Lottery Tax Windfalls, State-Level Fiscal Policy, and Consumption

Abstract

State governments receive an exogenous tax windfall whenever their residents win a multi-state lottery. These lottery tax windfalls are counter-cyclical but occur during a range of economic conditions. Therefore, lottery tax windfalls enable us to estimate the impact of fiscal policy on consumption during bust as well as boom periods to account for time-varying household borrowing constraints. Furthermore, lottery tax windfalls facilitate increased government spending or tax reductions without the issuance of debt, thereby circumventing Ricardian equivalence. We find evidence that lottery tax windfalls facilitate higher government expenditures on Supplementary Security Income that increase household consumption, but only during bust periods. Overall, the ability of fiscal policy to influence consumption is limited to higher expenditures during poor economic conditions.

Keywords: Lotteries, Fiscal Policy, Consumption