The Billion Dollar Powerball Aftermath!

    So just like millions of other people, I bought a Powerball ticket last week (well, maybe more than just one). Yes, I know, the odds of hitting the jackpot were 1 in 292 million. But I played anyway.

    And guess what????

    I didn’t win (feign shock). Oh well.

    A picture that shows how to read a losing Powerball ticket

    But I am ready, with my new ‘lucky’ set of numbers, for the next ‘billion’ dollar Powerball (whenever that is).

    And now that the Powerball frenzy has quieted down I got to thinking about the amount of money that flowed into state coffers during this recent ‘billion’ dollar Powerball season and how this branch of the lottery tree came into being.

    The history of the Powerball can be traced back to the Multi-State Lottery Association (now the MUSL) which was formed in 1987. When the MUSL began, only DC, IA, KS, OR, RI, WV participated. On April 22, 1992 the first Powerball drawing was held. Since then, states have gradually signed on. Today, Powerball is currently offered in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. You can see if your state participates here.

    Why have so many states signed on? The same reason Americans snatch up lottery tickets to begin with: money.

    You already know that federal (and state, where applicable) income taxes are payable by the winner, whether winnings are taken in a lump sum or as an annuity. But what about those states that sell tickets and don’t produce a winning ticket? They’re still winners. While about 50% of ticket sales are paid out in the form of prizes, net profits (after expenses) are retained by the individual lotteries and used to fund projects approved by the respective legislature.

    Twenty-seven states spend some of those profits on education, including New Jersey. As a state, New Jersey depends heavily on lottery dollars (as well as other gambling revenue). The New Jersey lottery is the fourth largest revenue producer for the state. In the last fiscal year, the lottery grossed over $2.9 billion in sales and sent nearly a third of that, $965 million, to the state’s coffers to help fund education.

    Lottery proceeds in New York also support schools: the New York Lottery’s sole mission is to earn money for education. Last fiscal year, the Lottery contributed $3.11 billion, or about 14% of total state education funding, to local school districts. The New York Lottery touts itself as “North America’s largest and most profitable Lottery” earning over $54.7 billion since it began.

    California lottery dollars are used to supplement funding to public education; since the 2000-2001 fiscal year, the Golden State has sent more than $1 billion a year to public education. Ditto for Georgia which uses proceeds to fund specific education programs including tuition grants, scholarships or loans at eligible Georgia colleges, universities, or technical colleges and pre-kindergarten programs. In 2015, the state used more than $980 million in lottery proceeds to fund education.

    Oklahoma also directs lottery winnings to education. By law, 45% of lottery funds are used to support elementary and secondary education from compensation for public school teachers to technology upgrades for school systems. A whopping 39.5% of lottery funds are used to further higher education institutions via tuition grants, loans and scholarships for Oklahoma residents, endowed chairs for professors and renovations and expansions projects. The remaining money is used to boost technology centers and fund the Teacher’s Retirement System Dedicated Revenue Revolving Fund and the School Consolidation and Assistance Fund.

    Arizona splits lottery revenues among four causes: the lion’s share goes to education with the remainder directed to health and human services, economic & business development and the environment. Nebraska also splits its lottery revenues – with a twist. In addition to funding educational and environmental causes, Nebraska sends 10% of its lottery revenue to the state fair (just over 1% goes to the Compulsive Gamblers Assistance Fund).

    Colorado almost exclusively directs lottery winnings to the environment. In 1994, Colorado voters decided to fund projects from lottery winnings as follows: 50% to the Great Outdoors Colorado (GOCO) Trust Fund, 40% to the Conservation Trust Fund, and 10% to Colorado Parks and Wildlife. If GOCO funds exceed $60.3 million, the overage is redirected to the Colorado Department of Education, Public School Capital Construction Assistance Fund.

    In Pennsylvania, lottery dollars benefit senior citizen programs; it’s the only state in the country that earmarks all lottery dollars specifically for this purpose. Last year, the Pennsylvania Lottery generated more than $1 billion in PA Lottery benefits to provide low-cost prescription drugs, free and reduced-fare transit, property tax/rent rebates, long-term living services and senior centers for older Pennsylvanians.

    Wisconsin bucks the trend of using funds to fill in budget gaps: the money raised by the lottery is returned to taxpayers. Since 1988, the Wisconsin Lottery has generated more than $3 billion for property tax relief. Including winners, retailer rewards, staff and property tax relief, the Wisconsin Lottery estimates that it returns at least 95% of revenue to Wisconsin taxpayers.

    But of course, as priorities change, so does funding. Prior to 1997, proceeds from the sales of lottery tickets in Texas were deposited in the general revenue fund. Since 1997, funds have been used largely to support public education. Vermont had a similar transition: for a period of 20 years, lottery profits were directed to the General Fund but in 1998, the Vermont Legislature mandated that all lottery profits instead be deposited in the state’s Education Fund.

    States also benefit from sales tax boosts. While sales taxes are not imposed on the sales of lottery tickets, they are generally imposed on all of the extras you buy in addition to tickets. That might include the cup of coffee and a donut you buy while waiting in those long Powerball ticket lines. It might also include gasoline at the convenience store or a pack of cigarettes at the counter while you’re checking out – in those cases, the feds win, too, through the imposition of excise taxes on items like gas and tobacco. Convenience stores and other retailers report considerably more business when taxpayers are in a frenzy over a potentially huge jackpot. That translates into more sales of goods – and therefore more revenue for taxing authorities.

    And what if the winning ticket isn’t claimed? It happens more than you think – especially when there are big jackpots. That’s because folks who buy tickets tend to check to see if they won the big prize and may forget to check to see whether they might have won a smaller prize. Those dollars add up. If unclaimed prizes aren’t collected within the allotted time frame, they’re kept by the state (or territory). About half of the lotteries are required by state law to put the money back into another game: the other half is required by law to turn the money over to the state’s general fund.

    Whether relying on dollars brought in from what many consider to be legalized gambling is good policy for states might be a moral question. In terms of finances, however, there’s no question: while it’s fun to fantasize about winning Powerball, when it comes to filling those state coffers, everybody wins.

    What do you think? Are the monies going to the right places?

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

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    Categories: Income Tax, Lottery

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