Since the Texas Lottery was launched in 1992, it has generated over $21 billion for the state, as noted by the Texas Lottery Commission. But where does that money go?

To recap sales in FY 2013, the total reached almost $2 billion and enjoyed substantial growth during the first 24 weeks of FY 2014. As previously discussed on this blog, lottery proceeds were allocated to General Revenue from 1992 to 1997 and have been transferred to the Foundation School Fund to support public education since 1998.

The Texas Lottery contributed $1.2 billion to education in FY 2013, which is 26.1 percent of total proceeds. Starting in FY 2010, part of the lottery proceeds also go to the Fund for Veterans Assistance.

Lottery proceeds from October 2012 to August 2013 show that each month, on average, about $96 million was transferred to fund education and $500,000 to veteran benefits.

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Lottery revenue seems to be a simple and easy way for states to fund public services. According to the Tax Foundation, on average states collect an average of $59 per person in revenue, excluding any income tax collections, from a lottery.

However, the money doesn’t come without a cost.

While no government labels its lottery as a tax, lottery profits can be considered an implicit tax with a rate of about 38 percent, since on average 62 percent of lottery sales is paid out as prizes to winners and the rest goes to the government.

This implicit tax from a lottery is regressive, meaning that the share of an individual’s income to taxes paid increases for those with lower income levels compared with a progressive tax where the opposite is true. Unsurprisingly, poor people are more likely to play more often than those with higher incomes.

From a study using New York lottery sales, lottery sales make up a substantially higher fraction of household income for low-income people, hence an implicit regressive tax (see figure below).  

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Relying heavily on a lottery also tends to cause difficulties for lawmakers to reconcile a budget gap to fund public education when lottery revenues fall short.

Noting the declining share of public education funding from the lottery, the Texas House of Representatives voted last session to abolish the Texas Lottery Commission. However, facing the harsh reality of coming up with alternative funding sources, legislators reversed the original vote hours later and kept the lottery intact.

Of course, a surge in lottery revenue would provide a boost to the state’s budget, but it is healthier for the budget to depend on more sustainable funding and avoid some of the issues discussed above.

Overall, as a revenue source, a lottery is at best a short or medium term fix, but not a long-term solution. 

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