Powerball and other lotteries don’t replace taxes — they add to them

Guest Post by Norm Champ

Powerball mania is upon us once again. The lucky winners of Wednesday night’s drawing will receive, at a minimum, a $375 million jackpot.

While the lure of winning such a large sum of money for a seemingly small investment ($2 for one ticket) can be irresistible, those who gamble on the lottery would be wise to save their money, instead of paying what is essentially a voluntary tax to state-sponsored gambling. And some of the biggest contributors to this voluntary tax are the country’s poorest citizens.

In 2014, Americans spent $70.1 billion on the lottery. Yet, the average savings rates of Americans are among the lowest of all modern democracies, generally somewhere around 5% or less. Consumer credit-card debt, meanwhile, is disturbingly high, around $16,000 on average. Average car loan debt is $27,000 per household. Average student loans, $48,000. Mortgage debt, $169,000.

The savings/debt scales are weighted even more heavily on the side of personal debt when we consider “voluntary” taxes paid in the form of lottery and casino gambling promoted by government. The practice of public financing via laws that enable government to profit from lotteries and casinos is grievous enough to warrant its own Hall of Shame.

The Hall would be packed with honorees. Currently, 44 states, Puerto Rico, the U.S. Virgin Islands, and the District of Columbia have operating lotteries. The lotteries typically dedicate net revenue to social and educational programs, so that governments can use positive public relations from “doing good” to retain public support for what has become a leading source of revenue for them.

But make no mistake: Lottery revenue amounts to nothing more than invisible taxes, paid voluntarily by citizens. Lottery dollars don’t replace existing taxes; they add to them. In 2009, lotteries provided more revenue than the state corporate income tax in 11 states. The Rhode Island lottery netted the state more than $3 for each dollar of state corporate income tax in fiscal 2009.

For those lucky enough to hit the jackpot, there are more taxes to pay. As investigative reporter and tax expert David Cay Johnston noted, people who win $600 or more have their take reported to federal and state tax authorities and then pay income taxes of up to 45% on their windfalls.

In New York state, taxpayers in the lowest segment of earners pay more for the lottery on average (about $1,000) per year than any other form of taxation, according to analysis by data expert Max Galka. At the same time, America’s poorest citizens (households earning under $13,000 per year) spend $645 a year on lottery tickets, which amounts to about 9% of their annual income.

Lottery sales remind me of penny stock brokers hard-selling from a boiler room.

A lack of transparency only exacerbates the problem. Since the Clinton Gambling Commission, studies have pointed to the role of lotteries in gambling addiction, shown their disproportionate effect on poor and low-income citizens, made clear that states vary widely in their accountability for spending of lottery revenues and indicated plainly that state advertising fails badly at making the poor odds of winning apparent.

Lotteries, however, are not bound by the Federal Trade Commission’s truth-in-advertising laws that cover private businesses. They can outsource advertising to top marketing and communications firms with state-of-the-art tools for manipulating consumer behavior.

As the novelty of lottery games wears off after they are introduced—and the drain on wallets becomes clearer—states constantly invent new games and new marketing strategies, thereby driving up costs, as well as artificially stimulating demand in ways that remind me of penny stock brokers hard-selling from a boiler room.

Lotteries are not just a way we all wind up paying more taxes and our low-income citizens end up being exploited. Most importantly, they are siphoning millions of dollars that people could be saving or investing wisely.

I don’t expect lotteries to be repealed and eliminated tomorrow. But it is high time to ask our state and federal lawmakers to impose common-sense changes to benefit us all. Reduce the number of new games introduced each year. Hold state lottery advertising campaigns accountable to federal truth-in-advertising laws, requiring disclosure of risks and odds. Insist that state lotteries set aside a share of marketing dollars for promoting good savings habits and financial literacy. Let’s bet on ourselves, for a change.

Norm Champ is a former director of the Division of Investment Management at the Securities and Exchange Commission and the author of “Going Public: My Adventures Inside the SEC and How to Prevent the Next Devastating Crisis,” from which this article is adapted.