By Mark Steckbeck
As the candidates vying for the Democratic nomination for president debate the merits of taxing the wealthiest Americans, maybe we should instead focus on getting rid of a program that effectively taxes the poorest among us. Imagine if one of the Democratic candidates proposed a regressive tax on income, beginning with a 5 percent tax levied on incomes less than, say, $30,000 per year, with that rate decreasing as incomes rise. At some point the rate falls to zero, maybe for those with annual household incomes greater than $200,000. For good measure, to make the tax have some appearance of noblesse oblige, let that candidate also proclaim that much of the revenue generated from this tax will help fund education. We’ll tax the poor to build better schools in places like Apex, Holly Springs, and Wake Forest. How could anyone object?
The NC Education Lottery does essentially that; it is a regressive tax that disproportionately adversely affects lower-income families. Studies show that lower-income households spend a greater percentage of their income on lottery tickets — roughly 5 percent — relative to families with higher household incomes. And since the lottery money is exchangeable, proceeds from the sale of tickets that allegedly go to fund pre-K, elementary, and secondary education in North Carolina (which is currently less than 25 percent) simply replace resources that are redirected toward other government expenditures.
The NC Education Lottery touts as a virtue the fact that 50 to 60 percent of the revenue raised from the sale of lottery tickets goes back to lottery players in the form of cash prizes. That is, for every dollar spent on the lottery in North Carolina, buyers of these tickets get, say, $0.55 back in the form of cash payouts. This is apparently a way to appease critics who argue that the lottery is an unfair tax on the poor; it might not be as bad as it appears. This is a spurious argument.
First, if casinos in Nevada offered the same low return to players, they’d be shut down for theft and fraud. Competition among casinos causes them to return about $0.95 for every dollar gambled. Even slot machines, the least fair of casino games, return between $0.88 and $0.98 per dollar played. At the two casinos in North Carolina, the minimum is $0.83 per dollar gambled in slot machines. Remember, slot machines are the least fair of all casino games, which is why they’re referred to as “one-armed bandits.”
Second, the average payout is less relevant than the median payout. Suppose you had 99 people in a room, all of whom earned no income last year. The average salary in the room is $0. Now, suppose a successful actress enters the room and the actress’s annual salary is, say, $10 million. The average salary in the room just increased to $100,000. But for the 99 whose incomes were already zero, they still have no income. Because the multi-state jackpots can get very large, a payout to one winning player skews the average payout to all lottery ticket buyers. The median payout to lottery ticket purchasers is a much better metric and that is near zero.
Some argue that people who buy lottery tickets do so voluntarily and since, unlike taxes, there is no coercion, there’s really no harm done to low-income people from playing the lottery. The NC Education Lottery sells a dream and for seemingly little money anyone can buy that dream.
Although it’s true that people who play the lottery do so voluntary, nearly all do so unwittingly. People voluntarily enter into exchanges every day, including some that are intentionally deceptive. We don’t say there is no harm done to consumers who freely, but unwittingly, engage in intentionally fraudulent or deceptive exchanges. It’s not so much as a dream the NC Education Lottery is peddling, but instead false hope.
Studies show that the human mind has a difficult time comprehending very large and very small probabilities. We therefore have a tendency to overstate the infinitesimally small chance of some low probability event happening, and understate the likelihood of some large probability event happening. For example, I know people who are afraid to fly (very safe relative to the alternatives), but also smoke cigarettes (very unsafe relative to the alternative). People therefore have a very difficult time understanding the near-zero probability of them ever winning a lottery jackpot. This causes people to overspend on lottery tickets.
To better understand how deceptively low the probability is of winning either of the two multi-state lotteries, PowerBall and Mega Millions, here are two comparisons that illustrate the odds of winning, which makes playing either a “sucker’s bet.”
First, you have a better chance of flipping a quarter and having the coin come up heads twenty-eight times in a row than you do of winning one of the two multi-state lottery jackpots. Should someone test the likelihood of their succeeding at this, they would not live long enough to see heads come up twenty-eight times in a row.
Second, there are 292,201,338 possible combinations of PowerBall numbers (302,575,350 for Mega Millions). If you were to lay 292,201,338 quarters edge-to-edge along Interstate 40, your line of quarters would begin at the entrance in Wilmington, continue westbound all the way to where I-40 ends in Barstow, California, and then return in the eastbound lanes two-thirds of the way back until you get to the airport in Nashville, Tennessee (Knoxville, Tenn. for Mega Millions). Under one of these quarters is etched a “W” to represent the winning quarter. For every PowerBall or Mega Millions ticket purchased, the buyer of that ticket is essentially purchasing the right to travel the 4,404 miles (4,560 miles for Mega Millions) across the country, and two-thirds of the way back again, stopping somewhere along the way to randomly pick up one of these quarters. If they are lucky, they’ll pick the one with the “W.”
These probabilities are so infinitesimally small that most people fail to comprehend how futile it is to play these games. The chance of a ticket winning is literally near-zero, and yet few people even understand how unlikely their chance is of winning this near-zero probability event.
My criticism of lotteries is not based on any moral or religious principle against gambling. I do not gamble myself, but don’t care to ban others from choosing how to spend their time and their money. My concern is with the lack of fairness inherent in state-run lotteries. The problem lies in state governments granting monopoly rights to sell participation in games of chance. The lack of competition allows the NC Education Lottery to prey on unwitting people by offering games with such infinitesimally low probabilities of winning. The games attract primarily those least able to comprehend the odds, and also those least able to afford to engage in such deceptive gambles. It therefore acts little different than a regressive tax that takes from the poorest in our state a greater share of their incomes. That is a problem of fairness about which we should all be concerned.
Mark Steckbeck is an associate professor of economics and the Lundy Chair in Business Philosophy at Campbell University. The views expressed in this article do not necessarily represent the views of Campbell University.