Is the Lottery a Taxable Activity?


Lottery is the most popular form of gambling in America. States promote it as a way to raise revenue, and people spend upwards of $100 billion on tickets each year. But just how meaningful that revenue is to broader state budgets, and whether it’s worth the trade-offs to people losing money, are questions that deserve careful scrutiny.

A lottery is a form of gambling in which tokens are distributed or sold and the winner is chosen by drawing lots. The first recorded lotteries were in the Low Countries in the 15th century, when towns used them to raise money for town fortifications and poor relief. The term “lottery” derives from the Dutch word for drawing lots, and was likely borrowed from French (the earliest English use of the term is in 1569).

The earliest modern lotteries were introduced by Benjamin Franklin to raise funds to buy cannons to defend Philadelphia during the American Revolution. He also backed the Virginia lottery in 1776, but that was unsuccessful.

Most states have lotteries to raise money for various projects, including education, road construction, and other public works. The lotteries are typically run by the state’s gaming commission, but in some cases a private corporation is responsible for operating the lottery. The games offered vary by state, but most offer daily numbers and scratch-off tickets. The odds of winning are much lower for scratch-off games, but the prizes can be substantial.

While state officials may claim that lotteries are an appropriate source of funding in a time of anti-tax sentiment, it’s difficult to argue that the government should profit from an activity that can be addictive and has significant social costs. Governments have long imposed sin taxes on vices, such as alcohol and tobacco, with the argument that the extra cost will deter the activity and reduce its harms. However, lotteries are different in that they are not a sin tax and are not likely to have the same deterrent effect as other vice taxes.

In many ways, lottery advertising is designed to mislead and confuse potential players. The most common tactics include presenting misleading information about the odds of winning (advertising often states that you have a better chance of being struck by lightning than striking it rich); inflating the value of the prize money won (lotto jackpots are paid in annual installments over 20 years, with inflation dramatically eroding its current value); and promoting the idea that playing the lottery is fun and a great experience.

In addition, a lot of lottery advertising targets specific constituencies, including convenience stores and lottery suppliers (heavy contributions to state political campaigns are frequently reported); teachers in those states in which lotto proceeds are earmarked for education; and state legislators who become accustomed to a steady flow of “painless” lotto revenues. These activities are at cross-purposes with the overall public interest, and it’s time for a more serious debate about how state governments should manage an activity from which they profit.