, 90% of the U.S. population lived in a state with an operating lottery. In addition, lottery tickets can be legally purchased by any adult physically present in a lottery state, even if that adult does not reside in the state.

As shown in Figure 7.2, Americans wagered more than $44 billion in lotteries during fiscal year 2003 (July 2002–June 2003). U.S. lottery sales were up 6.6% from fiscal year 2002 and increased steadily between 1998 and 2003.

LOTTERY HISTORY

Early History

The drawing of lots to determine ownership or other rights is recorded in many ancient documents, including the Bible. The practice became common in Europe in the late fifteenth and the sixteenth centuries. Lotteries were first tied directly to the United States in 1612 when King James I of England created a lottery to provide funds to the Jamestown, Virginia, settlement, the first permanent British settlement in 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 in the 1760s, was designed to finance construction of the Mountain Road in Virginia. Benjamin Franklin was also a lottery advocate and supported their use to pay for cannons during the Revolutionary War. John Hancock ran a lottery to finance the rebuilding of Faneuil Hall in Boston. Although many lotteries are mentioned in early American documents, the 1999 report of the National Gambling Impact Study Commission (NGISC) describes most colonial-era lotteries as "unsuccessful." Amid concerns about the public harm of lotteries, in the 1820s New York became the first state to pass a constitutional prohibition against lotteries.

The Rise and Fall of Lotteries in the United States

The southern states relied on lotteries after the Civil War (1861–65) to finance Reconstruction. The Louisiana lottery, in particular, became widely popular. 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 upon those revenues. The Louisiana lottery was very popular nationwide and brought in more than 90% of its revenue from out of state. It was also extremely profitable, returning a 48% profit to its operators.

In 1890 the U.S. Congress banned the mailing of lottery materials. The Louisiana lottery was abolished in 1895 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 fraud and deception in its operations. 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.

FIGURE 7.1

Negative attitudes about gambling began to soften during the early twentieth century, particularly after the failure of Prohibition. 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 lotteries out of the picture for another two decades.

Rebirth in the 1960s

In the early 1960s the New Hampshire legislature began considering a state-run lottery as a means to raise revenue. The state had no sales or state income tax at that time and desperately needed money for education programs. A lottery bill was passed in 1963, and the lottery (called the New Hampshire Sweepstakes) began in 1964. The game was patterned after the Irish Sweepstakes, which was very popular at that time, and was much different from the lotteries of today. Drawings were held infrequently, and the largest prize was $100,000. Tickets sold for $3 each. The biggest prizes were tied to the outcomes of particular horse races at the Rockingham Park racetrack. Nearly $5.7 million was wagered during the lottery's first year.

The state of New York followed quickly, introducing its own lottery in 1967. This lottery was particularly successful, grossing $53.6 million during its first year alone. 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). The lottery was firmly entrenched throughout the Northeast by the end of the decade. The reasons for this growth pattern are threefold. First, there was a desperate need to raise money for public projects without increasing taxes. Second, these states had large Catholic populations that were generally tolerant of gambling activities. Third, history has shown that states are most likely to start a lottery if one is already offered in a nearby state.

During the 1980s, lottery fever spread south and west with incredible swiftness. Seventeen states (Arizona, California,

FIGURE 7.2

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 started lotteries during the 1990s (Georgia, Louisiana, Minnesota, Nebraska, New Mexico, and Texas). They were joined in the early 2000s by South Carolina, Tennessee, and North Dakota.

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 were called passive drawing games. Passive drawing games were the dominant type of lottery game in 1973 but were nonexistent by 1997. Over time, consumers have demanded more exciting games that provide quicker payoffs and more betting options. Table 7.1 describes the common types of lottery games staged today.

La Fleur's 2004 World Lottery Almanac lists the types of lottery games offered by various states as of mid- 2003. (La Fleur's is a Maryland-based research firm that publishes statistics on the world's lotteries.) Nearly all states operating lotteries offered cash lotto and instant games. Most offer other numbers games, such as three-digit and four-digit games. Pull tabs, spiel, keno, and video lottery games are much less common. In general, keno and video lottery games are considered casino-type games. This makes them more controversial and generally less acceptable to the public than traditional lottery games, like lotto.

Most lotto tickets sell for $1 each. Each dollar buys a chance to choose a small set of numbers out of a larger set of numbers. Drawings are held once or twice per week to determine the winning numbers. In 2002 Connecticut, Georgia, and Michigan launched new lottery games that can be played for pocket change, anywhere from 25 cents to 99 cents.

Today many lottery games are online, using a computer network. Retail outlets have computer terminals that are linked by phone lines to a central computer at the lottery commission. The central computer records the wagers as they are made. Retailers can sell tickets for online games and validate winning tickets. The computer network is a private dedicated network accessible only by lottery officials and retailers. Thus, online lottery games differ from the Internet, which anyone can access. Lotto, keno, and numbers games are all conducted as online games. Players can either choose their numbers themselves or allow the computer to select numbers randomly, an option known as "Quick Pick."

Most lotto drawings are televised live. In addition, some states air lottery game shows in which contestants compete for money and prizes. The California lottery's game show, The Big Spin, has aired since 1985. Contestants are chosen through lottery drawings or special promotions. During the thirty-minute show, contestants spin a big wheel in an attempt to win cash prizes while family and friends cheer from the audience.

Lottery winners generally have six months to one year to collect their prizes, depending on state rules. The top prize in a lotto game is called the jackpot. In most lotto games a jackpot that is not won rolls over to the next drawing, increasing the jackpot each time. The most popular lotteries are often those in which a jackpot has rolled over several times and therefor has 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 or in installments. Either way, taxes are subtracted from the prize. Jackpots paid all at once are called cash lump-sum prizes. Annuities are jackpots paid out over many years—usually twenty or twenty-five. Even those who choose annuities can pursue ways to receive most of their money all at once. Businesses engaged in cash-flow financing often purchase the rights to annuities from lottery winners and pay them a discounted lump sum in exchange. For example, a $1 million jackpot winner might choose to collect the winnings in installments of $36,000 per year for twenty years. This totals $720,000. A broker would probably offer the winner about $500,000 in immediate cash in exchange for the future rights to the monthly installments.

Scratch Games

In 1974 Massachusetts became the first state to offer an instant lottery game based on scratch-off tickets. Today, games involving scratch tickets (or "scratchers," as they are called in some states) are extremely popular. Lottery

TABLE 7.1

organizations offer many different scratch games with various themes. For example, during the summer of 2004 the Connecticut lottery had more than one hundred scratch games ongoing.

Scratch games run for a specified period of time, usually for several months to up to a year. The top prize amounts are often hundreds of thousands of dollars. However, a wide variety of prizes are offered in these games besides money, including merchandise, trips, vehicles, and tickets to sporting events and concerts. In 2004 the Texas lottery offered scratch players a chance to instantly win a Corvette convertible. A Missouri lottery scratch game gave away sixty trips to Las Vegas, plus $500 in spending money. The winning tickets included 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. Lotteries in several states during the early 2000s offered scratch games featuring Harley-Davidson motorcycles as the top prizes. The use of licensed brand names in lottery games has become very popular. Most brand-name promotions feature famous celebrities, sports figures/teams, or cartoon characters. Lottery officials seek out joint merchandising deals in which companies provide prizes for scratch games. The companies benefit through product exposure and advertising. The lotteries benefit when companies share in advertising costs.

The latest trend in instant games is the sale of high profit point (HPP) tickets. Traditional scratch tickets sell for $1 each. HPP tickets are priced as high as $20 each and are usually part of a holiday or themed promotion. Most states offer several $5 and $10 ticket games, particularly around Christmas and other gift-giving holidays. In 2002 the Connecticut lottery was the first in the United States to offer a $30 instant ticket. The HPP tickets appeal to many scratch players because they offer more valuable prizes and payouts than regular-priced tickets. Lottery officials hope they will attract more affluent players to the games.

In 2001 the California lottery was sued for continuing to sell scratch-game tickets after the top prizes had been awarded. In other words, people bought scratch-game tickets not knowing that there was no chance for them to win the most valuable prizes. In January 2002 California lottery officials apologized for their actions and promised to stop selling instant-win tickets in the future after the top prizes were awarded. The state also set up a second-chance drawing for people holding losing scratch tickets from the earlier promotion.

A similar problem occurred in Colorado in 1997 after a Colorado Springs newspaper reported that more than $2 million in tickets were sold after the grand prizes had already been awarded. A lawsuit was filed against the state in 2000 by a woman with losing scratch tickets from the Luck of the Zodiac game. A judge dismissed the case because the plaintiff had not pursued her complaint through lottery administrative channels first. The ruling was appealed, and in August 2002 the state appeals court reinstated the lawsuit. The woman's lawyers hope to have the suit certified as a class-action suit on behalf of all scratch players who played the game. Similar lawsuits have been filed in Arizona and the state of Washington.

Most lotteries operate a toll-free number or Web site that provides information on scratch game prize claims. Patrons can find out which prizes have already been awarded and which prizes 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 try for cash or prizes. The Colorado lottery held a second-chance drawing during the summer of 2004 in which holders of nonwinning Lucky Dog scratch tickets could win money for animal-related nonprofit organizations and themselves. Other state lotteries offer new vehicles, concert tickets, and a variety of other prizes.

