A Closer Look at the Lottery Industry


The slew of recent big-ticket jackpots has made lottery play the most popular form of gambling in America. And it’s a multibillion-dollar industry for states, which promote lotteries to their residents as ways to avoid raising taxes. But that story is more complicated than it first appears, and a careful look at how lotteries operate and the costs they impose shows that there’s a lot to be worried about.

Until the nineteen-sixties, lottery tickets weren’t just games of chance—they were also a kind of tax. In fact, as Cohen argues, that’s why the modern lottery came into being. State governments were in dire straits in the immediate postwar period. Their budgets had been expanding, but they couldn’t continue that pace forever without either raising taxes or cutting services, both of which would have been deeply unpopular with voters.

Lotteries offered a way to raise revenue without hurting poor people, which made them politically attractive. The first modern state-run lottery started in New Hampshire in 1964. Other states quickly followed suit, especially those with large social safety nets that might need extra revenue. These were, in general, Northeastern and Rust Belt states that were notably tax averse, states that viewed the lottery not just as a minor source of funding but as a way to get rid of taxes altogether.

There’s nothing inherently wrong with that, if the entertainment value of a ticket outweighs the monetary cost. But, as we know from decades of scientific research in behavioral economics, not all consumers make that choice. Some are addicted to gambling, and they need the buzz of the game in order to feel normal. And there’s no doubt that the marketers of lotteries exploit this psychological vulnerability, not just with ads but with everything else about the lottery experience, from the size and shape of the tickets to the math behind them.

As for those winnings, there’s no shortage of stories of lottery winners who end up broke or broken and alienated from family and friends. And there are plenty of experts who say that if you win the lottery, it’s best to keep your mouth shut and enlist a crack team of helpers, even before you tell anyone what you won.

One last thing to consider: Those big jackpots aren’t exactly tax free. In fact, if you win a large jackpot, you may end up owing federal income taxes, state income taxes and property taxes. And in many cases, the federal government will withhold part of the prize, a process known as “deferred payment.”

The word lottery comes from the Dutch noun lot, which means fate or destiny. The earliest lotteries were run by towns in the Low Countries, and they were used for everything from building town fortifications to helping the poor. One of the earliest recorded lotteries took place in Ghent in 1445, and it raised funds for town fortifications, as well as to give money to the needy.