Based on recent talk around the bond market blogosphere, you would think having a lottery winner from your state might lead to a major improvement in your State’s financial condition, maybe even leading to a higher credit rating for its bonds.
May well respected news sources outside of the bond market also published articles with headlines such as:
- “Who’ll win the Mega Millions Lottery? The States” The Christian Science Monitor
- “Mega Millions Lottery Has States Salivating Over Taxes From Possible Winners” The Huffington Post
This seemed a little strange to us, so the research team here at LearnBonds decided to dig a little deeper. Here is what we found:
Taxes on the Mega Millions Lottery winnings are barely a drop in the bucket
Unfortunately, our findings are that the taxes resulting from lottery winnings will not make any significant difference, even in a small state’s budget.
Last Friday, the jackpot was a record breaking $656 million. There were three winning tickets. Each winner was entitled to receive $218.6 million over 20 years. Given the level of ticket purchases, the number of winners was not a surprise. Every Mega-Millions lottery jackpot that has exceeded $330 million has had between 2 and 4 winning tickets.
Assuming a winner takes the money in a lump-sum (which would be best for the State), the resulting income taxes would not even pay 1/1000 of any winning State’s annual spending for one year. In Illinois, the resulting income taxes would cover about 1/10,000 of the State’s spending.
While $8 million dollars is a lot of money to an individual, it’s a drop in the bucket of State Spending:
|State Tax Withholdings %||Lotto Tax Withholding $ Amount||Approximate State Budget||% of State Budget|
|Kansas||5.0||7.8 Million||14.2 Billion||> 0.1%|
|Maryland||8.5||13.4 Million||32.1. Billion||>0.1%|
|Illinois||5.0||7.8 Million||63.8 Billion||0.01%|
Source: USA MEGA, Sunshine Review
Even when including revenue from ticket sales, the benefit to the states is still very small. On average, Mega Millions gives back about 35% of the revenue from tickets sales to the States. There was an estimated $1.46 billion in ticket sales for this lottery, which means about $500 million went into state coffers. Assuming ticket sales are roughly in line with population, Illinois would have taken in an additional $20 million, Maryland $10 Million, and Kansas $5 million. Even after these numbers are added in, the total financial contribution of a the largest lottery in history did not equal 0.1% of annual spending.
Lottos are of course a crappy deal for players as well
I have always had a distaste for lottos. For almost three decades, I have tried to convince my mother not to spend $2 per week on this money losing proposition. Typically, lotteries payout about 50 – 60% of what they collect to players. This is far worse than any table game in Las Vegas. My mother knows that she is unlikely to win the lotto. However, like any speculator, she spends more time imagining what she will do with her winnings than she does calculating the odds. For the latest Mega Millions, the odds of selecting the correct number were 1 in 176 million.
If the odds of selecting the winning ticket are 1 in 176 million and the payout is $218.6 million, buying a $1 lotto ticket (for at least for this one particularly large jackpot) would seem to make economic sense. However, there are two factors which need to be considered:
- One dollar twenty years from now is not worth the same as one dollar today. In fact, Mega Millions provides the option of receiving the winnings immediately. However, the winner would only receive $157.8 Million or about 25% less money. Suddenly, even with the large payout offered in the latest mega millions, the expected return is negative.
- The after-tax returns make an “investment” in the lotto look even worse, as lotto winnings this large are taxed at the highest federal tax rate. This reduces the winnings by another 35%. In addition, States have the option of taxing lotto winnings as they see fit so you are likely to have an even higher tax bill.
Even if players will not make money on the lotto, how about the states where the winners reside?
Mom, if you gotten this far. Please stop playing the lotto.