St. Louis Fed Analysis Looks at Why States Adopt Lotteries

ST. LOUIS — States that have higher per capita incomes are more likely to adopt a lottery, while opposition from some religious groups tends to inhibit states from adopting a lottery, based on an analysis from the Federal Reserve Bank of St. Louis.

Those are just two of the conclusions from an article in the May/June issue of the Review, the Federal Reserve Bank of St. Louis' bimonthly publication of economic and business issues. The authors of the analysis are the St. Louis Fed's Cletus C. Coughlin, deputy director of research, research officer Thomas A. Garrett and senior economist Rubén Hernández-Murillo. The publication is also available online at the St. Louis Fed's web site: http://www.stlouisfed.org.

Since New Hampshire introduced the first modern, state-sponsored lottery in 1964, 41 states and the District of Columbia have followed. Lottery ticket sales in the United States in 2004 topped $48 billion, with state governments reaping nearly $14 billion in net lottery revenues. Coughlin, Garrett and Hernández-Murillo reviewed geographical, economic and political factors to analyze whether—and when—a state institutes a lottery.

"The spread of state lotteries," they said, "coincides with changing attitudes toward legalized gambling, growing state and local government expenditures, and growing public opposition to both new taxes and increased rates for existing taxes."

Coughlin, Garrett and Hernández-Murillo identified four main factors to explain states' adoption of a lottery:

1. The higher the income per capita, the more likely a state is to adopt a lottery. Coughlin, Garrett and Hernández-Murillo noted evidence which suggests that those with low incomes bear a relatively higher tax lottery burden than those with high incomes. For example, one study they cited provided data to show that low-income groups spend a larger share of their incomes on the lottery and that they also spend more in absolute terms.
2. A state is more likely to adopt a lottery if a neighboring state already has one. Prior to North Carolina's passage of a lottery, for example, it was estimated that the state's residents were spending $100 million per year on Virginia's lottery. "Legislators and residents concluded that if residents were going to play the lottery, they would prefer that the spending and resulting tax revenues be kept within their state," said Coughlin, Garrett and Hernández-Murillo.
3. A state is more likely to adopt a lottery in an election year than in non-election years. The economists referenced one study that argued that lotteries tend to be adopted in election years relative to other years because a lottery, compared to other types of tax increases, is generally more popular—a fact that elected officials are aware of and likely attempt to use to their advantage.
4. Opposition from certain religious groups, especially in Southern states, has inhibited lottery adoption. Generally speaking, the most strident opposition from religious groups is based on the belief that gambling is immoral. Other issues typically raised by opposition groups are deceptive advertising, the regressivity of the lottery tax, and the prospects for gambling-related problems.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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