You see the number readings every night during commercials, and they usually mean someone’s lottery dreams have just come true.
Every few months we read in the paper that someone was made a lottery millionaire - and then spent it all in a matter of days or weeks. Because of stories like these, each trip to the gas station tempts us with scratch-off tickets.
But how exactly does the lottery work? Where does the money go? Is it all given out in prizes?
Lotteries are a form of legalized, state-run gambling. Lottery games exist in 38 states and our nation’s capital, and most include scratch-off games and daily or weekly number drawings. Jackpots for large games in most states are typically predicted using projected sales. Because each lottery is run by a different state, the particulars of each lottery can vary greatly.
For example, let’s take a look at the New York Lottery.
By force of the New York State constitution, all proceeds from the New York lottery must fund education within the state. Revenue is distributed annually by the state comptroller’s office from the lottery fund to school districts throughout New York. The amount of lottery sales paid out is also dictated by law and varies depending on the game.
For instance, New York’s LOTTO game is limited to distributing 40% of sales as prizes. Other games are limited to 50% or 60%, and instant games are limited to 65%. State law also requires that not less than 90% of sales from video lottery machines be paid out in prizes. Overall, the state distributes 57 prize cents for every dollar in sales.
Answering the question of where the money goes gets a little more complicated when you remember that lottery prize dollars are taxable. In the end, a large portion of lottery dollars winds up in the hands of state and federal governments. To see how this works, let’s follow one dollar through the hands of a New York ticket purchaser to the state lottery, and finally to a prizewinner:
First, the participant buys the $1 New York LOTTO ticket. This dollar is added to the lottery’s sales receipts. We know that by law, the New York state lottery can distribute up to 40% of these sales as prizes. We’ll assume that all 40% is distributed to a prizewinner, and that the other 60% is used to fund public schools in New York.
So 60% – $.60 – of that dollar goes to fund public education in New York.
Now, the question becomes what happens to the $.40 of that dollar that is distributed as a prize?
It really all depends on the income of the winner!
If their marginal tax rate is low, they’ll get to keep most of the $.40 (and, of course, the millions of cents that make up the rest of the winnings!). If the winner’s tax rate is high, more of the money will be taxed.
If they’re a million dollar prizewinner and take that amount as a lump sum, roughly 35% of their winnings will go to the federal government as income tax. Assuming the prizewinner is also a New York resident, another 6.85% will go to the state income tax. That means that of the $.40, $.14 goes to the federal government, and roughly $.03 cents goes to New York State.
Exactly how much of sales receipts stay in the hands of prizewinners after taxes is tough to say—small prizes don’t catapult prizewinners into upper tax brackets. But, it’s safe to say that most of the proceeds end up funding public initiatives or going to the government—sooner or later—in the form of various taxes.