Video Lottery Games

Video lottery games are computer games played on video lottery terminals (VLTs). VLTs are essentially slot machines (video gaming devices) that are monitored and controlled by a central computer system that is overseen by a state's lottery agency. Thus, VLT profits (all or in part) benefit state lotteries.

According to La Fleur's 2004 World Lottery Almanac, VLTs were operated in only eight states in 2003—Delaware, Louisiana, Montana, New York, Oregon, Rhode Island, South Dakota, and West Virginia. Video lottery games are highly profitable. During fiscal year 2003, nearly 42,000 VLTs were in operation with a net income of $2.4 billion.

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. VLTs in Delaware, New Mexico, New York, and Rhode Island are only allowed at racetracks. Profits from these VLTs are split between the racetracks and the state lotteries.

In 2001 the state of New York passed legislation allowing the installation of video lottery games at racetracks in the state. Although the VLTs finally began operating in early 2004, they have been fought in lawsuits. In July 2004 a state appeals court ruled that the legislation authorizing VLTs at racetracks was unconstitutional. New York's constitution requires lottery proceeds to benefit education programs. Some VLT revenue was going to the racetrack owners and operators and to the racing industry. This diversion of lottery revenue was considered unconstitutional by the court. As of August 2004 the state's VLTs were still operating while the ruling is appealed to a higher court.

In general, video lottery games are 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 have special appeal to children and adolescents, who are already accustomed to playing video games.

Multistate Games

During the 1980s, lottery officials realized that multi-state lotteries could offer higher payoffs than sole-state lotteries because the costs of running one game could be shared by numerous states. Table 7.2 lists the states that operate lotteries and participate in multistate lotteries.

powerball. The Multi-State Lottery Association (MUSL) was formed in 1988 as a nonprofit association of states offering lotteries. It is entirely owned and operated by the member-state lotteries. The MUSL administers various games, the best known of which is called Powerball. Powerball is a lotto game in which five numbers are selected out of fifty-three numbers, and then a separate number is selected out of forty-two numbers, for a total of six numbers. The first Powerball drawing was held on April 22, 1992. Drawings are held twice weekly. In December 2002 Powerball paid out the largest jackpot ever awarded to a single winner—$314.9 million. It was won by a West Virginia contractor who reported that he only played the lottery when the jackpot exceeded $100 million.

TABLE 7.2

As of August 2004 MUSL had thirty members. Each member state offers at least one MUSL game, and twenty-eight of them offer the Powerball game. (See Table 7.2.) Each member state keeps 50% of its own Powerball ticket sales. The rest is paid out in prizes. The profits from all MUSL games are retained by the individual states.

mega millions. Another popular multistate game is called Mega Millions. It is played by eleven states, as shown in Table 7.2. Players choose six numbers from two separate number pools: five numbers from 1 to 52, and one number from 1 to 52. All six numbers must match to win the jackpot. Drawings are held twice weekly.

Mega Millions was formerly known as the Big Game. The first Big Game ticket was sold on August 31, 1996, and the first drawing took place on September 6, 1996. The Big Game became very popular and soon offered jackpots in excess of $50 million. As of late 2002, it held the record for the largest jackpot ever offered in a North American lottery—$363 million in May 2000. That jackpot was split by two winners, one in Michigan and one in Illinois. Overall, the Big Game had an average jackpot of $47 million during its run.

The Big Game was plagued by lagging sales during fiscal year 2001. Average sales had dropped by 34% from the year before. At that time, the Big Game accounted for approximately 6% of total lottery sales in the states in which it was offered. The game operators wanted to capture a bigger market and so renamed the game Mega Millions and increased the initial jackpot to $10 million, twice what it was for the Big Game. The lure of higher jackpots proved to be a strong sales incentive. Ticket sales increased dramatically.

constitutional questions. In January 2002 church groups and other lottery opponents sued the state of Ohio over a bill passed the month before allowing the state to join the Mega Millions lottery. The lawsuit claimed that the state's constitution required Ohio to run its own lottery and that the bill would transfer this authority to other states. Ohio officially joined Mega Millions in May 2002 in hopes of raising $41 million annually to overcome a $1.5 billion budget gap.

In July 2002 a judge ruled that Ohio's participation in Mega Millions was not unconstitutional because the state would retain sufficient control over the lottery to satisfy the constitution. However, he did overturn a part of the bill that would have allowed the state to divert the money raised away from the Department of Education into the general budget. The Ohio Constitution specifies that lottery revenues must go toward education programs. The bill writers had tried to circumvent this requirement with an accounting maneuver that would have initially assigned the revenues to the Department of Education but then allowed them to be taken out for other purposes. The judge ruled that this practice did violate the state's constitution.

New York's decision to join Mega Millions in May 2002 was also challenged in court on constitutional grounds. The plaintiffs claimed that participation in the multistate lottery diverted lottery profits away from education programs. In July 2004 a state appeals court ruled that the administrative costs of participating in the lottery were insignificant and did not constitute a diversion of funds.

INTERNATIONAL LOTTERY GAMES

Lotteries operate in more than one hundred countries around the world. According to La Fleur's, worldwide lottery sales were $160 billion during 2003. The North American Association for State and Provincial Lotteries (NASPL) reports on its Web site (www.naspl.org) that U.S. lotteries accounted for $45.3 billion (or 28% of this total). Canadian lotteries had sales of $8.1 billion (Canadian), meaning that North America accounted for about one-third of worldwide lottery sales during 2003. North American sales were up 7% from $50.7 billion reported for 2002.

More than seventy-five government and private lotteries operated in Europe during 2003. The European market generally accounts for 40–45% of world lottery sales. According to Scientific Games Corporation the top five lotteries in terms of sales during 2003 were in Spain, Japan, France, Italy, and the United Kingdom. In 2004 Spain, France, and the United Kingdom teamed together to start the Euro Millions lottery.

One of the most popular lotteries in the world is the Spanish lotto, El Gordo ("the fat one"). El Gordo has been conducted in Spain since 1812. Drawings are held four times a year, and the December drawing, called the Navidad (or Christmas) Lottery, is the largest single gambling event in the world. The lottery is operated by Organismo Nacional de Loterías y Apuestas del Estado (ONLAE). The number of tickets printed is limited to 66,000, meaning that the odds of winning a prize are about one in six. Winnings are paid out in a lump sum and are not taxed by the Spanish government. The Christmas Lottery has a 70% payout rate, much higher than most European and North American lotteries. In December 2003 the total prize for the El Gordo lottery reached $1.3 billion. The jackpot was only $470 million, but more than 10,000 prizes were awarded in all.

Beginning in the late 1990s several U.S. lottery agencies began talks with foreign countries regarding development of an international lottery. The International Lottery Alliance was led by Edward J. Stanek, director of the Iowa lottery. By April 2003 at least thirty states and dozens of foreign countries were negotiating terms for an international lottery (tentatively called Super Pool). It was expected to offer jackpots of up to $500 million. There were many logistical problems to overcome including setting a location for drawings and dealing with time zone and currency differences.

In April 2004 the Indianapolis Star reported that the deal had fallen apart after several European nations backed out in protest over the U.S. invasion of Iraq ("War Dampens Indiana's Hopes of International Lottery," April 3, 2004). The remaining foreign countries also backed out amid fears that U.S. residents would dominate ticket sales and prizes without more international participation.

LOTTERY ADMINISTRATION

States differ in how they administer lotteries within their governments. In 1998 the Council of State Governments (CSG) found that all but four lotteries operating at that time were directly administered by a state lottery board or commission. The lotteries in Connecticut, Georgia, Kentucky, and Louisiana were operated by quasi-governmental or privatized lottery corporations. The CSG reported that lottery oversight is most frequently performed by the lottery board or commission or by an executive branch agency. Enforcement authority regarding fraud and abuse rested with the attorney general's office, state police, or the lottery commission in most states. The amount of oversight and control that each state legislature has over its lottery agency differs from state to state.

Although 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 at retail outlets, such as stores, gas stations, bars, and so forth. These retailers contract with state lottery commissions to sell their games. In exchange, the retailers receive sales commissions on all tickets sold and cash bonuses for selling winning tickets.

Retailers

According to the NASPL Web site, nearly 186,000 retailers were selling lottery tickets around the country in 2003. California had the most retailers (19,000), followed by Texas (16,395) and New York (15,300). Approximately three-fourths of all lottery retailers offer online services. Approximately half of all lottery retailers are convenience stores. Other outlets include various kinds of stores, nonprofit organizations (churches and fraternal organizations), service stations, restaurants and bars, bowling alleys, and newsstands.

Retailers are attracted to lottery sales because they increase traffic and earn commissions for the operators. Outlets that sell winning jackpot tickets receive cash bonuses from the lottery, are often featured in media stories, and receive other public attention. Those that become known "lucky" places to purchase lottery tickets can greatly enhance their business.

Because lottery tickets are often an impulse purchase, they are usually sold at the front of the store near the checkout area. This also allows store operators to keep an eye on ticket vending machines to prevent play by underage customers. Increasingly, convenience stores offer pay-at-the-pump gasoline sales. This is likely to decrease in-store traffic and have a negative impact on lottery ticket sales. Lottery officials in Indiana want to develop a method for selling and printing tickets at the gas pumps to overcome this problem. Lottery officials in South Dakota have expressed interest in selling lottery tickets in massmerchandise stores like Wal-Mart and Kmart.

