Keeping State Lottery Revenue Alive

By Olivia Berlin and Jackson Brainerd | Vol . 25, No. 35 / September  2017


Did you know?

  • Education receives the majority of dedicated state lottery revenues.
  • Lotteries were illegal in every state in the country until 1964.
  • Instant scratch ticket games are generally state lotteries’ most popular product.

For the 44 states that have them, state lotteries represent a small but valuable source of revenue. On average, about 1 percent of state revenue comes from lotteries. Sometimes that money goes into the general budget, but most legislatures use it to fund certain projects, like schools, senior services or environmental protection. In crafting the current state budget, West Virginia lawmakers used some lottery money to fund Medicaid, rather than raise other taxes to cover that cost.

In some states, lottery revenue rivals or exceeds that of corporate income taxes, another important source of state revenues. Nationally, state lotteries generated $66.8 billion in gross revenue in fiscal 2015, which exceeds the $48.7 billion generated by corporate income taxes. However, after putting $42.2 billion of that income into prizes and $3.2 billion into administration and advertising, states were left with net lottery proceeds of $21.4 billion.

Between fiscal 2014 and 2015, 22 states saw their lottery revenue decline. According to data from the Rockefeller Institute, lottery struggles have been particularly pronounced in the Northeast and Mid-Atlantic dating back to Fiscal Year 2008, while lotteries in the Southeastern and Western regions have tended to experience growth. Lotteries are relatively newer in these regions, particularly in the South, and they also have relatively fewer commercial casinos to compete against.

Several factors are contributing to generally stagnant lottery revenues, including lower participation rates by millennials and a phenomenon called “jackpot fatigue”—when bettors wait to play until jackpots get unusually large. Lotteries also face growing competition from casinos and other forms of gambling.

There are seven more state lotteries today than there were in 1999, but the percent of Americans buying tickets has declined 8 percent, according to a 2016 Gallup poll.

State Action

States’ reliance on lottery income means they have to continually invent new games and prizes to keep bettors interested. States employ several strategies, including expanding to online ticket sales, restructuring prizes, and enhancing promotion and marketing efforts.

Online Ticket Sales. Illinois became the first state to sell lottery tickets online in 2012. The legislation enacted was a pilot program, however, and only had a lifespan of four years. Although the pilot program technically expired in March of 2016, the Illinois Lottery continues to sell lottery tickets via its website, though it does not offer online games as other online lotteries do. Georgia also introduced online ticket sales and instant play games on its website in 2012, and saw an 8.6-percent increase in revenue between FY 2012 and FY 2015. Michigan introduced its online lottery platform, iLottery, in 2014, in order to better connect with younger players. In 2016 Kentucky continued the trend, and this past June saw New Hampshire become the fifth state to legalize internet lottery sales and online games. At least four other states—Connecticut, Massachusetts, Pennsylvania and Virginia—considered legislation in 2017, but to date, none has passed.

Several other states, including North Carolina, North Dakota, New York and Virginia, offer online lottery subscriptions, where players are automatically placed in a series of drawings over an extended period of time.

Many citizens and policymakers in these states feel caught between a rock and a hard place with online gambling. Lotteries contribute millions in annual funds for important state programs, but the increased accessibility of online gambling could not only exacerbate gambling addictions, but also disproportionately lead to higher credit debt among young and poor consumers.

Restructuring Prizes. The Oklahoma State Lottery, which has seen significant revenue declines in recent years, has had to lower payouts when revenue falls short of expectations due to a mandate that 35 percent of all lottery proceeds be diverted to the Education Trust Fund. Earlier this year, the Oklahoma Legislature repealed that mandate, thereby allowing lottery officials to increase prizes in the hope of attracting more players and boosting sales. Officials are also planning to roll out 11 new games later in 2017.

The Mega Millions multi-state lottery game recently announced it was upping ticket prices from $1 to $2 starting in October, aiming to grow jackpot sizes. State lotteries have been increasing prize payout percentages for years, and evidence suggests it has a positive effect on sales.

Promotion and Marketing. States have been looking to boost awareness of games and increase opportunities to play by adding to advertising budgets and expanding lottery ticket retail locations. Many lotteries, including those in Colorado, Maryland and Ohio, requested more advertising funding for the upcoming fiscal year. There is some question about the effectiveness and desirability of lottery advertising, but developing a sound marketing strategy seems to be key. After Wisconsin Governor Scott Walker sought an additional $3 million of funding for lottery advertising, the state Legislative Fiscal Bureau noted the estimated return on investment ratio was 4 to 1, but also pointed to the varied success of advertising efforts, with two of the nation’s largest lotteries, in Massachusetts and New York, producing starkly different amounts of revenue ($626 and $79, respectively) for every advertising dollar spent.

States have also taken inventive steps to make purchasing tickets easier. Three states have implemented point-of-sale terminal programs since 2013, allowing players to buy lottery tickets at the gas pump without having to go inside the store. A similar measure was considered in Florida this year. In 2017, New Jersey and Virginia became the first two states to enact legislation allowing lottery courier services, or third parties that deliver tickets to players’ doors.