Low-income people pay more into lottery-funded scholarships

As the Mega Millions and Powerball jackpots grow, so do the lines of people looking to buy a ticket. That’s good news for state coffers and the public education programs they fund.

In many states, a significant share of lottery revenue helps finance public higher education. During the 2020 fiscal year, nontax state support for higher education—primarily from lottery revenues—grew by 9.1 percent nationwide to a total of nearly $4.4 billion, according to the latest State Higher Education Finance report from the State Higher Education Executive Officers Association.

When Georgia introduced its lottery in 1993, the state also created the HOPE scholarship program, which provides partial tuition scholarships to all Georgia students who meet a series of academic requirements. Big jackpots mean big payouts for the state; when the Mega Millions jackpot reached a record $1.5 billion in October 2018, Georgia raked in $34.7 million for its HOPE scholarship, pre-K and early childcare programs.

The HOPE scholarship is financed entirely through the lottery, and experts say the program is extremely popular among Georgia politicians and residents. Many other states—including Arkansas, Florida, Kentucky, New Mexico, South Carolina, Tennessee and Texas—also offer lottery-funded financial aid programs.

These programs aim to help thousands of students afford college each year, and to be sure, many students do benefit from the financial aid. But the fact that the aid comes from lottery ticket sales may also disproportionately hurt the very populations the programs are designed to help.

Lotteries are regressive. Because tickets cost the same for everyone, low-income people on average spend a higher proportion of their income on the lottery than high-income people, said Celeste Carruthers, an associate professor of business and economics at the University of Tennessee at Knoxville who has studied the Texas lottery.

“As we move from lower-income to higher-income areas, we don’t see a proportionate increase in lottery sales,” Carruthers said. “Lower-income areas purchase a disproportionate amount of lottery tickets.”

Ben Scafidi, professor of economics and director of the Education Economics Center at Kennesaw State University, put it another way: when a person buys a lottery ticket, a portion of the ticket price feeds into the ever-growing pot of potential winnings, and another portion pays for administration of the lottery. The remaining value is funneled into government programs—in many cases, education. Though the lottery is not labeled as a tax, it functions as such. Experts call this an implicit tax.

“If you like to gamble and the lottery is the only way you can gamble, there’s a very high tax rate embedded in that lottery,” Scafidi said. “In Las Vegas, if you spend $1 gambling, something like 90 cents or so gets paid out to players. But in the Georgia lottery, only 50 percent is paid out—that difference we call the implicit lottery tax.”

Many people don’t consider the lottery to be a tax-like revenue stream because purchasing lottery tickets is voluntary. But regardless of whether it’s called a tax, it functions like one, said Charles Clotfelter, a professor of economics, public policy and law at Duke University.

“Some people would say, ‘A lottery is not a tax because it’s paid voluntarily.’ And the way that we would usually look upon that is that it walks like a tax, it sounds like a tax—it’s very much a tax,” Clotfelter said.

The implicit tax on lottery sales is significantly higher than other state taxes, like sales, income and property taxes. On average, low-income people pay a higher implicit tax on the lottery than high-income people, according to Clotfelter.

“If you look at the average amount of tax on the lottery paid by somebody at a $25,000 income and compare that to somebody who is making $80,000—on average, that percentage does go down as you go up the income scale,” Clotfelter said. “There’s just no exception to it. We looked at lotteries of different varieties at different times, and no matter what you look at, the part of the lottery that looks like a tax is a regressive tax.”

Essentially, low-income lottery players are funding an inordinate share of states’ education scholarships.

The other side of the lottery-funded financial aid programs—distribution of scholarships—isn’t equitable, either. Scafidi calls the Georgia education lottery “double regressive,” because low-income people contribute a greater portion of their income to the scholarship fund than high-income people, but they do not necessarily see a larger payout.

In their research about the Georgia lottery, Georgia State University professors Ross Rubenstein and David C. Ribar found that low-income families were far less likely to benefit from the education lottery than high-income families. The two found that the distribution of Georgia’s Zell Miller scholarship—a companion to the HOPE scholarship—was particularly uneven. White students were eight times more likely than Black students to receive a Zell Miller scholarship, and low-income students were far less likely to receive a scholarship than high-income students. (This paragraph has been updated with the researchers’ correct names.)

“When we looked at income, students from families with incomes over $100,000 are much more likely to get the scholarships than students with family incomes below $30,000,” Rubenstein said.

Georgia’s education lottery has served more than two million students since its inception and has contributed $12.6 billion to higher education, pre-K programs and early childcare. To qualify for the Georgia HOPE scholarship, students must graduate with a minimum 3.0 GPA from an eligible high school or accredited home-study program and maintain a 3.0 GPA while in college, among other requirements. To date, the Georgia Legislature has not passed any laws to specifically address the economic disparities that the lottery and scholarship perpetuate, according to representatives from the Georgia Student Finance Commission. However, the scholarship program has expanded its eligibility to include students who pursue associate degrees or certificates and those who earn a GED to ensure that more students benefit from the program.

Making the lottery more equitable is no easy task. Marketing lottery revenue as a gift to higher education doesn’t necessarily change ticket-buying habits. In her research on the Texas lottery, Carruthers found that education messaging around the lottery made sales for instant games like scratch-off tickets slightly more equitable between high-income and low-income customers but had no impact on big jackpot games.

“What we were testing was whether or not rebranding the lottery as the ‘education lottery’ would induce some altruistic feelings among higher-income areas and increase their proportionate contribution to lottery tickets and instant games,” Carruthers said. “We just didn’t see that.”

Reforming the lottery and the associated financial aid programs would be difficult because they are very popular, Scafidi said. He calls the Georgia lottery a “political third rail.”

“I think my family has spent a total of $4 on lottery tickets since we moved here, but we hope our kids will get the scholarships … Even someone who maybe doesn’t have children or doesn’t have children that are going to get HOPE or pre-K, they still might like it, too, because they like to gamble,” Scafidi said. Politically, it’s a tough issue. Once you put it in, it seems to me almost impossible, politically, to take it out.”

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