Lottery personnel and retailers work together to ensure that merchandising and advertising are effective for both. The New Jersey lottery launched an Internet site during 2001 just for its lottery retailers. On the site, retailers can read about game promotions, ask questions of lottery officials online, and access individual sales data. During 2001 Louisiana implemented a lottery retailer optimization program, in which lottery officials supply retailers with demographic data to help them increase sales and improve marketing techniques. Although most states do not limit the number of retailers that can sell lottery tickets, they usually try to space them out to ensure that each obtains a good market share.

According to the Web site of the National Association of Convenience Stores (NACS; www.nacsonline.com), roughly half of all lottery sales during 2001 were in convenience stores. NACS says that nearly 80% of U.S. convenience stores sell lottery tickets. The typical commission paid to their retailers is 5 to 8%.

The NACS reported in its 1997 NACS Lottery Study that frequent lottery customers spend more than twice as much per visit as nonlottery customers ($7.07 as opposed to $3.47). Even infrequent lottery customers spend $4.80 per visit. The study found that lottery customers purchased at least one other nonlottery item in 95% of their store visits. Lottery customers also shop more times per week at convenience stores than do nonlottery customers. More than half of the customers surveyed (55%) felt that lottery ticket availability was important in their choice of store. Lottery tickets ranked fifth among store items in generating other impulse sales (behind household items, beer, cigarettes, and magazines/newspapers).

However, NACS also noted that the average cost of handling a lottery transaction is 39 cents higher than that of a nonlottery transaction. Lottery tickets actually have a lower margin than most other convenience store items, particularly those pushed at the front counter. Store managers report complaints from lottery officials about merchandise such as batteries and candy hiding lottery advertising from customer view.

Advertising

Just like any other business, lotteries aggressively market their products. Some of their best advertisements are provided free through media coverage of jackpot winners. The lotteries also allot a portion of their operating budget to advertising.

According to the NASPL, lottery states spend hundreds of millions of dollars on advertising. A 1998 study of lottery marketing plans found that the most commonly used themes relate to the size of the prize or the jackpot and the fun and excitement of playing the lottery. (See Table 7.3.)

Lottery advertising is sometimes controversial, particularly when ads focus on winning and neglect to mention the odds against the players. The NGISC's final report from 1999 criticizes lottery advertising, saying "much of it is misleading, even deceptive." The report complains that lottery advertisements rarely explain the poor odds of winning big prizes and that most imply the chances of

TABLE 7.3

winning are quite good. The NGISC report is also critical of lottery advertisements that focus attention on the jackpot amount but list the odds of winning any prize, including far smaller ones.

La Fleur's 2004 World Lottery Almanac reports the advertising restrictions on various state lotteries. Twenty-one states and the District of Columbia have no restrictions on the types of advertising that can be done, while fifteen have various restrictions, including no minors in lottery ads (Kansas), no ads for VLTs (Oregon), and inclusion of the odds of winning (Vermont, Oregon, Connecticut, and Colorado).

In February 2004 economist Edwin Rubenstein with the Oklahoma Council of Public Affairs complained that lottery states spend more on lottery advertising than any other message geared toward the public, such as "Just Say No" or "Stay in School" ("A Closer Look at the Lottery," February 1, 2004). Rubenstein estimates that lottery advertising takes up 1–2% of lottery sales.

LOTTERY PLAYER DEMOGRAPHICS

A national poll conducted by the Gallup Organization in December 2003 found that 49% of adults had purchased a lottery ticket within the previous year. (See Figure 7.3.) The percentage is the lowest recorded since 1989. In 1999 a Gallup poll found that 15% of teenagers aged thirteen to seventeen had purchased a lottery ticket within the previous year.

In general, public opinion polls consistently show high approval ratings for lotteries as a means of raising

FIGURE 7.3

public funds. The results of a lottery question from the most recent national gambling poll conducted in 1999 by the Gallup Organization are summarized in Table 7.4 and compared to previous years. Approval of state lotteries for cash prizes has remained strong since the late 1980s, with 75% of adults and 82% of teenagers expressing favorable opinions in 1999.

Lottery demographics were reported in the October/November 2001 issue of Lottery Insights, the official publication of the NASPL. The article uses data from the NGISC and the National Opinion Research Center (NORC). The study found that just more than half of the U.S. adult population purchased at least one lottery ticket during 1998. Those aged thirty to sixty-four were most likely to purchase lottery tickets. However, the amount spent on lottery tickets varied by age. People aged fifty to sixty-four spent the most—an average of $6.72 the last time they purchased lottery tickets. The youngest (eighteen to twenty-nine) and oldest (sixty-five and up) adults spent the least amount.

In 1998 NORC interviewed nearly 3,000 people as part of a survey on lottery participation and spending in the United States. The final results represent data on 2,867 people. The respondents were characterized by demographics and asked about their lottery play during the previous year, month, and week. The survey indicated that approximately half of the respondents had played the lottery during the previous year. However, researchers discovered

TABLE 7.4

that only 5% of the players accounted for 54% of the group's total lottery spending. The vast majority of the group's lottery spending (82%) was due to the play of only 20% of the respondents. The survey concluded that a relatively small group of "heavy" players are responsible for most lottery sales.

Some characteristics of the heaviest lottery players are listed in Table 7.5. The NORC survey found that:

• Men are slightly more likely to play lottery games than women.
• Participation is lowest for those aged sixty-four and up.
• Single people spend less on lottery tickets than married or divorced people.
• Per capita lottery spending is highest for those aged forty-five to sixty-four years.
• Participation rates do not differ significantly by race or ethnicity. However, per capita spending by African-Americans is higher than for any other group.
• Per capita spending is higher for those respondents who did not complete high school and for low-income households.

NORC respondents did not have overly rosy views about payout and win rates. Most (63%) thought that lotteries paid out less than 25% of total sales as prizes. (The actual payout percentage is around 50%.) The vast majority (86%) of those who had played the lottery during the previous year indicated that they had lost more money than they had won. Only 8% of respondents believed that they had made money playing the lottery.

TABLE 7.5

GTECH Corporation is a major supplier of equipment to the gambling industry. The company conducted its most recent national survey on gaming during July 2000. According to the survey of 1,200 adults nationwide, lotteries were considered an acceptable form of entertainment by 65% of respondents. As Figure 7.4 shows, nearly three-quarters of those surveyed were in favor of states operating lotteries. Favor was highest among those under thirty-five years old, who had an 83% favorability rating. Approval decreased with age, as 72% of those aged thirty-five to fifty-four favored state lotteries, as opposed to 63% of those aged fifty-five and up.

Seventy percent of survey respondents in lottery states in 2000 indicated that they would vote in favor of continuing their lottery. Support at the ballot box is slightly higher among Democrats (70%) than among Republicans (61%). In nonlottery states, the survey shows that 66% of respondents would vote in favor of a state lottery if given the chance.

Fifty-four percent of those asked believed that lotteries keep taxes lower. (See Figure 7.5.) As shown in Figure 7.6, lotteries are favored over higher taxes as a means of raising revenue by more than a three-to-one margin. Survey respondents provided the following as the main benefits of lotteries:

• Provide funding for education and other programs (42%)
• Entertainment/fun/can win money (15%)
• Keep taxes lower (15%)
• Jobs/economy/revenue (8%)

Education was deemed the most appropriate use of lottery proceeds by 54% of respondents, compared with roads/public transportation (17%), long-term care for the elderly (8%), and protecting the environment (7%). Support for education as the most appropriate use of lottery revenue declined with age. Seventy percent of those asked believed that some lottery proceeds should fund research into understanding and helping problem gamblers.

Survey respondents were more likely to play the lottery if proceeds go to specific causes. Sixty-five percent of those asked would be more likely to play the lottery if funds were set aside for a specific cause rather than going into a state's general fund. When asked about problems facing the lottery industry, 27% of respondents indicated that insufficient prize money is the most important problem. Improper use of lottery proceeds was selected by 24% of respondents. Other problems included underage gambling (12%), lack of funding for research into problem gambling (11%), and too much advertising (5%).

The disadvantages or weaknesses of state-sponsored lotteries that survey respondents named are as follows:

• People wasting money who cannot afford to do so (33%)
• Misuse of lottery money (24%)
• Compulsive gambling (17%)
• Players not winning enough money (13%)
• Promotion of gambling (10%)

GROUP PLAY

It has become quite common for groups of people to pool their money and buy lottery tickets, particularly for very large jackpots. According to California lottery officials, 30% of that state's jackpots are won by multiple winners on one ticket. Group wins are beneficial to the lotteries from a public relations standpoint. 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.

In 2001 the California lottery started the Lotto Captain program to help so-called 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. Lottery officials are extremely pleased with the program's success, as far more people enrolled to be captains than was expected. These are hard-core players who promote lottery games, recruit new players, and provide valuable feedback about lottery promotions. In January 2004 the Missouri Lottery started is own Lottery Captain program for group-play organizers.

Still, pooling arrangements, even if between only two people, can lead to all kinds of legal headaches if a group actually wins a jackpot.

