Alabama Lottery Proposal Analysis Term Paper
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benefit analysis of the proposed state lottery for Alabama. Assessing the costs and benefits of this lottery is challenging. The costs are ill-defined, and often lumped in with other gambling costs in general. Yet, lotteries are not the same thing as casino gambling or sports gambling. So there is a lack of hard data available. The benefits are clearer. These take into account the return on money already being spent by Alabamans out-of-state, and the multiplier effect of this new spending. For the state government, the lottery is a clear winner, but for the Alabama economy as a whole, the cost-benefit analysis looks less positive.
The state of Alabama is examining ways in which it can increase its revenues. One of the ideas that has been floated is that of a state-run lottery. In February 2016 a bill was passed that will allow the state to set-up a statewide vote on the issue in November (Cason, 2016). This is not the first time that the state's voters have been asked to consider the lottery idea -- the lottery concept was rejected in a 1999 referendum (Ibid.). Lotteries are utilized throughout the Western world as a mechanism for increasing government revenue. They are popular because the entity that runs the lottery has control over how much prize money is paid out, leaving the rest of the revenue as profit for the state to add to its revenues. If the state can access information from other public lotteries, it will have more than enough data with which to set payouts and prices to a level that is immediately profitable.
As the 1999 vote indicated, however, there is a substantial amount of opposition to the concept of a lottery. Gambling is generally considered to be a sin, or otherwise a moral failing. Thus, there is significant moral opposition to a lottery in the state of Alabama. Moreover, lotteries tend to be drain on the incomes of people, which can affect low income people who buy lottery tickets hoping to escape poverty, but end up deeper in poverty when they fail to win anything. Thus, there are social costs associated with a lottery, and these are sometimes significant. Indeed, lotteries often run contrary to state provisions against gambling, though there are certain differences between casino gambling and lotteries that are sometimes conflated by opponents. Nevertheless, that there are social costs associated with lotteries is a known fact (Rychlak, 1992).
The concept of a cost-benefit analysis is to gather and present information regarding a project. In particular government projects seek to balance a variety of different costs and benefits. Ideally, only projects with a positive net benefit are undertaken. There are numerous challenges associated with conducting a cost-benefit analysis. First, the data is always forward-looking, which means that it is speculative. With a lottery, there is probably a lot of data in existence from other governments, but that data might not be publicly-available. The reality is that a lot of what goes into a cost-benefit analysis is speculative. This means that great care must be undertaken to ensure that the data involved is of the best possible quality; otherwise the CBA will be a garbage-in, garbage-out scenario. In particular to public projects, there are many costs and benefits that are difficult to quantify. Where a corporation might look strictly at cash flows, a government has to take qualitative costs and benefits into account, and it can be difficult to convert these to hard numbers (Boardman et al., 2011). The objective of this particular analysis is not to make the decision, but rather to provide the necessary understanding cost-benefit decisions involved with the Alabama lottery concept for politicians and the citizens of Alabama to make an informed decision on the matter at such time as they are asked to vote on it.
The lottery idea has been proposed because it has been demonstrated to deliver an intriguing set of benefits to many other governments, both in the U.S. and around the world. Typically lottery revenue is allocated to a variety of state budget items. However, governments will often frame this money as being for education, or other popular expenditure, as a pragmatic matter of framing the trade-off in such a way as to increase lottery support (Pierce & Miller, 1999).
Studies have shown that around 29% of Powerball lottery revenue goes to education, for example (Gandel, 2016). This figure is in line with the experiences of other jurisdictions -- publicly available figures from the Province of Alberta show around one-fifth of lottery funding goes to education, so the relatively low number is not limited to the U.S. (ALF, 2016).
If education is just one category of expenditure, accounting for a bit less than one-third of lottery profits, that raises the question of what the other expenditures are. Lottery funds are used for a variety of other public expenditures, and can cover a wide range of social programs and other government spending. The use of education as a means of justifying lotteries is common in many jurisdictions, and some have speculated that perhaps this is because education is more acceptable to people than general government expenditures, given that many view government as bloated and wasteful (Allen, 1991). Ultimately, lottery funds are a new revenue source, one that allows the state to withhold tax increases, or even lower taxes, while still meeting balancing the state budget (Allen,1991).
Thus, the reality of the trade-off is that the state of Alabama can avoid tax increases, and can also avoid program cuts, while maintaining its budget. The state has chronic issues with respect to funding critical services, and has been looking for new revenue ideas for quite some time (Cason, 2016). Raising taxes is at odds with the ideology of the Republican-led government, so the lottery represents an opportunity for a new revenue source to be introduced to shore up the state's budget without an increase in taxes, and as such it is politically expedient.
There is no particular value to be ascribed to the political benefits of the lottery, however. The only benefits that should be taken into account for this analysis are the revenues that the state will receive. Indeed, the decision on how to spend those revenues is actually incremental to the decision to approve the lottery. The state government is free to use that money however it sees fit. How it sells the idea of the lottery to the public is a separate matter altogether. Given that it is not known how those funds will be used, it is difficult to speculate on the benefits. For example, there are benefits to education if that money is spent on education. But at this point, regardless of rhetoric, it is unclear if education would avoid cuts if the lottery is approved.
This raises the question of whether there are any benefits at all to the lottery. The thinking is this. At present, the people who would spend money on this lottery are Alabamans. This is money from the state, that goes from the people to the state government, to be cycled back into the economy through a variety of different programs and expenditures. There are going to be transaction costs associated with running the lottery, so the funds available to the state will be lower than the funds that are presently in the hands of Alabamans that would be spent on the lottery.
One issue of consideration is that Alabamans probably already gamble, when they go out of state. Even if one assumes that the market for lottery gambling is distinct from the market for other types of gambling (casino, sports betting, racetrack, etc.), most Alabamans live within two hours of a state that allows lotteries (Florida, Georgia or Tennessee). Thus, there is likely to be a net loss to the state with cross-border lottery shopping. Studies have shown that even when a state does offer lottery, there is some loss when other states offer lotteries perceived as superior (Garrett & Marsh, 2002). Thus, Alabama is already losing out on lottery revenue. This is especially noticeable during major lottery events like the $1.5 billion Powerball, when Alabamans traveled across state lines in numbers in order to buy tickets.
The group Tax Foundation estimates that in 2010 states earned $17 billion from lotteries (Hansen, 2010). This estimate is reasonable considering that Garrett & Marsh (2002) came up with a figure of around $11 billion in 2001. Today's number will doubtless be higher, perhaps conservatively inflated to around $20 billion. In the Garret & Marsh study, they found that Kansas lost around $10.4 million dollars of revenue in cross-border lottery shopping, and this was after Kansas institute its own lottery. In Alabama, the figure is likely to be the entire lottery expenditure. For Kansas this averaged around $56.79. Alabama's major cities are close to, but do not abut, lottery states. Therefore, the figure will probably be lower. A reasonable estimate, however, is that the $56.79 figure is still…
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