Shifting Incentives and Responses Across the Income Distribution: Lottery Evidence

That lotteries are a regressive source of state revenue is well documented (see, for example, Price and Novak [1999], Price and Novak [2000], and Rubenstein and Scafidi [2002]).  Recent work (Oster 2004) also demonstrates that the regressivity varies by jackpot level and that, at high enough jackpots, the lottery would (theoretically) become progressive. Using daily, establishment-level data on sales of five Virginia lottery games over approximately two years, we estimate the effect of local household income on local responses to changing incentives brought about by variable lottery payoffs.  We control for a variety of retailer characteristics including location and retailer type and a variety of location characteristics including average household income, average education level, racial composition, and lottery advertising.  Because Virginia is a large state with a diverse racial and economic makeup, this is an ideal environment in which to ascertain these effects.  Moreover, the size and detail of our data set (over 2.6 million observations by street address) allow for extremely precise statistical inference.  Preliminary results confirm the regressivity result of several previous studies.  However, unlike most previous work, we have data on various lottery offerings rather than just a single game.  In further analyses, we expect to find that not only does lottery play constitute a regressive tax in levels, but also, residents of low income areas are less responsive to changing payoffs.  Thus, we expect to demonstrate that not only are lotteries regressive in levels but in changes as well.  Moreover, because Oster (2004) extrapolates out of sample this could call into question some prior results.

References:

Oster, E. 2004. "Are All Lotteries Regressive? Evidence from the Powerball." National Tax Journal, 57(2): 179-187.

Price, D. I. and E. S. Novak. 1999. "The Tax Incidence of Three Texas Lottery Games: Regressivity, Race, and Education." National Tax Journal, 52(4): 741-751.

Price, D. I. and E. S. Novak. 2000. "The Income Redistribution Effects of Texas State Lottery Games." Public Finance Review, 28(1): 82-92.

Rubenstein, R. and B. Scafidi. 2002. "Who Pays and Who Benefits? Examining the Distributional Consequences of the Georgia Lottery for Education." National Tax Journal, 55(2): 223-238.