When you work in Medicaid policy as I do, you learn that one of the main goals motivating state governments is trying to maximize the money they receive from the federal government and minimize the money they send to the federal government. States have to balance their budgets every year, the feds don't, so states view the feds as a bottomless pit of money and spend countless hours devising new ways to feed at the trough. Books could be written (and I'm sure many have) about how states creatively "steal" money from the federal government through legal loopholes.
Which got me thinking about the lottery. According to USA.gov, 41 states, the Disctrict of Columbia, and Puerto Rico run lotteries, generally to raise funds for education. Some have referred to the lottery as a tax on people who can't do math, but whatever you call it, it is basically a voluntary tax levied on people who choose to take on very poor odds in an attempt to supplement their income. The states like it because it's an easy way to raise cash and doesn't piss off the electorate too much. But should the electorate like it? I think state's should increase income taxes rather than support lotteries to raise extra funds, and I'll show you why.
For an example of how much money state's are losingLet's look at New York State's lottery financial budget. In 2007, New York's lottery grossed $7.175 Billion Dollars. Of that revenue, $3.971 Billion of it went to prize money. According to most sources found throughout the web, the Federal Tax Rate on lottery winnings is about 35%, meaning that of the money won by prize-winners, $1.390 Billion of it was immediately sent to the Federal Government in the form of income taxes. That's 19.3% of the total revenue raised by the lottery, shipped to the feds! That's money lost by the states, they can't get it back. Beyond that, let's look at how much money they're spending in the form of advertising and marketing. In 2007, that total was $97 Million. Other expenses that come from running the lottery, like licenses, commissions, and other expenses that must accompany running a lottery totalled $737 Million, bringing the total expense from a lottery, above what would be required for a simple increase in the income tax, to $834 Million. Combined with the money lost in the form of Federal Income Taxes, that brings the total amount of state money wasted by having a lottery to $2.22 Billion. All this, just to raise $2.35 Billion for education.
In 2007, New York State raised $34 Billion through the Personal Income Tax. To raise an additional $2.35 Billion, the State Income Tax rate would have to be raised by 7% from 6.85% on income between $20K and $100K per year to 7.3%. That may sound like a lot, but that increase in the income tax gets you the money for education without sending $1.4 Billion to the feds in the form of income tax and without wasting another $834 Million on administrative and marketing expenses. Best yet, funds paid as state income taxes are tax deductible for federal income taxes, thus keeping even more money for the state and allowing the state's citizens to send less to the feds, making the actual cost of this tax even less than the $2.35 Billion being raised for education. Finally, because the people woudn't be spending the wasted $4.81 Billion in lottery revenues that DON'T go to education, they can be spending that money on things that help drive the state economy, or even, *gasp*, start saving.
We know politician would be crazy enough to propose this. One of the key things keeping America together is the illusion that success can happen to anybody, even if that success happens in the form of a lottery ticket. The weird thing, and the thing I really want to point out here, is that the lottery actually violates every instinct states have, in that it funnels money from states to the federal government and they get nothing in return for it.
