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Copyright © 2001 by David E. Ross

I just ran into the local drug store to buy film for our upcoming vacation to Canada (to see our daughter receive a second bachelor's degree, this one from the University of Toronto). What a line there was to buy lottery tickets! Tonight's California lottery jackpot will be worth at least $60,000,000! Every time someone wins a big lottery jackpot, it becomes front page news. Similarly, Melvin B. Milligan has been on the front pages for two days now because he waited almost until the deadline passed before claiming a $46,000,000 jackpot in New York's lottery.

Doesn't anyone else realize that, for someone to win $60,000,000 in the California lottery, others had to lose $120,000,000? That is correct: For every $1 paid to winners by the California lottery, $2 in tickets had to be sold. Gamblers in the California lottery lose twice as much money as anyone wins. Similar situations exist in all the other states that conduct lotteries.

But it's for the schools … isn't it?

Yes, in California (and in some other states) part of the money gambled on the lottery goes to public education. In other states, other worthy causes are supported by lottery bets that are not paid back in winnings. In all states that have lotteries, however, these causes are sufficiently worthy — and are clearly the responsibilities of the state governments — that they should be funded with taxes.

Let us look more closely at how California schools benefit from the lottery. Oh, yes, the dollar amounts are large. In the 1999-2000 fiscal year (the latest for which data are available), schools received $948,036,660 from the state lottery. But, in the same fiscal year, the state budget for public education was $35,608,893,000. Thus, the lottery contributed about 2.7% of public school revenues. In comparison, a typical public school system spends about 5% of its budget on utilities: water, electricity, sewage, trash collection, gas, and phones.

In the meantime, the California Lottery Commission talks about the $12,000,000,000 given to schools in the past 16 years. This amount (less than half of one year's state budget for schools) gives voters and taxpayers the false impression that there is no need to increase school funding for California, which is at a per-student level placing the state in the bottom quarter of the states.

But it helps the schools anyway … doesn't it?

Take a closer look at the economics:

You bet $10 on the lottery. You donate $5 to your local public school.
In the long term, you get back $5 in winnings. You win nothing.
Your net loss of $5 is not tax deductible. Net gambling losses are never deductible. Your donation to a government program is deductible, netting you a reduction of $1.40 in federal income taxes (28% rate in effect before the recent tax cut) and $0.40 in California income taxes (8% rate, not the highest bracket).
Your net cost is $5.00. Your net cost is $3.20.
The schools get $3.50 (35% of your bet). The schools get $5.00 (all of your donation).

Thus, if you donate to the schools, they get more at less cost to you! Do not try to excuse your gambling on the lottery by saying, "It's for the schools." Just admit you like to gamble. We all know you would do it even if the schools did not benefit.

16 June 2001

After several drawings in which no one held the winning ticket, the $60,000,000 jackpot grew to $141,000,000, which was finally won by a single ticket-holder while I was visiting my daughter in Canada. This means that, in addition to the $120,000,000 that I cited above as being already lost by lottery gamblers, an additional $162,000,000 was lost in just one week. That is correct: One person's winning of $141,000,000 meant that others lost a total of $282,000,000. And that does not include the additional losses needed to pay the liquor store that sold the winning ticket and all the smaller amounts paid to those who held tickets with three, four, or five winning numbers. (Think! If you won $5 on three numbers, someone else lost $10.)

No, it is not for the schools. It's for your own gambling addiction.

27 June 2001

Robert sent me an E-mail message, complaining that I oversimplified the numbers and thus inflated the cost of the jackpot. For a $141,000,000 lottery jackpot, the winner can receive $5,640,000 per year for 25 years or a significantly reduced lump-sum payment. At 5.36% (an average rate for the investment in federal bonds used by the Lottery Commission to generate those payments), this cash flow has a present value of approximately $76,700,000. Thus, only $153,400,000 (twice $76,700,000) was lost by lottery gamblers in order to pay the jackpot. In the meantime, the jackpot was actually worth little more than half the much publicized $141,000,000.

However, the cost was indeed greater. By law, the total payout by the California lottery is exactly half the amount gambled. Since there are other prizes, smaller than the jackpot, for holding only some of the winning numbers, more than $153,400,000 had to be lost to cover all winnings. No matter how you slice it, gamblers lose twice as much on the lottery as they win. That is the law: 50% back to the gamblers, 35% to the schools, and 15% for administration.

Robert also complained that my simplification invalidated my comparison between betting on the lottery and simply donating to a school. However, this comparison has nothing to do with the amount of the record-breaking jackpot or how the cash flow is computed. It too is based on the fact that, in the long term a gambler will win back 50% of what he bets.

27 June 2001

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