Investigation: State lotteries transfer wealth out of needy communities

Keywords Gambling / Taxes
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While the growing expansion of casinos and state-sanctioned sports betting steal the spotlight, state lotteries have nearly doubled in size over the past two decades, driving a multibillion-dollar wealth transfer from low-income U.S. communities to powerful multinational companies.

A nationwide investigation of state lotteries by the Howard Center for Investigative Journalism at the University of Maryland found that lottery retailers are disproportionately clustered in lower-income communities in nearly every state. The investigation’s analysis of cellphone location data shows that the people who patronize those stores come from the same kinds of communities.

Once rare, lotteries now operate in all but five U.S. states. Driven by more than a half-billion dollars in annual ad spending, lottery ticket sales have grown from $47 billion to $82 billion since 2005, according to La Fleur’s 2022 World Lottery Almanac. In 10 states, lotteries generate more revenue than corporate income taxes.

The investigation also found that a key promise of lotteries across the country—that they support education—doesn’t hold up. Instead, lotteries often compound inequities by disproportionately benefiting college students and wealthier school districts far from the neighborhoods where most tickets are sold.

“Poor people are collateral damage to a cause of raising money for what the legislators feel is good purposes … public safety, local schools,” said Gregory W. Sullivan, a former Massachusetts inspector general and now research director for a free-market think tank in Boston.

The multibillion-dollar wealth transfer starts in places like Warren, Michigan, where Ashley Standifer buys tickets in one of the state’s poorest neighborhoods.

On a snowy April day, Standifer stopped by the Korner Party Store in this Detroit suburb, its largest sign advertising “Beer Wine Lotto,” to buy scratch-off tickets.

She buys scratch tickets three times daily. Four years ago, she won $1,000 on a $3 ticket, but she hasn’t won big since.

“Of course, you know, I’m expecting to get my money back,’’ Standifer said. “But if I don’t … I’m still gonna buy it.”

Standifer’s spending is one small part of the $82 billion spent annually by lottery players, the first input in a nearly nationwide system that brings state-sponsored gambling directly into a majority of U.S. neighborhoods through more than 200,000 stores.

Standifer—and millions of players like her—lose about 35 cents for every dollar they spend.

“Yesterday I spent like $130 and I won like $85,” Standifer said, meaning she lost $45.

Those losses—$29 billion a year nationally—are why lotteries exist. The losses fund government programs and enrich others, including a Canadian private equity billionaire and a Japanese convenience-store conglomerate.

In the popular imagination, the lottery is funded by people who spend a few dollars on a Powerball ticket when the jackpot gets big. This is not reality.

More than two-thirds of lottery sales are of instant scratch-off tickets, which range in price from $1 to $50. A sliver of players are responsible for most of that spending.

A 1999 report to the National Gambling Impact Study Commission found the top 10% of lottery spenders accounted for two-thirds of sales. The most frequent players, the study found, had lower incomes, were high school dropouts and disproportionately Black.

High school dropouts spent four times more per year than college graduates. Black people spent, on average, nearly five times as much as white people.

Some states, like Massachusetts, are aware of frequent players’ importance. A 2016 study commissioned by the lottery showed that the top 10% of players account for about 40% of sales. The average player in that group reported lottery spending of nearly $200 per week.

In South Carolina, players with a household income of less than $35,000 a year spent more than twice as much as players with household incomes between $100,000 and $150,000, according to a 2014 state-commissioned study obtained by the Howard Center.

“When people get down, they probably take the last 10 or 20 dollars to try to make up 100 to 400 dollars,” said Cloyd White, 26, a construction worker from Jasper County, South Carolina, who estimated he spent $40 every day. “It’s a gamble and it’s risky, but I feel like it’s all about God.”

It’s also about choices states make about who can sell lottery tickets.

“There’s a reason why so many lottery outlets are concentrated in low-income areas across the United States,” said Les Bernal, national director of Stop Predatory Gambling.

The Howard Center found that stores in the vast majority of states with lotteries are disproportionately concentrated in communities with lower levels of education and income and higher poverty rates, with larger populations of Black and Hispanic people.

Only Alabama, Alaska, Hawaii, Utah and Nevada lack lotteries. The Howard Center was unable to obtain lottery retailer locations in South Dakota, but did obtain them for the other 44 states, plus Washington, D.C.

The center’s analysis found:

— In neighborhoods with lottery retailers, the percentage of the population that lives in poverty is higher than in neighborhoods without lottery retailers in all 44 states analyzed and in Washington, D.C.

— The Black population was higher in neighborhoods with lottery retailers than in neighborhoods without lottery retailers in 35 states and Washington, D.C.

— The Hispanic population was higher in neighborhoods with lottery retailers than in neighborhoods without lottery retailers in 37 states and Washington, D.C..

The store where Standifer bought her tickets is in a neighborhood that has a poverty rate almost three times Michigan’s average. It has four lottery retailers, with another 28 in bordering neighborhoods.

