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Powerball profits don't all go where you think they do

Ed Rodriguez, the father of two school-aged kids in Otisville, N.Y., had high hopes of winning the $580 million Powerball jackpot last night. Either way, he figured at least some of the money went to a good cause.

"Some of it goes to education," he said after buying a ticket Wednesday at a Citgo station on the Garden State Parkway in New Jersey. With many school budgets in his area facing tight budgets, "it helps a lot."

He'd be disappointed on both counts. He didn't win the largest Powerball drawing in history, which went to ticket holders in Arizona and Missouri. And the money doesn't do as much good for education as he thinks.

About 72 cents of every state lottery dollar goes somewhere else. About 60 cents goes to the winner. Some goes to run the lottery. A piece of it goes to a private, Italian-based conglomerate that operates lotteries and slot machines in 50 countries around the world.

Depending on what state you live in, that leaves as little as 11 cents left to pay for the government services these games were created to help.

Critics argue that, aside from being an inefficient way to raise money, paying for government services with lottery sales also shifts a larger portion of the overall tax burden to those who can least afford it.

“It’s a very regressive tax," said Lucy Dadayan, a senior policy analyst at the Rockefeller Institute of Government. “And any time a government relies on a regressive tax it's not the best policy option. But it’s easier for state officials to promote gambling rather than to increase income taxes or sales taxes.”

State-run lotteries have been around since the U.S. was founded, but the modern era of government games dates to the 1960s. Since then, they’ve spread to 44 states, which took in nearly $69 billion in sales in the 2012 fiscal year.

After paying the winners and covering operating expenses, the roughly $19 billion in remaining proceeds went to fund a long list of state and local programs and services, from education to social services, according to David Gale, Executive Director, North American Association of State and Provincial Lotteries.

“If lotteries were not in existence those programs and services would be cut or they would have to be funded through another source,” he said.

The bulk of the money collected from tickets – about 60 cents of every dollar on average - goes back to the winners, said Gale. After expenses – everything from advertising, fees paid to vendors selling tickets and salaries for lottery commission staff - the amount left over varies widely from state to state.

In Rhode Island, just 11 cents in net profits was returned to the 2012 state budget to support a variety of programs, from education to social services. Oregon’s lottery, the most profitable in the country, generated 50 cents in profits for each dollar of ticket sales last year to help pay for education, economic development and natural resource programs.

Profits can vary for a number of reasons, said Pierce. Some states use some of the revenues to pay for gambling addiction counseling programs. Some states have laws governing how much money can be spent on advertising.

To try to boost the take, a handful of states are considering turning over their lottery operations to private companies, like GTECH, which already provides a variety of services – from computer systems to retail terminals – to about half the states. Illinois and Indiana have signed on and New Jersey officials are considering the move, according to Robert Vincent, a company spokesman

"They’re saying, 'We think we can make more money for good causes if we put this in the hands of a private manager,'" he said. “We think we can drive more sales over the course of the contract.”

With revenues of more than $1 billion last year, GTECH is owned by Lottomatica Group, an Italian-based global gaming giant with 8,000 employees in more than 50 countries worldwide. Vincent said many state-run lotteries simply have don’t have the expertise to maximize their profits and boost tickets sales.

Image: Lotto ticket
Retired Dr. Paul Kruzel works on picking his choice for winning numbers at the Canterbury Country Store in Canterbury, N.H. If you think a sizable chunk of the profits from the giant jackpot goes to government services, such as education, think again. Jim Cole

“You’re competing with Altoids,” he said. “You’re on the counter of a convenience store and it's an impulse purchase whether you’re going to buy a lottery ticket or buy something else that’s there competing for your attention. That’s a very different environment than other government agencies that are there to protect, collect and manage infrastructure.”

States' hard-pressed tight budgets can use all the tickets sales they can get, which has increased pressure on lottery commissions to raise more money.

But critics of the reliance on lotteries to fund government argue that it shifts the funding burden unfairly onto the poor and working class.

The link between lottery sales and low-income purchasers has been fairly well established. In 2004, three Cornell economists reviewed 10 years of data from 39 states and found a strong correlation between lottery sales and poverty rates.

“State officials laud the benefits of lottery proceeds and promote the fun and excitement of participation,” the researchers wrote. “This entertainment value is one explanation for lottery demand by the poor: individuals with lower incomes substitute lottery play for other entertainment.”

By contrast, the researchers found little correlation between poverty rates and sales of movie tickets.

In some cases, lottery revenues have been used to cut income and sales taxes, further shifiting the burden of paying for state services to the poor, according to Patrick Pierce, a political scientist and author of "Gambling Politics: State Government and the Business of Betting."

Pierce found that in the early stages of initiating a lottery, spending on services like education went up for a few years, but then began to level off as the new lottery winnings eventually replaced taxes collected as general revenue.

“Governors could then take the political credit for no tax increases or tax cuts while they were governors,” he said. “The only reason they were able to do it was because of the lottery. They didn’t make state government more efficient. They didn’t do anything other than benefit from this voluntary tax that state residents were paying.”

State officials have found another reason to rely more heavily on lottery revenues. While revenues from sales and income are slowly recovering from the 2007 recession and weak recovery, profits from state lotteries have bounced back sharply – up 37 percent in the past two years.

Despite high unemployment and little or no wage growth, lottery ticket buyers are durable customers.

“When their situation becomes more desperate because of the economy, you get some folks playing the lottery precisely because their situation is more desperate,” said Pierce. “And this is the only route they see to escaping the situation that they’re in.”