In May 2001 a group of twenty-three cabdrivers working at Atlanta's Hartsfield Airport won a $49 million jackpot in the Big Game. Before the money could be paid out, it was frozen by lottery officials when seven other cabbies filed a lawsuit contending that they were also part of the winning lottery pool. The man heading the pool was accused of sloppy record keeping in regards to who was participating in each lottery. In addition, the plaintiffs contend that they regularly participated in the pool, and it was understood that small amounts won would be pooled together to buy more tickets in the next lottery. They believe that even though they did not directly contribute to the pool that purchased the big jackpot ticket, they are still entitled to a share of the money.

Also in 2001, a New York judge awarded $1.6 million to a Brooklyn woman who sued her former live-in boyfriend for breach of oral contract after he secretly collected a $7 million jackpot from a lottery ticket they had purchased while together in 1999. Although the defendant denied ever agreeing to split lottery winnings with the plaintiff, a clerk at the store where the ticket was purchased testified to the contrary. The plaintiff was awarded half of the after-tax amount of the jackpot. The defendant also had to pay $200,000 in punitive damages and attorney fees.

A California woman lost all of her $1.3 million jackpot in 2001 after a court found that she had fraudulently concealed the award from her husband. After winning, the woman sought advice from lottery officials about how to conceal the award from her husband. They advised her to get divorced before her first annuity check arrived. The woman did so and never declared the money as an asset during the divorce proceedings. This lack of disclosure was ultimately discovered by the ex-husband. Under California law, a court can award 100% of an undisclosed asset, plus attorneys' fees, to one spouse if the other spouse commits oppression, fraud, or malice during divorce proceedings.

WHY DO PEOPLE PLAY LOTTERIES?

A lottery is a unique gambling event because it costs only a small amount of money to get a chance to win a very large jackpot, albeit at very long odds. The huge jackpot is the main selling feature of the lottery. Rollover jackpots spur ticket sales. As more people buy tickets, the jackpot grows, while the odds of winning decrease. However, this does not deter ticket sales—sales actually increase under these circumstances. Lottery players often go against the statistical odds, playing in games with large rewards but small probabilities of winning rather than games with small rewards and better probabilities of winning. The lottery lure seems to be that winning a multimillion-dollar jackpot would be life-changing.

Lotteries are successful because people are ignorant of or choose to ignore the laws of probability. For example, the odds of choosing six numbers correctly out of forty-nine are approximately fourteen million to one. Ian Stewart, professor of mathematics at the University of Warwick in Coventry, England, once said that lotto games "are a tribute to public innumeracy" ("It Probably Won't Be You," Times Higher Education Supplement, April 12, 1996).

A 1998 study performed on behalf of European lotteries (Mark D. Griffiths and Richard T. A. Wood, Lottery Gambling and Addiction: An Overview of European Research, European State Lottery and Toto Association, Lausanne, Switzerland, 1999) looked at why people continue to play the lottery despite the long odds. The following reasons were given:

• The lure of a very large jackpot in exchange for a very small investment
• Successful advertising
• Publicity about jackpot winners
• Ignorance of probability theory
• Televised drawings
• Overestimating of positive outcomes and underestimating of negative ones
• The credibility of government backing
• Belief in players' own luck

One of the most interesting theories of the study concerns the role of entrapment in lottery play. Many people select the same numbers week after week. For example, a United Kingdom newspaper reported that 67% of people surveyed chose the same lottery numbers each week, mostly based on birthdates, address numbers, and lucky numbers. As time goes by and their numbers are not selected, these people do not become discouraged. Instead, they think their chances of winning are getting better. This mind-set is called "the gambler's fallacy." It is a common myth that the probability of winning increases the longer a losing streak lasts. Often players experience near-misses, in which two or more of their numbers are drawn during 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.

The study also reports on a 1996 survey that found that 22% of respondents believe they will win a lottery jackpot at some point. The lotteries themselves feed the illusion that winning is commonplace by encouraging widespread media coverage of winners and their stories.

THE EFFECTS OF LOTTERIES

Economic Effects

Proponents of lotteries mostly use economic arguments to justify their positions. Lotteries provide state governments with a relatively easy way to enhance their revenues without imposing more taxes. Lotteries are also 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. Finally, lotteries 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 the role of lotteries in funding state programs is actually quite small. Lotteries contribute only a small percentage of total state revenues. In addition, they cost money to advertise and operate. Lotteries lure people into parting with their money under false hopes. Opponents contend that those targeted come particularly from lower income brackets and may not be able to afford to gamble.

the division of lottery money. Lottery money can be categorized as sales, prizes, administrative costs, retailer commissions, and state profits. The sales amount is the total amount taken in by the lottery. In general, 50–60% 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 1–10% of sales. On average, retailers collect 5–7% of sales in the form of commissions and approximately 2% as bonuses for selling winning tickets. The remaining 30–40% of sales is profit turned over to the state.

U.S. state lotteries had approximately $45 billion in sales for fiscal year 2003. A fiscal year is defined differently from state to state, but in most states it runs from July 1 to June 30. Thus, fiscal year 2003 is the twelve-month period from June 30, 2002, to July 1, 2003. According to the NASPL national sales were up 6.8% in fiscal year 2003 from the previous year's sales of $42.4 billion. By comparison sales increased by 9% from 2001 to 2002.

According to sales figures reported by the NASPL for fiscal years 2001 through 2003 for each state, the District of Columbia, and Puerto Rico, nine states reported declining sales for 2003 compared to 2002. These states were California, Colorado, Connecticut, Delaware, Illinois, Louisiana, Massachusetts, Minnesota, and Vermont. Delaware had the sharpest decline (6.8%). By contrast four jurisdictions that were operating lotteries in 2002 and 2003 had sales increases in excess of 20%. These were West Virginia (up 27.5%), Puerto Rico (up 26.4%), Florida (up 23.1%), and Missouri (up 21.1%).

According to the NASPL during fiscal year 2003 New York had the highest lottery sales ($5.4 billion), followed by Massachusetts ($4.2 billion) and Texas ($3.1 billion). These three states accounted for 28% of national lottery sales. In total fifteen states had lottery sales in excess of $1 billion during 2003.

According to La Fleur's, total U.S. sales for all lotteries from the time of their inception through fiscal year 2003 add up to $556 billion. About $296 billion was paid in prizes over the same period, and $191 billion was collected by state governments.

The New York lottery has the largest cumulative sales, $57.6 billion since its inception in 1967. It has also achieved the highest profits of any state government (nearly $23 billion). New Jersey had the highest percentage return to any state government from a lottery (41%). Massachusetts has paid out the most in cumulative prizes (nearly $31 billion).

The states allocate their lottery profits in different ways. Table 7.6 describes each state's cumulative allocation of profits from each lottery's inception to June 2002. The list does not include lotteries that began during or after 2002 (South Carolina, Tennessee, and North Dakota).

retailer payments. According to La Fleur's, the average prize payout from each state lottery's inception to fiscal year 2003 is 53% of cumulative sales. The average state profit is 34%. Thus, administrative costs and retailer payments account for an average of 13% of cumulative lottery sales.

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. The state implemented the program in January 2000 in response to declining sales and a drop in the number of lottery retailers. Lottery officials believe that the incentive program is more effective than an increase in retailer commission at increasing sales. The incentive program encourages retailers to ask customers if they would like to buy lottery tickets. Retailers that sell a winning ticket in Wisconsin receive 2% of the value of the ticket (up to $100,000).

unclaimed lottery winnings. It is estimated that unclaimed lottery winnings add up to hundreds of millions of dollars each year. In early 2004 the California lottery

TABLE 7.6

turned over more than $15 million from an unclaimed lotto jackpot to educational programs in the state. According to the California lottery more than $530 million in unclaimed prizes have been forwarded to public schools since 1985.

Unclaimed winnings are allocated differently by each state. Some states require by law that unclaimed winnings be returned to the prize pool. This is the case with the New York lottery. Other states allocate such funds to lottery administrative costs or to specific state programs. For example, the Texas lottery turns over unclaimed prizes to funds that benefit hospital research and payment of indigent health care.

state budgets. Lottery revenues make up a very small portion of state budgets. One study (Charles T. Clotfelter et al., State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission, 1999) found that lottery revenues comprise anywhere from 0.67% to 4.07% of their states' general revenue. The average portion was approximately 2.2%. This compares with an average of 25% each for general sales taxes and income taxes.

taxes and other withholding from lottery winnings. Lottery winnings over a certain value are taxable as personal income. All prizes awarded greater than $600 are reported by the lotteries to the Internal Revenue Service. In general, the lottery agencies subtract taxes prior to awarding large prizes. For example, the New York lottery withholds federal, state, and local income taxes on prizes greater than $5,000. The lottery withholds 25% for federal taxes and 7.7% for state taxes from prizes greater than $5,000 won by U.S. residents. An additional 4.45% is withheld if the winner is a New York City resident. Non-U.S. residents face 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.

In June 2002 the South Carolina lottery launched a new online game called Carolina 5. The game was unique because the $100,000 jackpot featured prepaid taxes. This was the first online game to offer a tax-free jackpot.