Neighborhoods with a lottery retailer in Michigan have a median poverty rate nearly double the rate in neighborhoods without lottery retailers, the center’s analysis found.

The North American Association of State and Provincial Lotteries, an industry group, says on its website that it’s misleading to examine where stores are concentrated because people “don’t always buy their lottery tickets in the neighborhoods where they live.”

That’s true. But the Howard Center’s first-of-its-kind analysis of mobile phone location data to study customers of lottery retailers shows they are mostly local.

The center used mobile location data from SafeGraph, a location intelligence firm that collects information about store foot traffic at U.S. businesses. The aggregated SafeGraph data reveals the neighborhoods where a store’s customers live.

A Marathon gas station in Warren, Michigan—a five-minute drive from the Korner Party Store where Standifer played—sold more than $725,000 in lottery tickets in 2020, ranking among the top 20% of retailers statewide.

More than two-thirds of its customers live in the same neighborhood as the gas station or in surrounding neighborhoods, with the average customer living within 1.1 miles of the store.

The Howard Center analysis, which examined store traffic patterns at nearly three-quarters of all U.S. lottery retailers, found similar patterns nationally. In all but Arizona and Washington, D.C, a majority of lottery retailers had a customer base that mainly came from local neighborhoods.

The Marathon gas station’s visitors came from neighborhoods with a household income $16,000 less on average than Michigan’s median of $57,000. In 29 of 44 states it analyzed and in Washington, D.C., the Howard Center found a similar divide, where the average household income of neighborhoods that visited lottery retailers was lower than the state’s overall average income.

A Howard Center review found states recruit retailers based on factors like store security, the ability to hit sales targets and compliance with in-store advertising requirements. The review found no evidence that states consider racial or economic inequity.

As a group, players lose. But there are consistent winners: the multinational companies that run the lotteries on behalf of the states, the stores—including large chains—and advertising and media companies.

Of $29 billion lost by players, those entities—plus state administrators who oversee the process—will keep more than a quarter: $8 billion.

The lottery operations industry is dominated by two private companies, U.K.-based International Game Technology PLC and Canadian-owned Scientific Games Holdings LP.

State-level lobbying by Scientific Games in the 1980s was critical to the expansion of the lottery from one state, New Hampshire in 1964, to nearly every state. Scientific Games just sold its lottery business to Toronto-based private equity firm Brookfield Business Partners LP for nearly $6 billion. Future profits will benefit Brookfield CEO Bruce Flatt, who is worth $4.5 billion, according to Forbes.

Stores get a commission for selling tickets and cashing in winning tickets. They earn, on average, 6%, but also earn substantial bonuses when a customer wins big. They took in $5 billion in 2020, according to the La Fleur’s almanac.

Convenience stores account for nearly two-thirds of lottery sales. Major multinational firms profit from owning thousands of U.S. convenience stores, including the Japanese firm Seven & i Holdings, which has more than 10,000 7-Eleven and Speedway stores.

Many states permit sales at stores that specifically market to low-income clientele. Check-cashing stores, patronized by lower-income people who don’t have bank accounts, sell lottery tickets in 24 states, the Howard Center found.

After prizes are paid out and the costs of running the lottery are paid for, $21 billion of the original $82 billion remains for spending on government programs.

At least two-thirds of the $21 billion is earmarked for education programs.

The Michigan lottery, where Standifer plays, has for decades billed itself as a win for education. The vast majority of the state’s share of lottery funding is used for K-12 education funding.

Studies show the state’s education funding formula is inequitable. Michigan received a grade of “D” for how it allocates funding to low-poverty districts, according to a 2021 report from the Education Law Center.

The report classified 15 states as regressive, which meant high-poverty districts received as much as a third less per student than their low-poverty counterparts. Six of the those states—Florida, Illinois, Michigan, Missouri, New Hampshire and Texas–have lotteries that use at least a portion of funds to finance K-12 education programs.

Some states use lottery revenue to fund college scholarships.

In Kentucky, nearly half of lottery scholarship funding supports the Kentucky Educational Excellence Scholarship (KEES), which awards money based on a student’s GPA and test scores.

Nearly 10% of Kentucky high school students are Black, but they were awarded less than 5% of KEES merit-based scholarship funding, a Howard Center analysis of 2020 state scholarship data shows. The average white KEES recipient got an award of $1,745, compared with $1,244 for the average Black KEES recipient.

The same disparity did not appear in the state’s need-based scholarships, where Black students received about 11% of funds.

University of Louisville senior Abby Donahue, 21, said gambling is a “system designed to make you lose.”

But, she added, college is so expensive, and students are so desperate for scholarships, that they do not think about where the money comes from.

Meanwhile, Standifer and millions of others like her continue to play.

This story by the Howard Center for Investigative Journalism at the University of Maryland was produced in collaboration with Boston University.

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15 thoughts on “Investigation: State lotteries transfer wealth out of needy communities

    1. I have no problem with individuals gambling.
      However, do we want the state sponsoring and promoting gambling???

  1. There never was an ethical lottery or a conscientious Casino. Disgusting that they’re allowed to exist (and even expand!) in this century.

