Powerball and Mega-Millions: The Voluntary Tax On The Poor

Robert Neufeld

The stories always captivate American audiences and encourage them to partake in the games. Gloria MacKenzie won an advertised $590.5 million Powerball jackpot this past June after purchasing her $2 ticket. It was the largest jackpot ever paid out by the multi-state lottery contest, according to Reuters.

These sensational tales are what make the headlines, but its the people who don’t win that are the real story. The Chicago Reporter did a study in 2007 on who exactly buys lottery tickets. The newspaper examined lottery sales by zip code and compared this data with demographic and income information from the 2000 census. The 10 areas with the highest lottery sales all had average annual household incomes under $20,000 (city average was $24,000 at the time) and eight of the 10 had unemployment rates higher than the rest of the city, according to the report. The people who can least afford to spend money on lottery tickets are the ones voluntary handing their money to state and federal governments.

History Of Lotteries In America

Andrew “Jack” Whittaker won a $314 million Powerball jackpot in 2002. He ended up taking home about one-third of that, $111.7 million, after taxes, according to Bloomberg. Lotteries have always been in place for the benefits of those administrating them and not the players. The Mega-Millions multi-state lottery allocates only 38 percent of all ticket sales to the actual jackpot, according to its website. The rest is either given to state treasuries or taken by the federal government.

Lotteries have always been used in America to line the pockets of government and/or the British Crown. The California State Library notes that all of the 13 original colonies had some sort of lottery system to fund government and other projects. Nearly every Ivy League university, including Harvard and Yale, were built via lottery funds. Playing the lottery was viewed as being “patriotic” and a civic duty, similar to how income taxes are viewed by many today. The Revolutionary War was almost funded entirely through a lottery that eventually had to be abandoned because administrators could not handle its size and scale.

Modern lotteries, which players try and pick the winning numbers, originated from African American communities in late 19th and early 20th centuries. Numbers runners in 1920′s Harlem, for instance, would collect the money from players who selected three numbers. The winning numbers were either the last three numbers of the U.S. Treasury’s ending daily balance or the last three numbers of the New York Stock Exchange closing total, according to Crime Library. But the results were often rigged and, like today’s lotteries, offered only a slim chance to win.

Lottery Dreams Here To Stay

A disturbing 2008 study by the Journal of Risk and Uncertainty found that households that earn $13,000 or less spend about 9 percent of their income on lotteries. Those lucky enough to win usually take the lump sum instead of the annuity option. Though the previous makes the most financial sense on the surface, the latter is a type of structured settlement that companies will buy and give you a lump sum, usually for a fee less than the taxes. But long-term financial aspects like this generally never enter the minds of winners or losers of lotteries.

The dream of winning millions will keep the poorest people in America interested in lotteries. And federal and state governments are grateful for being able to tax the public without actually calling it a tax.