So in my previous post, I pointed out “accredited investor” rules to be outdated and offered suggestions on how to improve them. This was more to emphasize the lack of opportunity of investing in the best performing asset class for most of America. I also made the argument that we are allowed to “invest” in other things that are proven to be “on average” far more risky, and that the worst possible investment of them all, was actually subsidized by the state itself: the TN State Lottery.
First, I have been and will continue to be a proponent of legalizing and taxing most “vices” be it alcohol, cigarettes, gambling, etc. I think if you’re transparent with the costs, benefits, and outcomes of those goods, then you should let people decide on what they want to do with their money. The sales of most goods have significant competition for consumers, which drives down the costs of say a case of beer or cigarettes down OR gives the best odds/promotions such as casinos and apps competing for sports gambling attention.
But what we have here in the TN State Lottery, is a government sponsored entity that parades itself as the bastion of opportunity and scholarship, when in reality, the numbers and customer base tell a very different story.
To start, let’s look at the most recent audit report from the 2019 Tennessee Lottery. Here are the high level numbers:
So the Tennessee Lottery sold $1.8B in total lottery tickets. To put that in perspective, there are approximately 4.2M Tennesseans over the age of 18. Which means that if every person over 18 bought lottery tickets, we’d average $428 per person per year. Than alone is a pretty crazy number in my opinion and much higher than I would’ve anticipated.
The vast majority of this $1.8B was spent on scratch offs ($1.4B) which had an average winning percentage of 67%, 67%, and 66% over the past 3 years. In 2019, there was $177M paid to retailers (gas stations), gaming vendors (ticket suppliers, printers, etc), advertising, and other administrative costs to facilitate. This means that of the money NOT paid to the players of these games, roughly 30% of the remaining cash is paid to the retailers, vendors, advertising, and administrators.
So who is buying these lottery tickets you ask? Well according to the Atlantic’s Derek Thompson, the poorest third of all households buy more than half of the lottery tickets.
So if the bottom third of households are buying 50%+ of all lottery tickets, it stands to reason that means that the bottom third of households are purchasing almost $1,300/year in lottery tickets. If the average Tennesseean in the bottom third in income makes about $25k/year, that’s almost 5% of the entire income for a single individual in the bottom third. (https://statisticalatlas.com/state/Tennessee/Household-Income)
You may be thinking “well hold on Paul, the proceeds go to education, so it’s could be construed as a good thing!” Well let’s look into that.
Well the good news is that the vast majority of the operating income does go to education. Of that audited number of $445M, $430M went to scholarship accounts and the remainder to after school programs. And these numbers have continued to grow as the lottery grows from $293M in 2011 to almost $450M in 2019. That’s a LOT of scholarships I think we can all agree regardless of where the money comes from and who is subsidizing it.
But, there’s a catch here as well. Despite these numbers continuing to grow, is the lottery ACTUALLY putting more kids into college? I took a look at the tuition growth and enrollment growth of the University of Tennessee to “common size” these numbers.
So we have a fairly substantial rise in UT tuition from a little over $7k per year for in-state tuition to $13k per year for in-state tuition. So between the growth in tuition and the growth in the lottery scholarships is roughly the same, but the total number of scholarships appears to be in a downward trend.
So while the lottery is “common sized” for population and spend growth, the tuition of UT is only constrained by tuition growth. If we combine the avg tuition growth with the enrollment of a freshman class rising from 4,100+ students to 5,200+ students over the same time, we have an incoming Freshmen class that in 2011 spent $31M on tuition to $68M on tuition. So to put that in perspective, in 2011 the TN lottery could subsidize the entire tuition of 9+ Freshmen classes at University of Tennessee. But by 2019, it could only subsidize a little over 6.
So as you can imagine, over time if you continued the trend, you’d have more and more money spent on fewer and fewer full time scholarships being subsidized by predominantly lower class/impoverished individuals. So what do we do about it?
I honestly don’t really know. You can’t “ban” gambling as we just approved online sports gambling. Online sports gambling has netted $5.2M in tax revenues in the past 2 months in the state of TN, which annualized is $31M, which is a far cry from the $450M that the state pumps into scholarships. It’s only the first 2–3 months, so it’s in its infancy, and over time I’d expect there to be more growth here.
I guess what it really comes down to, ultimately, is “should the government be involved in gambling” game at all? Personally, I don’t. Until most recently, you could actually consider it a cartel on gambling considering they were the only game in town and nobody was allowed to compete. It makes sense given they can run a game where the house wins 67% of the time and people will still play. Especially when you don’t even publicize the expected outcomes but advertise “you could win $10,000 on a $1 ticket”.
But if you insist on the scratch off lottery game to be allowed, then you’d have to do a couple things:
· Get the government out of the game.
· Allow gambling companies to “bid” on the opportunity and then tax it appropriately
· Force each winning company to provide SIGNIFICANT disclosures on odds and expected outcomes of tickets not dissimilar to the labels required on cigarettes or alcohol.
At the very LEAST, that last point should be required regardless of who is sponsoring the merchandize. “One in four are a winner” written in small print on the back is VERY different than “on average, these tickets will payout $0.67 cents for every dollar that you spend”. Or maybe even put this on the package “the odds on this card are worse than roulette, blackjack, craps, and basically any other game at a casino INCLUDING most slot machines.”*
Unfortunately, with the state government being in the business of funding scholarships through these programs, I’m not optimistic we actually get any change. Even if the ones being hurt are at the bottom of the socio-economic ladder. My advice? Stick with buying an extra $10 in gas at these gas stations instead of splurging on some scratch offs. Because at least when you do that, you’re getting all $10 of gas instead of $6.67.