State Lotteries and the Financing of Public Education

September-October 1994

By Thomas H. Jones

STORRS, Connecticut—By the late 1980s, 28 states had been prompted by fiscal crises, tax revolts, and education reforms to institute lotteries as a means of supplementing public income. Support of the public schools was the cause most frequently invoked for legalizing gambling. Seven states named schools as the sole recipient of lottery revenue, and five of these obtained lottery revenues exceeding the amount of federal funds received for the public schools. Another 11 states routed some lottery funds to education through the general fund or designated schools as one among several recipients of lottery receipts.

In the book that John L. Amalfitano and I published earlier this year, America's Gamble: Public School Finance and State Lotteries (Technomic Publishing Co., ISBN: 1-56676-092-5), we report results of a statistical study that provides a nationwide analysis of the claim that lotteries enhance public education spending. We compare all fifty states and ask, "Is school finance enhanced in lottery vs. non-lottery jurisdictions?" For decades, lottery advocates have claimed that school financing is enhanced by means of lotteries. It seemed reasonable to assume that lottery states would, by now, be doing a better job than non-lottery states in financing their schools.

What we found, however, was that lotteries did not enhance the funding of public education. Lottery states actually used a smaller percentage of their wealth for education than did non-lottery states. Measured by per capita income, it is clear that wealthier states spend more on education than do less wealthy states. But the presence of a lottery does not account for significant variation among states in education funding. Wealthy states appear to adopt lotteries in advance of other states, but it is not the lotteries that make states wealthy.

Other factors that are also significant in determining the amount a state spends on education include the size of the school-age population, the degree of urbanization, the percentage of nonwhite population, and the rate of school completion among adults. The proportion of the population enrolled in nongovernment schools was not a significant factor.

It is ironic that lotteries are operated and rationalized as a means of "helping" schools in states where personal income levels are generally higher than the national average. It is often the wealthiest states, with high tax burdens, that have turned to lotteries as an alternative means of public finance. One of our conclusions is that states with lotteries are states where, in some very rough and indirect sense, the public believes it bears a heavy tax burden. This does not fully explain the existence of state lotteries, but it is an important condition.

These findings are not surprising. It is a well-settled economic principle that earmarking funds for particular uses has no effect. What is surprising—and to us unjustifiable—is that states should continue to rationalize their gambling systems by using this discredited technique, that is, by justifying their lottery on the grounds that it will enhance public education.

As a means of enhancing public truthfulness, therefore, we are proposing that every state in which school financing claims have been made to justify a lottery, a special notification should be printed on each lottery ticket and posted at each lottery station. The notification would read: The State of "X" has determined that lotteries may not provide improved levels of school funding.

Such notification, in our estimation, would not greatly affect lottery sales. But it might make some difference at the margin, just as cigarette warning labels have marginally affected sales. More important, states do have an obligation to tell the truth. After years of making misleading statements, states have an obligation to lottery ticket buyers and to the taxpaying public in general to make clear that the education-enhancement claims for lotteries are false.

One drawback to our proposed notification about lotteries is that states might then change their rationale for the lottery to argue that it supports services such as health care, eldercare, etc. Some states already do this. We contend that if such services are important enough to be financed publicly, they should be financed through the regular tax system.

And this brings us to our second, and preferred, policy recommendation: states should renounce lottery profits altogether. In our book, we discuss ways this might be done. More broadly, we view lotteries and other forms of state-sanctioned gaming as symptomatic of the fiscal problems inherent in the modern state. Government programs have grown beyond the point where most taxpayers are willing to finance them. Lotteries are then sold to the electorate as the means of reducing the tax burden and enhancing public services. But lotteries do neither of these. They become one of government's false promises, further alienating significant numbers of citizens.

To many people, state governments have become the sponsors, administrators, regulators, and chief financial beneficiaries of major gambling games. We believe that these multiple roles have created an ethical problem with practical consequences. Even under the most optimistic of scenarios, gambling could meet only a tiny fraction of a state's revenue needs. We believe that only by renouncing lottery profits can a state reclaim its legitimate role as the regulator of such games.

[Dr. Jones is professor of professor of education at the University of Connecticut.]