The Tax Incidence of Lotteries: Evidence from Five States

The nature of revenue generation for state-sponsored lotteries has been an issue of public debate for quite some time. Although most studies have found lotteries to have a regressive tax incidence, several have concluded otherwise. Unfortunately, the vast majority of academic studies address this concern by examining the tax incidence of only one state's lottery and/or by using only one time period's data. In addition, many assessments of the tax impact of lotteries fail to consider other demographic variables that may influence purchase patterns and, thus, be of interest to policymakers. To remedy this, the current paper assesses the incidence of the lottery excise tax for five states using county level data spanning multiple years. Also assessed are changes in incidence across demographic groups as the lotteries matured. Lottery tax incidence is assessed with multiple regression estimates of the income elasticity of demand for lottery products. The predominant finding is that the lottery tax for these state s had a regressive incidence. Otherwise, few consistencies in either change in lottery tax incidence or purchase patterns across demographic variables were found. The growth of state-sponsored lotteries in the U.S. has been phenomenal both in terms of the number of states providing lotteries and in terms of the sales of existing lotteries (Mikesell 1994; Miyazaki, Hansen, and Sprott 1998). Lotteries were reintroduced to the U.S. in 1964, were sold in fourteen states by 1980, and currently are sold in thirty-seven states and the District of Columbia. From 1980 to 1991, U.S. national lottery sales increased by 22.3 percent per year (Mikesell 1994); from 1992 to 1996, the average annual growth rate was 12.6 percent (cf. Miyazaki et al. 1998). Concomitant with this sales growth has been the proliferation of the lottery products offered, expanding from instant scratch-off tickets to many different types of lotto and daily numbers games. The fairness of state-sponsored lotteries has been a concern of consumer advocates and policymakers since the reintroduction of lotteries into the U.S. marketplace (Clotfelter and Cook 1989; Jackson 1994). A main concern is that public lotteries, although strictly voluntary, may represent a form of regressive taxation on the populace, wherein lower-income consumers bear a proportionately larger burden of the tax generation than higher-income consumers (Brinner and Clotfelter 1975; Clotfelter and Cook 1989; Stearns and Borna 1995). Lottery tax incidence studies have been based on a variety of data including surveys of winners (Borg and Mason 1988; Brinner and Clotfelter 1975; McConkey and Warren 1987; Spiro 1974), surveys of the population (Brinner and Clotfelter 1975; Clotfelter and Cook 1987, 1989; Livernois 1987; Suits 1977a; Vaillancourt and Grignon 1988), lottery sales by zip codes (Clotfelter 1979), sales by city (Jackson 1994), sales by state (Vasche 1985), winners by zip codes (Clotfelter and Cook 1987; Koza 1982), and winners by census tracts (Brinner and Clotfelter 1975; Heavy 1978). In addition to the differences in the type of lottery data used, these studies also vary with regard to the state lottery examined and the year of data collection. Finally, there is considerable variety in the techniques used to assess the tax impact (e.g., simple correlation, multiple regression, the Suits tax concentration index, and other elasticity measures). While the majority of the studies report that the lottery excise tax is regressive, a number of studies suggest that lotteries represent proportional or even progressive tax vehicles (see Miyazaki et al. 1998 for a review). The lack of consistency across studies begs the question as to whether different findings are the result of the various techniques, samples, states, and years used by researchers in their efforts. That is, does the tax incidence of lotteries truly differ across states and/or time periods, or do differences in methodologies explain the diversity in prior results? …