Education

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

In April 2004 mathematics professor Donald Miller of Saint Mary's College in Indiana argued in a USA Today article that educational spending per student gradually decreases once a state starts a lottery ("Schools Lose Out in Lotteries," April 15, 2004). The finding is based on examination of data from 1965 to 1990 for twelve states that enacted lotteries for education during this time. According to Miller, average pre-lottery spending increased each year by approximately $12 per student in these states. Post-lottery spending showed a huge increase in the immediate years following lottery initiation. On average the states increased their education spending by nearly $50 per student. However, the increase fell sharply in following years and eventually lagged behind states without lottery-generated education funds. Miller blames the problem on legislators using lottery funds "to replace rather than add to existing sources of education funding."

A 1999 study conducted by researchers at Duke University for NGISC calls earmarking lottery proceeds for education "an excellent device for engendering political support for a lottery." However, the study noted that it was doubtful that earmarked lottery revenues actually increase the funds available for specific programs. Some lottery funds earmarked for education just replace other funding sources. This is not true of programs initiated solely with lottery money, like Georgia's HOPE scholarship program.

the hope scholarship. Begun in 1993, the Georgia lottery funds three educational programs:

• The HOPE scholarship program
• A voluntary pre-kindergarten program
• Grants to train teachers in advanced technologies and capital outlay projects for educational facilities

HOPE stands for Helping Outstanding Pupils Educationally. 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 B grade average to qualify for HOPE money in the first place and to maintain their eligibility in subsequent years. Most recipients are recent high school graduates who pursue college degrees.

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. At private colleges, the HOPE Scholarship provides $3,000 per academic year to full-time students, plus students can qualify for the Georgia Tuition Equalization Grant (GTEG) of $900 per academic year. Part-time students attending private colleges are eligible for $1,500 per academic year, but do not qualify for the GTEG.

During its first ten years of operation the lottery provided approximately $2.5 billion to the HOPE scholarship program, $2.1 billion to the pre-kindergarten program, and $1.8 billion to the remaining programs.

As of August 2004 more than 800,000 students have received HOPE scholarships. HOPE is the country's largest state-financed merit-based aid program and is credited with significantly increasing the attendance of instate residents at Georgia colleges. Similar programs include Kentucky's Educational Excellence Scholarship and New Mexico's Lottery Success Scholarship.

Social Effects

Think of lottery winnings just like other income—except you don't have to work for it.

—Charles T. Clotfelter et al., State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission, April 23, 1999

Lotteries are undeniably a cultural and social phenomenon. They are operated on every continent around the world with the exception of Antarctica. In the United States, lotteries enjoy unprecedented popularity in the gambling realm. They are legal in forty states and generally considered a benign form of entertainment with two enormous selling points. First, they seem to offer a shortcut to the "American Dream" of wealth and prosperity. Second, they are a voluntary activity that raises money for the public good in lieu of increased taxes. Lottery opponents generally base their objections 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 NGISC final report of 1999 complained 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 to lower-income people.

Because online lottery tickets are so widely circulated, lottery officials in several states have decided to use them as a means to spread critical information. The Amber Alert message system is used around the country to notify the public via television, radio, and electronic billboards about abducted children. Lotteries in several states have all agreed to use the message system to alert ticket buyers about abducted children.

underage play. The legal minimum age to play the lottery varies by state from eighteen to twenty-one. However, numerous studies have shown that children and adolescents are buying lottery tickets. A 1999 Gallup poll on gambling found that 15% of adolescents age thirteen to seventeen had purchased a lottery ticket in the previous year.

Similar findings are reiterated in other surveys. Dr. Martin Lazoritz and his colleagues interviewed 1,051 Florida teens over the phone about their gambling habits. (Parental permission for the interviews was obtained first.) The Florida researchers reported at the October 2002 meeting of the American Academy of Child and Adolescent Psychiatry that 18.5% of Florida adolescents (age thirteen to seventeen) surveyed had purchased a lottery ticket at some time in their lives. In addition, 12.5% of the respondents had purchased a lottery ticket during the previous year. (The results also appear in the study Teen Gambling: Evidence from the University of Florida's Statewide Epidemiological Study.)

The NGISC reported in 1999 that 47% of seventh-graders in Massachusetts had played the lottery. The commission developed seven advertising recommendations for lottery officials to discourage underage play:

• The legal minimum age should be posted at lottery points of sale.
• Lottery advertising should not be directed primarily toward minors.
• Lottery advertising should not contain symbols or language primarily intended to appeal to those under the legal minimum age.
• Animated characters used in lottery advertising should not have any association with television programs and movies geared toward children.
• Celebrities who would primarily appeal to minors should not be used in lottery advertising.
• Lottery advertisements should not picture people that are or appear to be minors.

poverty and race/ethnicity. One of the most common criticisms leveled against state lotteries is that they unfairly burden the poor—they are mostly funded by low-income people who buy tickets, but benefit higher-income people for the most part. 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 a "regressive" tax. Although the lottery is not really a tax, many people consider it to be a form of voluntary taxation because the proceeds fund government programs. In 1999 Dr. Philip Cook testified to NGISC that "the tax that is built into the lottery is the most regressive tax we know."

Cook and his colleague Dr. Charles Clotfelter examined this issue at length in their book Selling Hope: State Lotteries in America (Cambridge, MA: Harvard University Press, 1989). The researchers found that lottery players with annual incomes of less than $10,000 spend more on lottery tickets ($597 per year) than any other income group. They also found that high school dropouts spend four times as much as college graduates, and that African-Americans spend five times as much as Caucasians. The NGISC final report expressed serious concern about the heavy reliance of lotteries upon less-educated, lower-income people. It also mentions that an unusually large number of lottery outlets are concentrated in poor neighborhoods.

In response to these claims, the president of the NASPL made the following points at a presentation in July 1999 to the National Conference of State Legislatures:

• The NGISC report does not provide any evidence that lotteries target their marketing to poor people.
• Marketing to poor people would be unwise on the part of lotteries from a business and political standpoint.
• People often buy lottery tickets outside of the neighborhoods in which they live.
• Many areas associated with low-income residents (for example, inner cities) are visited or passed through by higher-income shoppers and workers.
• High-income residential neighborhoods have relatively few stores and gas stations, making them less likely to have lottery outlets.

In 2001 researchers at the Vinson Institute of Government Studies at the University of Georgia reviewed a number of nationwide and state studies on the relationship between income and lottery participation and found that "the regressivity finding remains largely consistent throughout the literature" (Joseph McCrary and Thomas J. Pavlak, Who Plays the Georgia Lottery?, 2002). Researchers cite a common belief among lower-income people that playing the lottery is their only chance to escape poverty.

In October 2002 the Chicago Reporter published a report on its analysis of lottery sales in Illinois since 1997. The story "Illinois Lottery: The Poor Play More" compared 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 past six fiscal years were all in the city of 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 in excess of the city average of 10%. Residents of half of the zip code areas were populated by at least 70% African-Americans. The newspaper found 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 Latino zip code areas.

The zip code with the highest lottery sales in the state, 60609, coincides 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 fiscal year 2002. The newspaper also found that residents in poorer communities spent a larger portion of their incomes on lottery tickets than did people in more affluent neighborhoods. Lottery spending during fiscal year 2002 was $224 per person (or $1.57 for every $100 of income) in zip codes that were at least 70% African-American and $173 per person (or $0.46 for every $100 of income) in zip codes that were at least 70% Caucasian.

In Georgia the Vinson Institute reported that African-Americans and less-educated people are more likely to be active lottery players than Caucasians 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.

Studies performed by Ross Rubenstein and Benjamin Scafidi ("Who Pays and Who Benefits?" National Tax Journal, June 1, 2002) and by Christopher Cornwell and David Mustard (The Distributional Impacts of Lottery Funded Merit-Based Aid, Athens, GA: University of Georgia, August 2001) have criticized Georgia's lottery for providing more lottery 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 college scholarships.

Researchers at the Vinson Institute argue that a county-by-county comparison of HOPE scholarship recipients is not appropriate because there are other factors that affect these statistics—for example, whether a particular county contains a college or university. However, they did conclude that minorities in Georgia are "slightly less likely" than whites to get a HOPE scholarship while in college.

In late 2003 the latest findings of the Vinson Institute regarding the lottery were published in "The Georgia Lottery: Assessing Its Administrative, Economic, and Political Effects" (Review of Policy Research, Winter 2003). The researchers examined census data, polls, and other statistics from lottery inception through 1999. They found 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. The study also noted that lottery spending per person was highest in counties with larger percentages of African-American populations.

Regarding the HOPE scholarship program, the researchers found that white students received a disproportionately high amount of the funds compared to African-American students. In 1999 white students comprised 66% of the freshman class in Georgia, but accounted for 74% of all HOPE scholars. By contrast, African-Americans comprised 26% of all freshmen, but accounted for only 21% of HOPE scholars. The authors note that this disproportionate relationship was true for every year examined, back to 1994. However, they noted that the gap narrowed substantially over that time.

Analysis of Georgia's lottery-funded prekindergarten program provided completely different results. The Vinson Institute found that the rate of enrollment in the prekindergarten program is higher in lower-income areas of the state than in affluent areas. The researchers conclude 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 another study published in the January 2004 issue of Journal of Hispanic Higher Education a researcher from Saint Leo University in Florida found that minority and low-income students did not have proportionate access to higher education in lottery states ("State Lotteries: Their Effect on Equal Access to Higher Education").

compulsive gambling and "cognitive distortion." All state lotteries have programs in place that encourage responsible play. Messages are included in promotional materials, advertisements, public service announcements, and even on lottery tickets. Some states publicize toll-free numbers or Web sites that offer help to problem gamblers.

