Buying Up Powerball Tickets? Remember the Lottery is a Tax There is a load of hoopla over the latest Powerball jackpot, now up to $235 million. But from a business standpoint, these kinds of lottery awards can be nothing but trouble.

By Ray Hennessey

Opinions expressed by Entrepreneur contributors are their own.

As Henry Fielding once wrote, "A Lottery is a Taxation on all the fools of Creation."

He could have also added that they are bad for business.

There is a load of hoopla over the latest Powerball jackpot, now up to $235 million. That no doubt has folks dreaming of lighting Cohibas with $100 bills, and talk about how the lucky winner will have tons of dough to spend in our consumer-driven economy.

But from a business standpoint, these kinds of lottery awards can be nothing but trouble.

For one thing, lotteries are a tax. Most people think of them in terms of the payouts, but they ignore the buy-in. By buying a ticket, a player is subsidizing government spending. Revenue that fuels state spending is one of three things: a fee, fine or a tax.

Yes, there are a number of experts who argue that, because lotteries are voluntary -- you have to be in it to win it, after all -- they can't possibly be a tax. Plus, you get something back if you win. Taxes don't usually give you a benefit, right?

Sure they do. Under that argument, any sales tax wouldn't be a tax either. We get benefits from other products we buy which states heavily regulate and tax. Compare the lottery with, say, the cardboard packaging you buy for your business. In both cases, consumers pay the government to get a product (a lottery ticket, or box) and get an opportunity (winnings, or the ability to make money off a sale of a product shipped in that box). In both cases, the governments take their cut.

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If you don't think of lotteries as tax, the states certainly do. You may get an insane amount of scratch when you win these lotteries, but the take-home is so much smaller than the headlines. Last year, a person in Michigan won $320 million in the Powerball. Because the Michigan winner decided to take it as a lump sum, he took in $213 million. The federal tax of 35% (it is income, after all) reduced that to $138.45 million. Then the state stepped in, which taxed at a 4.35% rate. That took his winnings after taxes to $132.43 million.

Now look at it from the perspective of the government. The 44 states that took part in the lottery got to divide up their own $320 million. The Federal government got its $74.55 million in income tax from the winner, and Michigan got a state income tax of $9.27 million.

So, who wins in a lottery, the guy who takes home $132.43 million, or the state and federal governments which walked away with $403.82 million?

Plus, lotteries are a nasty, regressive tax because everyone pays the same. That hurts the poor the most, since they have less ability to pay. A $2 lottery ticket saps more of the income of someone in poverty than it does someone who makes $250,000 a year. And studies have shown that the most active buyers are the poor and uneducated.

Not convinced that that lotteries are tax? Then imagine a world without them. States tout that they use lotteries to pay for noble pursuits like education. If lotteries were to go away, what would fill that hole? One might hope a new era of cost-cutting and fiscal responsibility to do more with fewer resources, but there is a far more likely scenario: another tax.

Even though lotteries are a tax, shouldn't capitalists love the idea of parlaying a $2 investment into $132.43 million by the turn of some balls? Actually, no. Lotteries aren't free enterprise. States love them so much that they keep them to themselves. Businesses that try to run private lotteries find themselves violating very strict gambling laws. Governments don't like competition and they would lock up business owners who muscled in on their game. In short, lotteries are a government monopoly, the polar opposite of a free market.

Related: Business Owners Not Sold on Obama's 'Grand Tax Bargain'

What's more, they are corrosive to markets since they suck consumer-spending capacity. John Kindt, professor emeritus of business administration at the University of Illinois, has written passionately about how playing lotteries and other state-sanctioned gaming has a negative effect on local businesses.

When New York floated the idea of expanding its Quick Draw video lottery, Kindt noted that "every dollar that is dropped into gambling is a dollar that is lost to the consumer economy." That, in turn, actually hurts the government, too, since sales taxes are reduced, he said.

Will that stop lines from forming every time lottery jackpots boom, like they did earlier this year when they surpassed half a billion dollars? Probably not.

But, hey, you never know.

Wavy Line
Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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