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March 1998
Volume 16, Number 3

The Lottery Racket
by Gregory Bresiger

Seen and heard almost everywhere in New York are these four words: "Hey, you never know." It's the slogan of the New York State Lottery Commission, and it is used to trick people into a self-imposed form of higher taxation.

The pursuit of the average Joe's dollars is relentless. Day and night the slickly produced ads are broadcast on radio, the boob tube, and billboards. There's no escape for people who can see, hear, or read. And, despite booming lottery revenues, the appetite of government for more money is ravenous.

Even finding ways to grab a few extra cents is not beyond the imagination of lottery bureaucrats. For instance, not satisfied with just taking a few bucks from the citizens, the announcer urges the public to call the lottery's "official" number hotline for results, then adds "all calls 40 cents."

Lottery officials can't be accused of discrimination. They want to separate anyone and everyone from his money. If you're an invalid, these folks want your money, too. You can play by mail. Would you like to prepay for a year's worth of games? Lottery commission officials will be happy to take your check. Hey, you're welcome!

Millions of taxpayer dollars are spent by state officials and their flunkies, who are constantly trying to hook citizens on a form of gambling so outrageously rigged that no odds are ever quoted in these compelling commercials. Why do they need all this advertising to constantly snag more poor suckers?

In one New York State lottery publication, a bureaucrat writes: "the history of state lotteries suggests that consumers may lose interest over time and, as a result revenues may decline. "Hey, you never know! To combat this trend," the publication continues, "new products will have to be introduced to stimulate consumer demand and advertising expenditures may increase greatly."

So what are the chances of winning a six-figure state lottery? They are 1 in 13,983,816. Take out your calculator, divide 1 by 13,983,816, and you get something like 0.000000715. It's a point made by A.K. Dewdney, a computer science professor who wrote a superb book, 200% of Nothing. The chances of winning a substantial prize are so close to zero as to be just about indistinguishable from nothing. You have almost as much chance of winning by playing the lottery as not playing the lottery. The upshot: keep your money.

Yet millions of people across the United States still play. Last year, 37 state lotteries and the lottery in the District of Columbia generated $35.8 billion in sales and $11.8 billion in profits, according to the state lottery organization that compiles this sort of data. Sales and profits of state lotteries generally grow at an annual rate of about 4%.

In New York State, it's also tall cotton for the state government. Since state lottery flimflammery began in 1967, some $30 billion has been spent on lottery tickets. The masters in Albany have made about $12.5 billion after deducting for expenses such as the ubiquitous commercials.

When a private-sector business makes this kind of money, it usually is branded as "obscene profits."But, because this is all for "a good cause," no one complains. The suckers in the Empire State were told back in the 1960s that they were helping education (state education, of course) and that their lottery would lower their taxes.

The state would need less in taxes because of this huge new source of revenue, an argument reminiscent of the one used whenever a new tax has been put on the books. Even so, in a cheery pamphlet applauding the New York State lottery by the New York State School Boards Association, lottery advocates agree that "in most states, as in New York, lottery proceeds are far less a boon to education than most people think."

Lottery advocates concede there was confusion back in the 1960s. That's when the notoriously spendthrift governor Nelson Rockefeller and his henchmen in the state legislature started to push the scheme. Taxpayers were led to believe that lottery revenues would provide "a separate, supplemental, dedicated source of education fund that would result in lower increases (or even perhaps reductions) in the level of property taxes for New York State homeowners," according to a publication of the State School Boards Association.

Nevertheless, over the past 30 years, taxes and the state debt skyrocketed. New York State's debt is the highest in the nation. And even though the lottery money was supposed to make things easier on the beleaguered New York taxpayer, this year state lawmakers were asking for approval of yet another $2 billion bond issue that would supposedly fix the state's crumbling public schools.

Meanwhile, the state's private elementary schools, many of them operating on shoestring budgets, get by just fine. New York City's public schools, allocating $9,000 per pupil, are, as usual, a mess. Of course, media elites say it could be all fixed with more taxpayer bucks. Maybe the state could start a monopoly cocaine business. Hey, you never know!

The answer that lottery backers give to these objections is: without the lottery, taxes would have to be much higher. In fact, the operation of the government's books only vaguely replicates the market system of supply and demand. The government demands unlimited money, but the public only supplies what the government can get away with taking. And over time, state lotteries displace other forms of revenue from sales taxes on goods left unpurchased by money dumped into lottery tickets.

Yet despite the trail of faulty reasoning, broken promises, and fraud, lottery officials always can fall back on one indisputable point: Someone will "win" the million dollar prize and achieve the American dream. He will become a millionaire. Says a typical state lottery official: "We've created 173 millionaires in 12 years."

But have they? Haven't the media elites, in writing breathless, cheerleader stories pumping up these lotteries, misled millions of Americans who don't realize that everyone suckered into these state sponsored three-card Monte games--both the winners and the losers--is hoodwinked?

Ah, but some say, no one will deny you your money once you win. So some good even comes out of using the massive power of government to stoke the potential gambling addiction of millions of Americans, doesn't it?

I don't think so.

Say you win $1 million in a state lottery. Are you a millionaire? Generally not. You're not even close. The most common way of paying out a $1 million prize is in 20 payments of $50,000 a year, which means the state is actually paying the winner a form of an annuity that it says becomes $1 million in two decades.

Let's not forget that the $50,000 annual payment is, of course, before taxes, which can be considerable unless the winner is an extraordinarily smart person who sets up tax shelters to protect himself. Withholding for a New York City resident is 28% federal tax, 6.85% state income tax, and 3.88% New York City income tax.

Figure the time value of that money. That $1 million is really worth about $450,000 over the next two decades. Given the persistence of inflation, it might be less. Investors who buy $1 million lottery tickets from winners who want cash now (yes, such markets exist) will typically offer 40 cents on the dollar. They know they are not buying a liquid asset, although most lottery players and winners don't understand this.

Lottery officials are certainly right about one thing: the poor fish who buy these tickets, win or lose, will never know. One lottery "winner," Michael Ondrish, actually took this millionaire claim seriously when he won in 1982. He demanded the whole amount. But Arizona Lottery Commission officials insisted on paying him through the usual payment scheme. Ondrish took the commission to court, which then sided with the commission on grounds that if Ondrish didn't like it, he should be given back his buck. The case stands as the classic precedent shoring up the legality of a racket.

To understand this chicanery better, let's reverse this situation. You owe the government $1 million. Would the government be willing to accept 20 yearly payments of $50,000 and wave any interest and penalties in the meantime?

Hey, you do know!

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Gregory Bresiger is a financial journalist in New York.

FURTHER READING: A.K. Dewdney, 200% of Nothing: The Eye-Opening Tour Through the Twists and Turns of Math Abuse and Innumeracy (New York: John Wiley & Sons, 1996).

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