Study finds wealthy counties get most benefit from Indiana Lottery profits

Jun 8, 2009, 8:36 am (1 comment)

Indiana Lottery

INDIANAPOLIS — When you play the Hoosier Lottery, the odds are against you. But if you're poor? Then, so is the system.

An Indianapolis Star review of the Hoosier Lottery has found that while lower-income players disproportionately fund the lottery, the state transfers lottery profits disproportionately to the wealthiest counties.

It's a quirk that seems to punish the very people the state counts on to fuel a revenue source that last year topped $217 million.

"It's a sad state of affairs when state policy is to go after our most disadvantaged citizens," said state Sen. Michael Young, R-Indianapolis, a critic of the lottery.

The inequity is caused by the formula used by the state. Lottery profits in Indiana are not returned to counties on a per-capita basis or based on where tickets are purchased.

Instead, the bulk of the money is returned to local government based on the assessed value of motor vehicles in the county. In other words, the more valuable the cars, boats and RVs in your county, the more money you receive.

Lottery players "ought to see a return on their money in their home county," said state Sen. Brent Waltz, R-Greenwood, whose district includes the largest lottery retailer in the state, on Indianapolis' Southside. "Clearly, the auto excise is not the fairest way to allocate funds."

To understand the inequity, one needs only to look at neighboring Marion and Hamilton counties.

Marion County players spend $3.55 on lottery tickets for every dollar returned from a pool of money funded mostly by lottery profits and tracked by the State Budget Agency. Hamilton County, the state's richest, spends only $1.19 on lottery tickets for every dollar that comes back.

If the money were distributed in proportion to lottery sales, Marion County would have received more than $14 million more; Hamilton County would have received nearly $19 million less.

It wasn't always this way. In 1996, amid howling over the rising costs of vehicle registration and licensing fees, the legislature cut the auto excise fee in half.

But to make up for that lost revenue, the state decided to primarily use lottery and other gambling funds and changed the formula. So, in essence, lottery players — who trend toward lower-income — subsidize luxury car, boat and RV owners, who received the biggest benefit from the reduced auto excise taxes.

Rep. John Day, D-Indianapolis, wonders whether that's fair.

"Maybe it (the lottery) wasn't the ideal way to fund the auto excise tax relief," said Day, who was not in office in 1996.

"Now that you've raised it, I may give it some thought and talk to some of my peers."

Day said he wants to look into how other states spend their money.

Twenty of the 43 states that run lotteries direct all or virtually all of their lottery profits to education. That includes the four states bordering Indiana: Illinois, Ohio, Michigan and Kentucky.

South Carolina's lottery is even called the "South Carolina Education Lottery."

According to the Hoosier Lottery's own survey, people most often associate "education" as a use of the profits. But it's a misconception that more than a fraction of the total pie ends up in classrooms.

"I would love to be able to say 'The Hoosier Education Lottery,' " said Kathryn Densborn, executive director of the Hoosier Lottery. "That's a much simpler message."

Joe Heerens, Gov. Mitch Daniels' chief legislative counsel, said the governor "would much rather see lottery profits spent on education in our state," including money for low-income families to pay for college.

Eight states put lottery profits in their general funds. Pennsylvania (senior citizens) and Colorado (parks and outdoor recreation) target unique uses for all or most of the money.

Massachusetts has a formula for dividing most of the money among cities and towns. The formula favors places with high population and low property values but has been criticized for not taking into account a town's lottery sales.

Wisconsin's profits go exclusively to property tax credits, which has been criticized as a transfer of money from the poor to the more affluent, who are likely property owners.

The distribution of Hoosier Lottery profits always includes $30 million annual payments each to the teachers' retirement fund and the Police Officers and Firefighters' Pension and Disability Fund.

Last year, the remaining $157 million went to the Build Indiana Fund, which also is funded by riverboat casino taxes and other gambling taxes. Lottery profits accounted for about two-thirds of the Build Indiana Fund last year.

A small portion of that fund goes to technology grants and the Department of Natural Resources.

But almost all of the Build Indiana Fund is what's labeled "excise tax replacement." That money arrives at local government units such as towns, schools and libraries with no strings attached. So in reality, there's no way to know precisely how the majority of lottery money is spent.

But even if lottery funds were targeted for education or redistributed in a way that better matched who actually is buying all those tickets, experts say it is still inherently a bad bet.

Lottery players spent more than $800 million last year, but the Hoosier Lottery returns just 61 percent of sales as prizes -- not unusual among state lotteries. That's much less than other forms of legal gambling, such as slot machines, which have a return of about 90 percent.

It is widely agreed by experts that the poor disproportionately play the lottery, a contention supported by surveys and studies.

