Lottery Tax Rates Vary Greatly By State

April 2, 2012

With the Mega Millions jackpot recently reaching a record $540 million, Americans in 43 states and the District of Columbia were lining up to buy tickets for Friday's drawing.  Everyone knows that winners must choose between a lump sum payment and installment payments, but where you purchase your winning ticket also matters, due to state income and withholding taxes, say Joseph Henchman, Alex Raut and Kevin Duncan of the Tax Foundation.

  • While lottery winnings are subject to state income tax in most states, withholding tax varies from zero (California, Delaware, Pennsylvania, and the states with no state income tax) to over 12 percent in New York City.
  • Arizona and Maryland have withholding rates for non-residents, so an out-of-state winner who bought a ticket in those two states could face double withholding.

States rely heavily on lottery revenue, collecting an average of $58 per person in "profit" aside from any income tax collections.  While no government labels its lottery as a tax, lottery "profits" are an implicit tax.  After prizes have been awarded and operating costs have been covered, the remaining money is transferred to state coffers.  To the extent this revenue is used for general government purposes, it is a tax.  Further, because state lotteries pay out an average of only 60 percent of gross revenues in prizes (compared to about 90 percent for casino slot machines or table games), state-run lotteries are only viable as a monopoly, in conjunction with a ban on private lotteries.

Some argue that while it is a tax, it is a "voluntary" one since the revenue is handed over to the government enthusiastically.  But this argument confuses the purchase of a product with the payment of the tax on the product.  True, the purchase of the product is voluntary, but the tax portion of the ticket price is not, just as a sales tax is compulsory on the purchase of clothing or books.  The voluntary nature of the purchase does not make the tax any less of a tax.

Source: Joseph Henchman, Alex Raut and Kevin Duncan, "Lottery Tax Rates Vary Greatly By State," Tax Foundation, March 29, 2012.

For text:

http://www.taxfoundation.org/news/show/28083.html

 

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