Still, some people and organizations believe any type of gambling can be harmful, even lottery play. The Naples, Florida, office of the Salvation Army, an evangelical Christian charity, refused a $100,000 donation from Florida Lotto winner David L. Rush in December 2002. A spokesperson for the head of the office, Major Cleo Damon, explained that "there are times when Major Damon is counseling families who are about to become homeless because of gambling." Major Damon expressed concern that taking lottery winnings would constitute "talking out of both sides of his mouth." Two other charities, Habitat for Humanity and the Rotary Club of Marco Island, accepted large donations from Rush's lottery winnings in the same time period.

The vast majority of states operate lotteries, meaning they are easily accessible to large numbers of people. Surveys, including one conducted by the Gallup Organization in December 2003, have shown that lottery play is the most popular and widely practiced form of gambling in the United States. But does the combination of easy and widespread access and general public acceptance mean that lottery players are more likely to develop serious gambling problems?

The Gambling Impact and Behavior Study: Report to the National Gambling Impact Study Commission was conducted by NORC of the University of Chicago in 1999. The NORC study concluded 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 study found that multivisit lottery patrons had the lowest prevalence of pathological and problem gambling among the gambling types examined.

These researchers also warned that the patron database used in this 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 very large amount. In other words, a casino gambler who loses thousands of dollars in a day may be more likely to admit to having a gambling problem than a lottery player who loses the same amount over a longer period of time.

In July 2001 The Wager, a report of the Harvard Medical School and the Massachusetts Council on Compulsive Gambling, described a study published by Canadian researchers on the cognitive misconceptions of problem lottery gamblers. Sixty-three college students at McGill University in Montreal were screened to determine their participation in gambling activities. Those with some gambling experience were given the South Oaks Gambling Screen, or SOGS test. This is a common series of questions used to determine the probability that a person has a gambling problem. Those with a SOGS score of 0–2 are considered not to have a gambling problem. A SOGS score of 3–4 indicates a probable problem gambler, and a SOGS score of 5 or more indicates a probable pathological gambler.

All of the students were shown sixteen lotto tickets, each marked with a different sequence of six numbers out of forty-nine numbers total. All sequences followed one of these configurations:

• Random (for example: 1, 13, 19, 34, 40, 47)
• Pattern (for example: 5, 10, 15, 20, 25, 30)
• Long sequence (for example: 1, 2, 3, 4, 5, 6)
• Nonequilibrated or unbalanced (a series not covering the whole range of possible numbers, usually limited to either high or low numbers—for example: 3, 5, 9, 12, 15, 17)

The students were asked to choose the twelve tickets they would most like to play in the lottery and to rank these tickets from best to worst. Results indicated that random sequences were by far the most popular. More than half of the tickets selected by the students as their first, second, third, or fourth favorite choices contained random sequences. When choosing a favorite lottery ticket, the second most popular choice was the pattern sequence, followed by the nonequilibrated sequence and the long 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 (for example, a birthdate) was the second most popular reason, named 69.5% of the time.

The researchers point out that all of the students' choices were irrational because every ticket has an equal chance of winning. However, those students who regularly play the lottery or participate 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. The authors concluded that there was "some level of cognitive distortion" demonstrated by all of the gamblers in the study.

THE FUTURE OF U.S. LOTTERIES

New State Lotteries?

As of August 2004, only ten states had no lotteries: Alabama, Alaska, Arkansas, Hawaii, Mississippi, Nevada, North Carolina, Oklahoma, Utah, and Wyoming. Hawaii and Utah permit no types of gambling at all. Alaskan politicians have shown no interest in a lottery. Wyoming politicians have stated publicly that they do not want to expand gambling options in their state. Lotteries are also long shots in Nevada and Mississippi because of the tremendous growth of casino gambling in these states.

However, polls conducted during the early twenty-first century in Alabama, Arkansas, North Carolina, and Oklahoma show strong support for lotteries that would benefit education in those states:

• A June 2002 poll performed by the Mobile Register and the University of South Alabama found 52% approval for a statewide lottery. Approval rose to 75% for a lottery dedicated only to educational programs.
• A poll conducted by the Arkansas Democrat-Gazette in August 2002 showed a 51.9% approval rating for a lottery conducted to fund government programs. Support was slightly higher (58% approval) for a lottery with funding dedicated only to educational programs.
• Likewise, a poll conducted during March 2002 by The Oklahoman newspaper and the University of Oklahoma found 68% approval for a lottery in general and 76% approval for a lottery to benefit education.
• The North Carolina House of Representatives voted in September 2002 to prevent a statewide lottery referendum from appearing on the ballot in November 2002, despite a survey by Mason-Dixon Polling & Research showing that 58% of respondents supported a lottery in the state.

As of August 2004 North Carolina shows potential for adding a state lottery in the near future. North Carolina Governor Mike Easley is a strong proponent of a state lottery to fund education programs. However, the state's Republican party and other opponents have fought measures to introduce a lottery. With the advent of lottery play in Tennessee during early 2004, North Carolina is completely surrounded by lottery states.

Oklahoma voters overwhelming approved a lottery to fund education in November 2004. The measure was supported by Governor Brad Henry who made the lottery a key component of his successful campaign for the governorship. Following the election, Governor Henry wrote on his Web site (www.governor.state.ok.us) that he was reviewing applications for positions on the state's new Lottery Commission, and concluded that "the sooner the lottery is up and running, the sooner our children—and our state—will reap the benefits."

Attempts at a National Indian Lottery

The Coeur d'Alene Indians of Idaho have been trying to start a national lottery since 1995. The National Indian Lottery would allow residents of all lottery states to dial a toll-free number at the reservation and register numbers to be played in each drawing. Players would pay using a credit card. The plan was approved by the National Indian Gaming Commission (NIGC), and the Coeur d'Alenes had already contracted with AT&T to set up the phone lines when state attorneys general from ten lottery states challenged the plan. They warned AT&T that the company's participation in the lottery program would be illegal. The company pulled out of the deal and was sued by the Coeur d'Alene Indians. AT&T countersued and was backed up by U.S. District Judge Edward Lodge, who ruled that the national lottery would violate federal law.

In March 2002 the Ninth U.S. Circuit Court of Appeals overturned the ruling. The court ruled that the states had to take their grievances about the lottery to the NIGC instead of pressuring AT&T to not participate. As of August 2004, the Coeur d'Alene Tribal Council has not decided if it will pursue the phone lottery further. The tribe tried to run the lottery over the Internet during the late 1990s but gave up after the attorneys general of several lottery states filed suit.

coping with "jackpot fatigue." A huge problem facing the lottery industry is called "jackpot fatigue." Lottery consumers demand higher and higher jackpot prizes to get excited about lotto games. However, individual states cannot increase jackpot sizes without either greatly increasing sales or decreasing the portion going to public funds. The first option is very 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 in order to raise much needed funds. Opponents argue that cutting prize payouts will reduce sales, making it nearly impossible to increase state revenues.

Lotteries

BIBLIOGRAPHY

Lotteries are most frequently government-sponsored alternatives to primarily illegal numbers games whereby the participants win cash prizes if they match a series of numbers or symbols. It can be argued that lotteries date back to biblical times (the process of “casting lots”) and there is considerable historical evidence of lotteries from the sixteenth century forward as a means by which municipalities raised funds for government finance. In the eighteenth and nineteenth centuries numerous lotteries raised very significant revenues to build roads, canals, courthouses, and so on, and in particular, to finance wars (Gribbin and Bean 2006). In the modern era of lotteries (presumed to have begun in 1964 with the initiation of the New Hampshire lottery in the United States), lotteries have generally not generated commensurately large revenues, but have served as an alternative revenue source that is politically expedient due to both participant and nonparticipant perceptions.

Lottery players generally cite the expected utility of a potential win as justification for playing, or at the least, the utility derived from thinking about what they would do with the money if they win. There is limited entertainment value in lottery instruments beyond these measures of expected utility, and no skill. Lottery players also recognize that even if they do not win, their money is designated for a generally desirable beneficiary group such as public schools, the elderly, or specific public works projects. Lottery commissions recognize the lack of entertainment value in their games and thus must constantly innovate to maintain player interest in participation.

Nonplayers appreciate that lotteries allow them to shift a portion of the municipal tax burden to those who do not understand or care about the long odds of winning. Their perception is the opposite of the advertising slogan, that is, “you cannot lose if you do not play.” Legislative leaders understand lotteries for what they have become: tax revenue sources that are not perceived as such, that allow the government representatives to take advantage of fungibility to shift funds to whichever projects or groups they choose, while maintaining the perception of effective earmarking for a desirable recipient group (Borg and Mason 1988).

From a procedural standpoint, lottery games fall into two basic categories: instant games and lotto games. Instant games are mostly scratch-off instruments whereby the player uses a coin or some other means to remove a coating from areas on a card, attempting to match a particular series of like symbols to win a predetermined amount. These games represent a relatively minor portion of the revenue raised by lotteries, but the area in lottery administration that requires the most innovation to maintain player interest. Lotto games are closer to the illegal numbers games mentioned above, requiring the winning player to match from three to six numbers, most frequently printed on ping-pong balls drawn from a container. The payouts in these games are substantial, ranging from hundreds to hundreds of millions of dollars. Most of these lotto games reflect odds that follow simple mathematical combinations, for example _x C₆ is a standard for many U.S. state games, where x is 49 numbers, 53 numbers, or some other magnitude. The ₅₃C₆ game implies that odds of winning are 1 in approximately 22 million. Longer odds are encountered in multistate games that also imply that the last ball drawn reflects a specific number (e.g., the “powerball”).