"Every bit of credible evidence I have ever seen shows that," said Duke University Professor Charles Clotfelter.

That includes a marketing survey for the Hoosier Lottery in 2005 that concluded 67 percent of lottery players have household incomes of less than $50,000, compared with 58 percent of the general population.

A stark analysis of lotteries and the poor came from Sam Papenfuss, who in 1997 wrote a paper for George Mason University's Center for Study of Public Choice. The paper argued that lotteries serve the purpose of government reclaiming welfare benefits.

"The lottery is a simple method for raising revenue from the poor," he wrote.

Still, in truth, no one knows the income levels of those who buy lottery tickets. One of the best indicators is where tickets are bought.

Through public records requests, The Indianapolis Star obtained and analyzed sales and address data for 2007 and 2008 from every Hoosier Lottery retailer and compared them with income data from the state's census tracts.

Among the findings:

In three median household income groups — less than $50,000; $50,000 to $74,999; and $75,000 or more — the lower an area's income, the more lottery retailers it has per capita.

Retailers in areas with less than $50,000 in median household income sold the most lottery tickets per resident older than 18, a median of $359 for the two years measured. That's more than $100 higher than the figure for both of the other income groups.

Some of the tickets undoubtedly could be bought by people who work — but don't live — in the area or who are just driving through.

But two of the top retailers in Indianapolis — both in lower-income areas — say they primarily sell tickets to people who live in the neighborhood.

Lawmakers and lottery officials point out that, unlike a tax, those players are making a choice. But it's not a choice everyone thinks should be encouraged — or even allowed.

Earlier this year in Tennessee's General Assembly, a bill sought to discourage people on public assistance from playing the lottery by limiting their winnings to $600.

A fiscal review was performed for the General Assembly. That review assumed that of the state's 590,000 food stamp recipients, half play the lottery. The bill eventually failed.

Jerry Fallen, 48, Indianapolis, estimates his monthly income at $700, plus $500 in food stamps. He can't work because of a spinal cord injury.

He and his wife spend $10 a month on scratch-off lottery tickets, along with the occasional Powerball ticket when the stratospheric payout is hard to resist.

"I know what it would go for," Fallen said of a potential windfall. "It would go for my daughter's education and me getting out of an apartment."

If instant riches are an allure that's hard for the poor to resist, the same might be said of state-run lotteries that are in business to make money.

Clotfelter, the Duke professor, wrote in his book "Selling Hope" that state lotteries don't simply accommodate a public desire for the games but "seek to foster that taste."

Densborn, the Hoosier Lottery director, noted that voters approved the lottery and that she can't control the location of retailers. "I do not target any demographic with our advertising or anything we do."

Still, Densborn, who makes $106,636 a year — more than the governor — acknowledges the awkward role states play when they run for-profit lotteries.

"I have a foot in both worlds," Densborn said, "and I don't fit easily into either."

She won't use cartoon characters in ads, because of their appeal to children, and instituted a policy against using cartoon characters on instant tickets.

But the lottery hardly leaves its business to chance. It spent almost $10 million last year on advertising, and it commissions detailed market research.

Young, the Indiana state senator, said of the lottery: "They know what they're doing. They're not going after millionaires. I bet they don't run ads in Forbes magazine."

The Star analyzed three Hoosier Lottery advertising campaigns in 2007 and 2008 in Marion County, using billboard locations obtained through public records.

The analysis showed the billboards were placed predominantly in lower-income areas.

Densborn said a media buyer makes recommendations on where to place billboards.

"Were those decisions based on income levels? I doubt it," she said, adding she can't control potential billboard locations.

But whether it's intentional or not, the images are there — and the poor are disproportionately exposed to them.

"I'm not zoned in on a demographic," Densborn said. Instead, she said her marketing surveys sort people primarily by attitudes such as "casino enthusiast," "jackpot hopeful" and "thrill-seeking men."

But beyond advertising, the lottery's best marketing tool might be those who defy the odds — and make even the most elusive of dreams seem possible.

Recently featured on the Hoosier Lottery Web site's home page was the story of Martinsville resident Patricia Huber.

Huber won $100,000 in the lottery after she "lost everything" in a flood last year. Such news releases — and the media stories that echo them — inevitably have a celebratory tone.

The news release ends with a reminder to "please play responsibly," but it's also careful to list all the things Huber plans to do with the money: Pay off her van, take a vacation, get a computer, earn a bachelor's degree.

"It rocks!" Huber says in the release. "It really rocks!"

Indianapolis Star


maringoman's avatarmaringoman

Sad, ain't it? I always say that the benefits of a resource should benefit the person who sweats for it most then the others. If a city within a state spends a lot of money on the lottery, it is only natural that the state spend a higher percentage of the profits on that particular city. Fairs' fair.

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