Legislatures and Lotto: Taxing Federal Transfers

Abstract

I examine the relatively rapid adoption of state lotteries over the past 30 years within a public choice context to determine why some states implement lotteries and others do not. Without trying to explain why people gamble, I argue that legislatures use the lottery to tax federal welfare benefits, and not the poor per se. I use a probit model to test the importance of transfers relative to poverty and find considerable support for the transfer tax hypothesis and little support for the poverty alternative. While welfare benefits are not the sole cause behind lotteries, its significance helps us understand the current proliferation of lotteries.

JEL Classification: H73, H53, H23, H77