Lottery games are generally available in a large number of retail locations including grocery stores, convenience stores, and other establishments that are licensed by the municipality to distribute the tickets. Ticket sellers receive a commission for selling the tickets (frequently around 5% of sales) and many also share in the good fortune of winners with extra compensation. Evidence suggests that play increases when ticket availability is found close to either one’s home or workplace. Consequently, lottery ticket sales are frequently higher per capita in large cities as opposed to small towns and rural areas (Clotfelter and Cook 1989).

There are other significant demographic characteristics of lottery players that identify the implications of the tax inherent in lottery games. Consistently, researchers have discovered that lottery players tend to be older, and frequently members of racial and ethnic minority groups. Far more players come from large municipalities. There is significant crossover between states and countries whenever jackpots of the lotto games become large, and women tend to play lottery games slightly more than men. From an economic standpoint, the most significant demographic reality of lotteries is that while lottery play increases with income, it does so at a declining rate, suggesting that the routinely 50 percent tax rate inherent in lottery games is regressive (Clotfelter and Cook 1989, among many).

Among the other economic implications of lotteries, lotteries are inefficient from a tax standpoint. The responsiveness of demand for lotto games to price changes is often greater than one in absolute value, implying that taxes inherent in lottery games do not raise the same levels of revenue for the same cost as other tax sources. This reflects the luxury nature of lotto tickets in the player’s market basket. The magnitude of this effect is mitigated whenever a municipality increases the frequency of lotto games during the week, so current trends have reduced this effect somewhat (Mason, Steagall, and Fabritius 1997). Lottery tax revenues are generally relatively small compared to other tax sources, and are not as stable given that their magnitudes frequently depend on rollovers, and the impact that they have on player frenzy. Earmarking of lottery revenues to specific recipients is a bait-and-switch process that motivates players to justify their involvement while legislative bodies shift funds away from the designated recipient simultaneously. Numerous studies have shown that designated recipients of lottery revenues, for example, public education, are often worse off after the creation of a lottery (see, for example, Gribbin and Bean 2006). As more states adopt lotteries, the competition for lottery player dollars becomes more intense while the attractiveness of playing lottery games wane. This makes it likely that future lottery revenues generated by all states will diminish.

In summary, lotteries are a means by which legislative groups motivate individuals to provide tax revenue that they do not perceive as such in exchange for minute chances of winning cash awards. The economic consequences of these lotteries are just as condemning. Perhaps the best perspective on lotteries is that “your odds of winning are almost as good if you do not play.” The forty-one states in the United States and many municipalities around the world should learn this lesson to generate more stable and more conscientious government revenue generation.

SEE ALSO Expected Utility Theory

BIBLIOGRAPHY

Borg, Mary O., and Paul M. Mason. 1988. The Budgetary Incidence of a Lottery to Support Education. National Tax Journal 41: 75–85.

Clotfelter, Charles T., and Philip J. Cook. 1989. State Lotteries in America. Cambridge, MA: Harvard University Press.

Gribbins, Donald W., and Jonathan J. Bean. 2006. Adoption of State Lotteries in the United States, with a Closer Look at Illinois. Independent Review 10 (3): 351–365.

Mason, Paul M., Jeffrey W. Steagall, and Michael M. Fabritius. 1997. The Elasticity of Demand for Lotto Tickets and the Corresponding Welfare Effects. Public Finance Quarterly 25 (5): 474–490.

Paul M. Mason

Instant Lottery Ticket

Background

During the last few decades, lottery tickets have become an increasingly popular form of legal gambling in the United States. One popular game is the instant win, or scratch off lottery which features tickets that have the winning (or losing) numbers concealed on the game card itself. The winning numbers are typically hidden by a coating, which is removed by rubbing. By removing this coating, the owner of the ticket can instantly determine the ticket's winning status instead of waiting for a matching number to be drawn. Since the cash value of the ticket is determined at the time of printing, the tickets must be designed and manufactured with extraordinary security precautions to avoid ticket fraud.

Design

The design of instant lottery tickets varies from game to game. To entice potential purchasers, games may be thematically linked to popular interests such as sporting events, television shows, or even other gambling games like poker card or horse racing. Some states have even allowed customers to participate in the design process. For example, in 1993, the Oregon State Lottery held a "Designer Scratch-it Contest" for the general public. Winners were judged based on theme, style of play, graphics, and originality. Regardless of the design type, instant lottery tickets are designed to be played by scratching off a concealing coating to reveal numbers, letters, or symbols that will (hopefully) match the designated winning symbol located somewhere on the ticket. These games are all designed with multiple security features to prevent tickets from being counterfeited or tampered with.

There are several techniques used to breach game security, which must be taken into consideration during the design process. One method of defrauding the lottery is to decode the relationship between the serial number on the ticket and the ticket's lottery number. Each ticket contains an individual serial number composed of a series of digits or alphanumeric characters. This number is used by the game operator to track the distribution of tickets from the operator to the selling agents and for accounting of sold and unsold tickets. It may also include information that shows the ticket is only valid for certain games or dates. These numbers are especially helpful in case tickets are lost or stolen and can be used to track tickets to make sure they are not inappropriately claimed.

By understanding the relationship between the serial number and the lottery number, one could try to locate lots or batches of tickets that are more likely to be winners. Other methods to breach ticket security attempt to directly view the lottery number without scratching off the ticket covering. One way this is done is by candling, which involves shining a bright light on the ticket in an effort to read the lottery number through either the front or back covering. Another technique, known as delamination, involves separating the different layers of the ticket to make the numbers visible. This technique can even be used after the owner has uncovered a winning number and turned in the ticket for redemption. In this scenario, individuals with access to winning tickets could separate the front layer of the ticket that contains the winning number and glue it onto a new back layer that has a different name and address for the winner. Still another way of circumventing lottery security, called wicking, uses solvents (e.g., alcohols, ketones, acetate, or esters) to force the lottery number to bleed through the concealing coating.

The design features employed to prevent these security breaches vary from game to game. In general, these features involve the serial number and the concealing coating. One key to controlling game security is to select serial numbers, which do not reveal any information about the winning status of the ticket. This is done by randomly encoding tickets with a series of computer-generated numbers or symbols. Each lottery game uses a specific algorithm, or mathematical process, to randomize the relationship between the serial and lottery numbers. This prevents anyone from discovering the connection between the two numbers. When properly encoded, the serial number cannot be deciphered by the ticket purchaser but still provides useful information to the ticket agent. Printing matching, coded numbers on the front and back of each ticket can help ensure winning tickets have not been tampered with. The security features used to prevent candling, delamination, and wicking involve the coating used to conceal the lottery number. A heavy foil coating can be used over the numbers to prevent light from passing through the ticket and illuminating the numbers. However, this foil is expensive to add and it does not prevent delamination. A better way to prevent the numbers from being read through the coating is to use an opaque covering in conjunction with confusion patterns imprinted on the back and front of the ticket. These confusion patterns are random designs used to obscure the image when light is shined through the ticket. This method can also be used to prevent wicking by utilizing dyes in the coating which are responsive to solvents. If anyone attempts to dissolve the concealing coating, the ink bleeds and obscures the lottery numbers.

Raw Materials

The basic materials required for ticket manufacture are the same as those employed for any similar ticket or card printing. The main component is paper stock of appropriate stiffness, but aluminum foil is also used as a component of some multilayer tickets. Other important raw materials include the suitable inks, adhesives to laminate multi-part tickets, and the scratch-off coating materials used to conceal the number. These coatings are most often made using acrylic resins.

The Manufacturing
Process

Printing

• 1 Depending on the technique employed, tickets may be printed in a single stage (where all the information is printed at once) or in two stages (where the game information and secure numbers are printed separately). Game information includes details such as ticket prices, gaming rules, validation dates, prize information, and graphics to entice the consumer. Tickets can be printed by either a continuous feed process or by a sheet press process. In the continuous feed process a strip of paper ticket stock is fed into the computer controlled printer. In the sheet press method, ticket sheets are imprinted by engraved plates. After printing, the sheets are sliced into individual tickets. These tickets are then stacked and shuffled to ensure the lottery numbers are not in consecutive order. Winning tickets are randomly intermingled so there is a wide and preferred distribution of winners.

Serial number coding

• 2 Coded serial numbers and corresponding lottery numbers can be added to the tickets in several ways. The continuous printing process uses sequencers, which advance the serial number for each ticket when it passes through the press. These serial numbers go through a complex mathematical transformation (known as algorithmic conversion) to intermediate numbers, which are in a consecutive order. A second algorithmic converter operates on the intermediate number and generates the actual lottery number.
• In the sheet printing process, after the tickets have been cut and shuffled, they are fed into a serializer which adds a computer generated serial number. Depending on the process employed, these numbers can be conveniently printed with fast, computer operated ink jet printers. Sensors attached to the printers transmit information on speed and relative position of individual tickets as they are being printed. The computer then generates print control signals that cause the ink jet printers to simultaneously print book numbers and lottery numbers. By printing both these numbers at the same time from opposite facing printers, the front and back of the ticket can be printed at the same time. Similarly, tickets can be printed with a single printer which has a print head located on the top and bottom of the ticket face. After the printing process is complete and both the lottery and serial numbers have been added to the cards, the lottery number can be concealed.

