"Prior to the 20th century, almost all lotteries in the United States were operated privately. But a series of scandals involving political corruption rendered private lotteries illegal for nearly 100 years. State lotteries began to come back in the mid 1970s, and in 2005 they took in more than $52 billion, according to the North American Association of State and Provincial Lotteries.

…The State of Illinois is seeking to privatize its state lottery system, hoping to attract as much as $10 billion from private investors interested in an operation with 800 retail outlets and 2005 revenue of about $650 million.”

“The other day I saw a headline indicating that Illinois was about to get out of the lottery business. At first I was cheered; it seemed that Illinois and I had something in common. Having made my living for the past decade exploiting lottery winners — and recently having repented my ways — I hoped the state had simply grown tired of profiting from its citizens’ weaknesses.

But as I read the article, it turned out that Illinois isn’t acting on moral principle, but in fact succumbing to the lure of easy money that has brought so many lottery winners to ruin.

The state’s plan is to turn over the running of the lottery for the next 75 years to private investors in exchange for a huge sum up front — perhaps $10 billion. Indiana is considering following suit. The states seem to think they can do more with the money if they get a big balance all at once, albeit less money than the lottery would earn them over time. I understand that line of thinking.

In essence, Illinois wants what virtually every lottery winner wants: the money up front.

…And now the Illinois officials are acting just like any spendthrift winner who’s being paid over time. Like many of my former clients, Illinois is selling its future in order to fortify its present. But an individual who burns through his lump sum in a few years will bear the consequences of his actions. That’s not the case for Illinois: the officials who would enjoy the $10 billion windfall will be out of office decades before the 75 years is up.

… State officials seem to think they can make smart decisions with the $10 billion. But I worry that these politicians are making a decision that will allow them to spend freely and leave nothing behind for the next folks. And because (in theory at least) a goodly portion of lottery revenues usually goes to the schools, we should all be concerned about states looking for the quick payoff.”

When initially adopted by various states, lotteries were sold as harmless mechanisms to increase state revenue without raising taxes. Why the public fell for the gamble remains a puzzle, but a study by two political scientists at the University of Maryland exposes the emptiness of that pitch by documenting how lotteries are major generators of income inequality.

The professors chart the Gini coefficient—a standard measure of income concentration in a political jurisdiction—based upon the Current Population Survey of the Census Bureau, from 1976 and 1995, comparing states without a lottery against states with a lottery during every year of the analysis. During the twenty-year period, the increase in the level of income inequality was 40 percent greater in the lottery states relative to the non-lottery states. In fact, the trend lines reversed themselves; whereas the non-lottery states began with a higher Gini factor in 1976, the lottery states surpassed the non-lottery states by 1993.

Multivariate regressions that included measurements of other state tax policies, demographic factors, and welfare spending on income inequality in all fifty states confirmed “the lottery effect” as an independent and significant contributor to income inequality, as the presence of a state lottery positively correlated with inequality in all three models (p<.05). According to the researchers, “the magnitude of the effect is sizable,” comparable to a full standard deviation change in manufacturing employment (which is negatively associated with inequality) and greater than the per-revenue-dollar impact of either the sales or state income tax (each of which were positively associated with inequality).

Each statistical model also found that increases in state welfare spending were associated with increases in income concentration (p=.01 in all three models).

While these findings may not prompt states to reassess their dependence on this revenue source, they document the problematic nature of lotteries and raise questions as to whether the increased popularity of all sorts of gaming are also related to increases in both state spending and the family tax burden.