Bryce Covert & Judd Legum
January 11, 2016
If you want to go to the corner store this week to pick up a gallon of milk, be prepared to wait. America has been gripped by lottery fever and lines are snaking out the doors of convenience stores across the county.
The next Powerball drawing, scheduled for Wednesday, will be worth about $1.5 billion to the winner. This is projected to be the biggest lottery payout in the history of the world.
Why are Powerball jackpots getting so huge? It’s not an accident.
Prize Pools Are Going Up Because Powerball Just Became Much Harder To Win
In October, the consortium of states that runs Powerball approved a series of rule changed that made it much harder to win the jackpot. Under the new rules you select five of 69 numbers, up from five out of 59 numbers. The choices for the Powerball was actually reduced from 35 to 26. Still, this decreased the odds of winning the jackpot from 1 in 175 million to 1 in 292 million.
The purpose of this change was to increase the chances that there would be no grand prize winner for any given drawing. When this happens, the prize pool rolls over creating giant jackpots. At the time the rule changes were first floated in July, FiveThirtyEight estimated that the chances of a $1 billion prize pool increased from 8.5% to 63.4% over a given five year period.
At the same time, the decreased number of choices for the individual Powerball made winning small $4 prizes more likely. “The rules change is intended to increase the odds of winning any prize, while making it more difficult to win the jackpot prize,” the New York State Gaming Commission wrote in a memo supporting the change.
The purpose of creating massive jackpots is because they induce more people to play. The prospect of big payouts spark a flood of free media attention, encouraging people to speculate on how a windfall would impact their life.
Last year, when there was no huge jackpot, Powerball sales declined by 19%.
Americans Already Spend An Obscene Amount On Lottery Tickets
The “slump” in lottery ticket sales, of course, is relative. In 2014, Americans spent $70.15 billion on lottery tickets. That’s about $630 for every household in the United States.
Spending on lottery tickets exceeds the amount of money spent on sports tickets, books, video games, movies and music, combined.
The Lottery Is A Regressive Tax On The Poor
For all the money Americans spend, they get very little in return — particularly the poorest.
The odds of winning any lotto jackpot are extremely low. And that means people spend a lot of money without getting much, if anything, back. Players lose an average of 47 cents on the dollar each time they buy a ticket.
And it’s those who can least afford to lose any money who are most likely to be buying tickets. Low-income people account for the majority of lottery sales, while sales are highest in the poorest areas. One study found that the poorest third of households buy more than half of the tickets sold in any given week.
Profit from those ticket sales go to government coffers. The share of lottery profits that is paid out to players varies greatly by state, from just 15 percent in West Virginia to 76 percent in Massachusetts. But even that smaller share in the latter state is an important source of revenue. In 2009, lotteries in 11 states brought in more revenue than the corporate income tax. And thus the lottery acts like an implicit 38 percent tax on mainly the poorest people.
The Myth Of Lottery-Fueled Education Funding
The promise of many lotteries is that this extra government revenue will go to important things like education funding, so people can rest easier about throwing their money at tickets. But even that promise is often hollow. In New Mexico and Georgia, two states that promised to create scholarship programs with lottery revenue, demand outstripped the money so quickly that both rescinded the promises.
This is pretty typical of what usually happens. States increase per capita spending on education right after they enact a lottery, but they end up decreasing overall spending later on. On the other hand, the six states left without lotteries end up spending 10 percent more of their budgets over time, on average, on education compared to lottery states. Part of the problem is that lottery revenue tends to be unstable and hard to predict over the long term, while it can only rise so much given that residents can only buy so many tickets. It’s also easy for lawmakers to move the money away from priorities like education to anything else, like plugging budget holes.
Lotteries promise the low-income people who make up the biggest portion of ticket buyers that they’ll win either through a payout or increased services. But most of the time, neither is true. As one study put it, “lotteries set off a vicious cycle that not only exploits low-income individuals’ desires to escape poverty but also directly prevents them from improving upon their financial situations.”