Powerball lottery jackpot hits record $550 million

With much of the economy teetering in uncertainty, one dubious economic indicator is flourishing: lottery jackpots. And while a healthy lotto industry is good news for the state budgets they help fund, this week’s giant national jackpot is renewing concerns about who foots most of the bill – namely, lower income earners.

There's a twist, however: The larger the jackpots are, the less regressive lotteries become.

On Wednesday, the multistate Powerball jackpot reached an estimated $550 million, after failing to produce a winner since Oct. 6. It’s already the largest Powerball jackpot ever, shattering the previous record of $336 million and becoming the second largest lottery jackpot in history, behind a $656 million Mega Millions prize in March 2012. If no one wins Wednesday night, the Powerball jackpot will likely eclipse that figure.

The record jackpot is part of a corporate strategy to create larger jackpots faster. The company that runs Powerball raised single ticket prices from $1 to $2 in January in an effort to create larger jackpots and generate more revenue for the 42 US states that use Powerball proceedings to fund state run programs, including things like academic scholarships.

The price increase reduces the number of tickets, but makes the jackpot “more likely to roll over,” says Victor Matheson, an economics professor at the College of the Holy Cross in Worcester, Mass. “It generates the same level of revenue while selling half as many tickets, decreasing the odds of a win.”

It’s been a successful tactic. Powerball ticket sales generated $3.96 billion in fiscal year 2012, and a spokesman for the Iowa-based Multi-State Lottery Association, which runs Powerball, told the Associated Press that figure is expected to reach $5 billion in the coming fiscal year.

That means more funding for the states, which receive $1 of every $2 ticket sold. Where that money comes from, however, is a thorny issue.

Lotteries are far and away the most popular form of household gambling, with worldwide revenues reaching nearly $262 billion in 2011.

“The thing lotteries offer that other forms of gambling don’t is the possibility of an life-changing event happening instantly,” Dr. Matheson says. “You can have a good night at a casino and come away with a few hundred bucks, but a $250 million lottery ticket is a life-changer.”

Adding to the appeal, he says, is the fact that there is no skill involved, and lotto is unmatched in terms of convenience. “There are literally tens of thousands of locations where you can buy a ticket,” as opposed to just a smattering of casinos across the country.

But study after study indicates that those who play the lottery regularly are relatively poor on average, and spend a greater percentage of their household budgets on tickets. In South Carolina, for instance, 54.3 percent of  frequent lotto players made less than $40,000 per year, according to a 2009 state-conducted survey. In Texas, a 2004 study found that someone with less than a high school education spent a median $600 on the lottery each year; someone with a graduate school education spent less than a third of that, at $156. In one study released in March, households earning less than $13,000 annually spent 9 percent of their earnings on lottery tickets.

“There’s no doubt this is a highly regressive tax,” Matheson says. “Lotteries are in the business of selling hope, and they prey on people who are down on their luck and don’t see any other options to make their life better.”

What’s more, the resulting windfall for states is “less than 3 percent of state revenues,” says Kent Grote, a professor of economics at Lake Forest College in Chicago. And they don’t necessarily fund programs for  the low-income groups who are footing the bill.

In Florida, for instance, the state lottery funds Bright Futures, a college scholarship program for high-achieving students who don’t generally come from  the most impoverished backgrounds. “If we’re going t be taking money primarily from low income people, then let’s use it for programs to help lower income groups,” Mr. Grote says.  If it’s general education, fine.”

But huge lotto jackpots, like the one that will be announced Wednesday night, aren’t necessarily the worst offenders, Matheson points out. “The large jackpots attract people from a large income spectrum. The more that the lottery emphasizes high payoff low odds, you are more likely to attract higher income buyers.” Games with lower payouts, like scratch off tickets, are “disproportionately purchased by low-income individuals.”

“There are studies out there that suggest it gets less regressive as lotto jackpots get larger,” Grote adds.

So huge jackpots like tonight’s aren’t truly symptomatic of the day-to-day problems with the lottery system; they may even be a step in a more helpful direction.  But they are occasion for those very real issues to get some attention.