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The Hidden Costs of Lottery Revenues

The Hidden Costs of Lottery Revenues


The lottery is a game in which numbers are drawn for prizes. The term is also applied to state-organized schemes for the distribution of public funds, such as those for construction of colleges. Private lotteries may be held for a variety of purposes, such as the sale of property or products. Benjamin Franklin organized a lottery in 1776 to raise money for cannons to defend Philadelphia during the American Revolution. Later, it was widely used in the United States as a way to obtain “voluntary taxes.” Modern state lotteries are based on an auction model, wherein applicants pay a fee for a chance to win a prize.

The main argument made by the promoters of lotteries is that players voluntarily spend their money for a chance to gain something they want, which gives state governments a way to raise revenue without raising taxes. This argument is effective, especially in times of economic stress, when voters may oppose tax increases and other cuts in government spending. However, studies have shown that the popularity of lotteries is not related to a state’s objective fiscal condition, and they can attract broad popular support even in healthy economic times.

Lottery revenues are often compared to the cost of other alternatives to higher taxes, such as cutting public programs or increasing sales and income taxes. But these comparisons are flawed. They ignore the fact that lottery proceeds are not free, as they come with a significant amount of “hidden” costs. First, there are the transaction costs of operating the lottery, including promotion, the cost of tickets, and so forth. In addition, the winners of a lottery have to pay taxes on their winnings. In some cases, these taxes are very high.

Finally, there are the social costs of running a lottery. While the bulk of lottery advertising focuses on persuading people to buy tickets, it is important to remember that it is promoting gambling and that many individuals are predisposed to problems such as compulsive gambling or financial ruin. Furthermore, it is important to recognize that many people play the lottery because of a desire for an adrenaline rush.

In addition, the reliance of most states on lottery revenues has led to the development of an unwieldy system of overlapping and competing administrative agencies that make it difficult to achieve any clear vision for the future of the industry. Most importantly, it has created a situation in which policy is made piecemeal and incrementally, with the result that the overall needs of the population are only intermittently taken into account. It is important to remember that the goal of a lottery should be to raise funds for the general welfare, not to generate specialized taxes. Whether or not this goal can be achieved depends largely on the effectiveness of the administration, which in turn depends on the ability of state officials to keep up with the rapidly changing business environment of lottery operations.