Profitable Lottery Taxes

Historically, governments have raised revenue by taxing vices that people engage in for pleasure: gambling, alcohol, and tobacco. Although these activities may be harmful, they are less costly to society in the aggregate than, say, poverty or war. In this way, lotteries are like sin taxes. While the odds of winning a large jackpot prize are very low, many people play the lottery hoping that they will be the one who wins the big money. Unlike other sin taxes, however, the money from lotteries goes mostly to state and federal government coffers.

A good portion of that money is used to pay out prizes, but some of it goes toward commissions for retailers and the overhead for the lottery system itself. In addition, the lottery generates a substantial amount of profit for state governments, who often direct it to particular programs and projects. For example, Illinois’s lottery funds help train more than 20,500 special athletes every year, and the state is a major contributor to breast cancer research and HIV/AIDS prevention.

A significant portion of the lottery’s total revenue, though, also winds up in state general funds, which can be directed to a wide range of programs. Depending on the state, that could include anything from bolstering infrastructure to supporting gambling addiction treatment and education initiatives. If you happen to win the lottery, of course, you’ll be paying income taxes as well, and some states even have laws that require your winnings to be withheld from your paycheck.