Lottery number concealment

• 3 The tickets are sent through a cover applicator, which treats the ticket with one of several concealing coatings. One type of coating is an opaque metal foil, which is applied with pressure. A paper pulltab may also be used to conceal the number, although this method is not frequently used today. The preferred concealment method uses an acrylic film to cover the number. This type of coating is applied in several layers. First, the paper card surface is treated with a primer coating which prepares the surface to accept the other layers. Next, a confusion pattern, consisting of random lines or symbols the same color as the lottery numbers, is printed on top of the primer coat. The lottery numbers are printed on top of this layer, and a seal coat is applied over the numbers. The uppermost concealing covering is added next. This concealing coating contains highly opaque materials such as carbon black pigment or aluminum paste mixed with acrylic resins and appropriate solvents such as methyl ethyl ketone. The resulting coating effectively hides the numbers beneath but can be easily removed by rubbing. An additional confusion pattern is printed on top of this layer. Finally, an overprint layer featuring additional graphics or instructions may be printed on top.

Conversion and packaging

• 4 After the printing and coating processes are complete, additional converting operations may be performed on the tickets. These operations include slicing the tickets into rolls or perforating them for ease of dispensing. Finally, the tickets are boxed and readied for shipment to distributors. After delivery, the tickets are sold for use. When the ticket is purchased and the owner scratches off the covering, he or she reveals the ticket's winning status. The ticket is then taken to a ticket vendor to claim the prize, and the game operator inputs the serial number in their computer to decode it and confirm that the ticket is a winner. The ticket vendor then pays the customer and is subsequently reimbursed by the lottery operator.

The Future

Printing technology is continually evolving and this evolution is likely to lead to new methods for lottery ticket production. For example, improved encryption technology could result in the creation of more secure lottery numbers. Likewise, newly developed chemical methods of concealing lottery numbers could produce less expensive tickets than those currently used. Perhaps of more interest for the future are alternate ways in which games may be played. One method under consideration by the lottery commission involves a video terminal instead of a paper ticket. It is conceivable that at some time in the future, an instant lottery game could even be played over the Internet on a personal computer.

Where to Learn More

Books

Johnson, Ben E. Getting Lucky-Answers to Nearly Every Lottery Question You Can Ask. Chicago: Bonus Books, 1994.

Periodicals

Lotto Magazine

Other

The Lottery Collectors' Society. 1007 Lutrell St., Knoxville, TN 37917.

—Randy Schueller

LOTTERIES

LOTTERIES. State-sanctioned lotteries have a long history as a way of raising "painless" revenue for "good" causes. Most European countries (France, Holland, England) utilized lotteries to finance capital improvements, such as roads, harbors, and bridges. For the original European immigrants to the United States, lotteries were an established method of raising the funds to build the infrastructure a developing country needed. Hence lotteries often are seen by American legislators as the harmless form of gambling that can be harnessed for the common good. The United States has experienced three waves of lottery activity.

The First Wave: State-Sanctioned Lotteries (1607–1840s)

The first wave of gaming activity in North America began with the landing of the first European settlers but became much more widespread with the outbreak of the Revolutionary War. A few of these lotteries were sponsored by colonies to help finance their armies, but most lotteries were operated by nonprofit institutions, such as colleges, local school systems, and hospitals, to finance building projects or needed capital improvements. For example, both Yale and Harvard used lotteries to build dormitories. In 1747 the Connecticut legislature gave Yale a license to raise £7,500, while Harvard waited until 1765 for approval from the Massachusetts legislature to conduct a lottery worth £3,200. The primary reason for the failure of Harvard's lottery was that it had to compete with lotteries to support British troops fighting the French and Indian War. It should also be noted that, during this wave of lottery activity, no colony ever operated its own lottery. Private operators conducted lotteries. An organization or a worthy project, such as the Erie Canal, received permission from state legislatures to operate a lottery to support its "worthy" cause.

But these private operators often were less than honest in conducting lotteries. One famous lottery scandal occurred in Washington, D.C. In 1823 Congress authorized a Grand National Lottery to pay for improvements to the city. Tickets were sold, and the drawing took place. But before anyone could collect winnings, the private agent that organized the lottery for the District fled town. While the majority of winners accepted their fates with resignation, the winner of the $100,000 grand prize sued the government of the District of Columbia, and the Supreme Court ruled that the District had to pay the winner. It was a sober reminder to local officials that authorizing lotteries could be potentially dangerous, and the movement to ban lotteries began. From 1840 to 1860 all but two states prohibited lottery activity due to various scandals that occurred in the 1820s and 1830s. However, less than forty years later lotteries once again exploded onto the national scene.

The Second Wave: National Lotteries (1860s–1890s)

With the conclusion of the Civil War, the South had to find some method to finance the construction of roads, bridges, school buildings, and various other social capital projects to recover from war damage. One way was to permit private operators to conduct lotteries to raise revenue for reconstruction. The primary difference between this period of lottery activity and the previous period was the scale of ticket sales. Whereas in the previous lottery boom, sales of tickets were confined to local regions, these southern lotteries took on a national scope and, ironically, were particularly popular in the North. The most famous southern lottery, known as the Serpent, was conducted in Louisiana. In the late 1880s almost 50 percent of all mail coming into New Orleans was connected with this lottery.

As was the case with the first wave of lottery activity, controversy surrounding lotteries eventually led to a federal government ban. In 1890 the charter that authorized the running of the lottery in Louisiana was about to expire. The operators bribed various state officials with offers of up to $100,000 to renew the Serpent's charter, and this was reported throughout the country. Various state legislatures passed resolutions calling on Congress and President Benjamin Harrison to stop this lottery. In late 1890 Congress passed the primary piece of legislation that crippled the Louisiana lottery by denying the operators the use of the federal mail. If customers could no longer mail in their requests for tickets, then the lottery's life would be short-lived. By 1895 the Louisiana lottery had vanished, and as the twentieth century dawned, gaming activity in the United States had ceased. But like a phoenix lotteries were resurrected as governments searched for additional sources in the late twentieth century.

The Third Wave: State Operated Lotteries (1964–)

In 1964 New Hampshire voters approved a lottery. The rationale used by proponents to justify its legalization was strictly economic. Proceeds from the lottery were to fund education, thereby averting the enactment of either a sales or an income tax for New Hampshire. The lottery was an instant success, with 90 percent of the lottery tickets purchased by out-of-state residents. But this lesson was not lost on neighboring northeastern states, and in the next ten years every northeastern state approved a lottery.

However, the greatest growth of state lotteries occurred in the period between 1980 and 1990. By 2001 only three states (Utah, Hawaii, and Tennessee) did not have some form of legalized gaming. Lotteries and associated forms of "gaming" had gained a social acceptance that had not occurred in previous waves of lottery activity.

This third wave of lottery activity was quite different from those that preceded it. First, the breadth or the widespread use of gambling as a source of revenue for state governments was greater. Thirty-eight states plus the District of Columbia sponsored a lottery by the twenty-first century.

Second, the depth of gambling taking place was unprecedented. No longer was lottery play confined to a monthly or even a weekly drawing. Most states offered three types of lottery games. First was a daily number game that involved selecting a three-or four-digit number for a fixed-amount prize. The second type of game fits the general rubric of "lotto." These games involved picking six numbers of a possible forty or forty-eight numbers. The game was usually played twice a week, and jackpots can build up quite enormously, sometimes up to $90 million. The final lottery innovation was the "instant" or scratch tickets, in which the players know immediately if they have won. The odds and the sizes of the prizes for these games varied greatly.

The third difference in the third wave of gambling activity involved both the state-authorization and the state-ownership of the lottery operations. Previously the actual operation of the lottery itself was given to private brokers. In the third wave the state itself became the operator and sole beneficiary of lotteries. While some states, such as Georgia, Nebraska, West Virginia, Maine, and Texas, have permitted private concerns, such as Scientific Games and G-Tech, to operate the instant game portion of their lotteries, the vast majority of lottery operations were conducted by the state at the beginning of the twenty-first century.

The final difference deals with the "good" causes lottery proceeds are used to support. In the two previous waves, the good causes were onetime events, and lottery proceeds supported building canals, waterworks, bridges, and highways. Once the good cause was complete, the lottery ceased. While the state needed the lottery to finance these projects, it did not depend on lottery proceeds to fund daily services, By the twenty-first century many states, such as California, Illinois, Florida, and New Jersey, used lottery proceeds to fund education. In other states lottery proceeds have funded Medicare (Pennsylvania), police and fire departments in local communities (Massachusetts), and a host of other day-to-day operations of government.

State lotteries are no longer one-shot affairs. They must provide the sponsoring state with a consistent source of revenue to fund various good causes in order to justify their approval.

BIBLIOGRAPHY

Fleming, Alice. Something for Nothing. New York: Delacorte Press, 1978.

RichardMcGowan

See alsoGambling .