The “Free” Kansas Lottery Proceeds

An article titled “Nothing’s Free” by Russell Roberts, published in The Freeman: Ideas on Liberty
http://www.fee.org/publications/the-freeman/article.asp?aid=4419 explains that even though we might be accustomed to thinking that the state’s proceeds from taxes like those on the Kansas Lottery are “free,” this is not at all the case. As Mr. Roberts explains:

About 55 percent of the receipts go to prizes, 10 percent to expenses, and 35 percent to education or some similar unimpeachable cause. Because 35 percent goes to neither winners nor losers, the real cost of the lottery is that you win less often and the prizes are smaller than would be the case without a government monopoly. If government allowed competition or made gambling legal, people who like to gamble would have a higher chance of winning and there would be more money distributed to winners.

So lottery-funded education is not free after all. Subsidizing education out of lottery proceeds punishes people who like to gamble. Those turn out on average to be people who are relatively poor with less education. Can you think of a more immoral solution for funding education than to take the money from those with the least education?

(I checked the Kansas Lottery’s website. Our state’s figures are close to the figures Mr. Roberts gives: “In fiscal year 2005 (July 1, 2004 through June 30, 2005), the Kansas Lottery paid out 54 percent in prizes. The State Gaming Revenues Fund received 31 percent of ticket sales; cost of sales was 5 percent (which covers online vendor fees, telecommunications costs and instant ticket printing); 6 percent was transferred to retailer earnings and 4 percent covered administrative expenses (salaries, advertising, depreciation, professional services and other administrative expenses.)”)

(By the way, for Kansas in fiscal year 2005, a year in which $65,400,000 was transferred to the state, a whopping $80,000 went to the Problem Gambling Grant Fund.)

What’s ironic is that gamblers are worse off playing against the State of Kansas than the mob-run numbers rackets. As a letter-writer in the New York Times wrote: “They [organized crime] paid out about 85 percent of the amounts that were bet, retaining 15 percent or less for profits and expenses like payoffs.”

If we want to let people gamble, let’s at least have a lottery where players have a decent chance of winning. From Mr. Roberts again: “Under a private, competitive lottery system, the prizes would be bigger and the odds of winning would be higher. It would be a better world than the one we now live in, where people in search of hope are forced to pay a 35 percent tax to finance the college education of mostly upper-class children.”

1 Comment

  • A question from a reader:

    Here’s a question. The most recent powerball drawing promoted that the prize was “$365 million.” Then it was $177 million lump sum payment that shrank to $124 million after taxes (that’s what I assumed the reason the $177 million was reduced to initially) or the option of $6.5 million for 30 years (or $195 million). Any idea how the figure can legally be inflated from $124 million to $365 million. This looks like a “bait ‘n switch” that would be illegal under consumer protection laws. What do you think?

    The answer to this question is that the $365 million figure (or whatever the advertised and promoted figure is each drawing) is the total amount that a single winner would receive over the next 30 years, if they chose to receive their prize as an annuity.

    The $177 million figure is what a single winner would receive if they chose a single payment. See http://www.powerball.com/pb_contact.asp

    Taxes, as you mention, would reduce either payment by an additional amount. Of course, if one gave away all the money to a registered charity, the government would receive no taxes. Wouldn’t that be something?

    Is this misleading, you ask? Sure it is. But as I once heard from the comedian Jeff Foxworthy: “Sophisticated people have a retirement plan. Rednecks have the lottery.” This may give us another clue as to who is the intended audience of these state-run lotteries.

    Anyway, doesn’t government usually exempt itself from the laws it passes that everyone else must follow?

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