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When he introduced a bill last year to increase the tax rate on Montana's video gambling machines, Rep. Butch Waddill argued that other states (like South Dakota) tax gambling machines at far higher rates. And he argued that Montana, facing a substantial budget deficit, needed the revenue. "This is a significant way to get some money," he told the Helena Independent Record. "And it's not taking food out of anyone's mouth."
While Waddill's bill didn't pass—the gambling industry opposed it and others were skeptical it could raise as much money as promised—his comment raises an interesting issue. Where does the money spent on lotteries, pulltabs or video gambling come from? More specifically, do these forms of gambling draw greater expenditure from the rich or the poor? And do they compete with essentials in the family budget, or simply come out of discretionary income, money that would otherwise be spent on DVDs or a seat at a ballgame?
Most economic studies have found that gambling expenditure and, therefore, gambling taxes are regressive in the sense that the poor spend a higher proportion of their income on gambling than do the rich. Indeed, even though participation rates are similar among demographic groups, research shows that there are significant differences in the levels of spending among groups, and generally speaking, members of less advantaged groups—the poor, racial minorities and less educated spend considerably more per capita.
The 1999 National Survey on Gambling Behavior, for example, conducted by the National Opinion Research Center (NORC) at the University of Chicago, found that while whites, blacks, Hispanics and others have roughly equal lottery participation rates, blacks spend far more annually on a per capita basis. And while equal percentages of high school dropouts and college students had participated in a lottery within the past year (48 percent), the dropouts had spent $334 per capita in that year, while the average college grad had bought just $86 of tickets.
When it came to income, households with incomes in the $50,000 to $99,999 range actually participated in lotteries at a higher rate (61.2 percent) than households with less than $10,000 in income (48.5 percent), but those poorest households spent an average of $520 on lotteries in a year, while the richer households spent $301. Industry groups have critiqued these NORC numbers, but most independent, academic studies support their general findings.
Which pocket?
One of the more interesting studies of lottery economics was published by the National Bureau of Economic Research in November 2002, just as North Dakotans were voting themselves a new lottery. The analysis, by economist Melissa Schettini Kearney at Wellesley College, looked at household spending data from 1982 to 1998 (a period in which 21 states adopted lotteries) and compared changes in household gambling expenditure in states that adopted lotteries to those in states that didn't.
Kearney found that total household gambling increases after a state introduces a lottery, meaning that spending on gambling doesn't just shift from slot machines to scratch-off tickets, for example, but that lottery money comes from some other pocket of the family budget.
Kearney found, in fact, that after a state lottery is introduced, the average household reduces its monthly nongambling consumption by about $38 a month. And "among households in the lowest income third," she wrote, "the data demonstrate a statistically significant reduction in expenditures on food eaten in the home (3.1 percent) and on home mortgage, rent, and other bills (6.9 percent.)"
Sounds bad, perhaps, as it implies that people do in fact sacrifice food and housing for illusive gambling gains. But Kearney pointed out that a new lottery could be "welfare-enhancing" in the sense that adoption of a state lottery lowers the price of gambling and so people can buy more of it, if they so choose.
Prices are lower both because consumers don't have to drive to a neighboring state to buy a ticket and because whatever negative stigma was previously attached to lottery participation is decreased by the state's support of it. "They're just responding to the price change as predicted by standard economic theory," she said. And welfare is enhanced, in an economist's view, whenever a consumer is given more choices at lower prices.
But economic theory also assumes perfect information, and Kearney looked at this side of the question as well. Do consumers understand the gamble they're buying? Are they making informed choices? By analyzing weekly data from 91 lotto games between 1992 and 1998, Kearney found statistical support for the idea that lottery sales are driven by the expected value of a gamble (prize amount times the probability of winning). She also found that consumers respond to "entertainment" features of lottery games that are unrelated to potential gains (for example, the number of drawings per week or the number of digits chosen). Taken together, these results imply that lottery gamblers are "at least partly—and potentially fully—informed, rational consumers."
But Kearney offered two caveats. First, some households undoubtedly reduce monthly consumption by far more than the average $38 drop; and second, within each household, individuals may have very different preferences regarding gambling vs. food. "So a parent might have the money and decide to spend less on food and more on lottery tickets," explained Kearney. "That makes the parent happier, but doesn't benefit the children, so on net, this might decrease social welfare."