  2. From the beginning, state lotteries were known as a “poor tax” due to the disproportionate purchase of lottery tickets by lower-income people. I guess when you are stuck at the bottom of the ladder you are more likely to spend what few dollars you have for a chance at instant riches. Frankly, I never understood the lopsided award of winnings, giving hundreds of thousands or even millions of dollars to a single winner when you could take the same amounts and spread the money among more people. The state could still yield the same revenue, but more residents would benefit from the pay-offs.

  3. Brent
    the first part of what you say is correct. The poor are the people who invest the most and can afforded it the least. I remember pea shake houses and the numbers game ran off the GNP( NO WAY TO FIX) only poor enter city and vice cops even knew about it. The other is not correct. the higher the payoff the more players the more the net to the lottery.

  4. As disappointing as this is, non of it should come as a surprise to people who understand human nature. It is good, however, to have such a detailed, comprehensive report.

    This should serve as an excellent object lesson to all the liberals who scream about what a backwords state Indiana is; not being “progressive” enough. There was a time not too long ago when a state-run lottery was prohibited by Indiana’s Constitution….a constitution that served the state well.

    But, of course, between greed and the ever-leftward march of “progressivism,” Indiana’s good constitution was amended to allow the state to cash in by legally tempting the poorest of its citizens to answer the siren call of “get rich quick without working” and buy lottery tickets….you know, “for the children.”

    And here we are today with tragic reports such as this. Jesus said the poor will always be with you. He certainly knew what he was talking about.

    1. Progressives are the problem?

      Recall, Bob, that a lottery was sold to citizens because the funds were going to education … which lasted around 5-6 years before yet another tax cut was passed and the lottery funds were diverted to other uses.

      You can blame the left for lots of things, and some are valid, but the never-ending tax cuts ain’t one of them. We’ve long since cut too far and the damage is plain for all to see. Only retired Republicans like Kenley dare speak up to plead to invest more in services … long after he helped cause much of the problems, and without much admission of his role.

    2. Yes, Joe; progressives are the problem. Who championed the Indiana Constitutional Amendment to allow the lottery?

      And I’m waiting with baited breath for you to “own up” to anything negative for which the left is responsible. The word responsibility is rarely, if ever, used to describe a disaster for which the left may be properly credited.

    3. Best I can tell, Bob, the Legislature was pretty close to split in the mid 1980’s and this would have had to pass two different legislatures (1985 and 1987) to end up on the 1988 ballot.

      I do know that the House was split 50-50 in 1989 and that Legislature was the one that passes the lottery bill since the constitutional amendment had been removed.

      But please post your numbers.

      That said, I’m supposed to own up to the Left because I’m “one of them” just because I didn’t drink the Kool-Aid like most of today’s “Republicans”. Broad conservative tent you’ve got there. Sounds more like a cult of some kind.

      Democrats spend too much and care far too much about thoughts and feelings as opposed to being practical.

      Republicans don’t collect enough in taxes and somehow manage to leave their Christian principles that they trumpet at the door when it comes to governance.

      Neither is an appealing choice, but Republicans are also authoritarian-friendly these days so I get to hold my nose and vote for Democrats. Like Secretary of State this year … Destiny Wells is getting my vote because not only is Diego Morales unqualified, he’s also nuts. Like policy differences matter in that race?

  5. I believe the Hoosier Lottery started around 1990. Evan Bayh was the Governor from January 1989 through 1997. The composition of the two houses of the Indiana legislature was regarded as “split” in 1990 (so Democrats had a majority in one and Republicans in the other). As I recall, the first head of the Hoosier Lotto was Jack Crawford (the former Democratic elected prosecutor from Lake County).
    We knew all those years ago that a lottery was a poor tax. It was in the papers and on TV (back before the internet was as ubiquitous as it is today). This was understood. There was hand-wringing. The politicians did it anyway. Like many morally questionable decisions, they did it because of peer pressure (other states around us had lotteries and our citizens would go there and spend money) and they justified it in part by saying a portion of the $$ could go to education. Lot of good lessons there.

  6. People are always going to gamble. The story champions someone who buys scratch offs “multiple times a day” and someone with a bizarre quote about “I know it’s bad, but it’s up to god”. You can’t legislate stupidity, so might as well make a buck.
    It’s too early to have a good sample size, but I wonder if State dispensaries will produce similar results?

  7. In the illegal days of gambling, gambling was the daily sign-up, tip boards, rare slots, and bingo in the local lodges and veterans posts. Excise ignored it if no one complained. Those local lodges and posts gave all their excess back to their communities. Those evil days are over. So now we are legal and poorer for it.
    The state could have let the locals have slots tied to the state’s computer bank to guarantee the state its take. Instead, the Las Vegas owners take the riches and the General Assembly has pledged its souls to them to keep the pittance flowing to its coffers. Good luck on changing this current casino arrangement. To many well-heeled vested interests to oppose.