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Tracking the Distribution of the Texas Lottery Revenue

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Nearly twenty-two years ago, Texan voters approved an amendment to the Texas Constitution authorizing lottery sales in Texas, assuming most funds would go to education.  On May 29, 1992, the Texas Lottery was officially launched and by the end of the first week, 102.4 million tickets were sold, signaling that Texans were fired up about potentially winning money and helping fund schools—or so they thought!

A common belief still held among Texas residents today is that most, if not all, of the state’s profits from lottery sales go to public education.  Prior to the creation of the Texas Lottery, many residents remember seeing advertisements claiming 100 percent of the profits from the proceeds would be transferred to public education, hiding the truth that a substantial percentage would be set aside for the lottery prize reserve fund and other expenditures.  

In fact, from 1992 to 1997, not a single dollar from lottery sales was given to public education.  Instead, the revenue was allocated to Texas’ General Revenue Fund, retailer commissions, the prize reserve fund, and administrative expenses.  It was not until 1998 that the Texas Lottery Commission transferred 37 percent of total lottery sales directly to the Foundation School Fund, which supports public education in Texas.  In the 75th legislative session, a constitutional amendment was passed dedicating the state’s profits from the lottery to public education.

In 1993, management of the lottery shifted from the Texas Comptroller of Public Accounts to the Texas Lottery Commission.  According to the Texas Lottery Commission, the current guideline for apportioning lottery sales is as follows: roughly 63 percent is paid out in prizes; 5 percent covers agency administration costs; retail commissions claim another 5 percent; and approximately 2 percent (or the sum of unclaimed prizes) is transferred to the Texas Legislature, which then chooses to disburse the money as it sees fit.  That leaves roughly 25 percent for the Foundation School Fund; this rate has steadily declined over the last 15 years (see Figure 1).

This means that even though lottery sales have generally increased each year, the amount of lottery revenue allocated to the Foundation School Fund has remained relatively flat over time (see Figure 2). 

 

Interestingly, as the percentage of prize distribution increased, the percentage to public education decreased each year (see Figure 3).

 

Although more and more Texans are contributing money to public education via the lottery, as reflected by an annual increase in lottery sales, the percentage to public education continues to decrease.  Against this backdrop, the Texas House voted on April 23, 2013 to abolish the Texas Lottery Commission, which would potentially bring an end to the Texas Lottery.  However, ending the lottery would have created a significant problem: namely, a projected $2.2 billion gap in revenue for public education in the upcoming biennium.  Confronted with that harsh reality, state representatives reconvened hours later and reversed the original vote, keeping the lottery intact.

The House vote points out the difficulty lawmakers face to come up with other financial outlets to fund public education.  And although public education continues to rely on a decreasing percentage of Texas Lottery sales, people are unaware of the ramifications the lottery imposes on certain individuals. (Stay tuned for an upcoming post on the Texas Lottery to find out more about the regressive nature of lotteries.)