THERE MAY have been two winning tickets for that $587.5 million Powerball jackpot last month, but there were three big winners.
Mark and Cindy Hill of Dearborn, Mo., opted to take their half of the big prize in a lump sum of $193,750,000, and it’s likely that whoever bought the other winning ticket in Fountain Hills, Ariz., will do the same thing. But a whopping share of the jackpot will go to a greedy uninvited partner who didn’t even bother to play: Uncle Sam.
The Internal Revenue Service treats lottery winnings as ordinary income, and a nine-figure income is subject to the highest federal tax rate of 35 percent. That means the first thing the Hills had to do after landing their big prize was surrender $67 million of it to the US Treasury. The lucky owner(s) of the Arizona ticket will fork over the same amount. There are also state taxes to kiss goodbye. In Missouri, where the income tax rate is 4 percent, the Hills will be charged almost $8 million; the Arizona winner will pay at least 5 percent: nearly $10 million.
Admittedly, few of us will lie awake at night in despair over the Powerball winners’ tax bill. Even after rendering unto Caesar what is Ceasar’s, the big winners will clear more than $110 million each. Money may not buy happiness, but $110 million can certainly buy a reasonable facsimile of it. “I think we’re going to have a pretty good Christmas,” said Cindy Hill.
Yet the taxman doesn’t just take a bite out of the biggest winners. The IRS helps itself to a hefty chunk of every smaller jackpot too. Three elderly gents in Oklahoma who bought a winning $1 million ticket each took home $236,667 after taxes, the Tulsa World reported last week. Sure, that’s a lot better than throwing away a losing ticket. But when the government sells you a chance to win a million dollars that actually pays only 700 grand, it hasn’t really sold you a chance to win a million dollars, has it? The tax bill of the happy new multimillionaires in Missouri and Arizona may not inspire much sympathy. But it’s easy to imagine the difference an extra $100,000 might have made to the families of those three senior citizens.
Income taxes paid on lottery prizes are only the tip of the iceberg. The billions netted by the IRS from Powerball, MegaMillions, and their forerunners over the years are dwarfed by the tens of billions raked in by state lotteries every year. In 2011-2012, the nation’s 44 state lottery commissions cleared $60.8 billion in their ticket sales; according to the Los Angeles Times, 32 of those states broke their previous sales records. But unlike private casinos, where payouts of 90 percent or more at slot machines and other games are common, state lotteries typically pay out an average of only 60 percent of their revenue in prizes. In 2010, the Tax Foundation calculated the average nationwide tax rate represented by lottery tickets at a steep 43.7 percent — not including those aforementioned taxes on winnings.
It’s a rotten deal for players, only partly mitigated by the fact that no one is forced to buy a lottery ticket. Private lotteries are illegal. If they weren’t, the state-run ripoffs wouldn’t stand a chance. There may be a few enterprises that are practical to operate only as a government-owned or -licensed monopoly — highways and fire departments, for example — but lotteries certainly aren’t one of them.
This isn’t merely an academic quibble. State lotteries prey with particular pitilessness on the poor. Indiana University researcher John Mikesell observed in 1994 that lottery sales tended to rise with unemployment rates; a more recent analysis in Connecticut found that residents of the state’s poorest cities accounted for a disproportionately large share of lottery customers. The “cruel truth” about state lotteries, write three Business Insider editors (in a piece citing these and many other studies), is not just that people who can least afford to buy tickets are the likeliest to buy them. It is that the government, spending public funds, “goes out of its way to tell them it is a good idea.”
By all means, be happy for the lucky folks who bought those winning Powerball tickets. Just don’t make the mistake of thinking that state lotteries are about them. Lotteries are designed to enrich the government. The really big winner is always the tax collector.Jeff Jacoby can be reached at email@example.com. Follow him on Twitter @jeff_jacoby.