To Avoid Massive Tax Hikes, Privatize State Lotteries

August 30, 2012

As states continue to try to find ways to relieve the effects of slow economic growth, many are turning to the state lotteries. Specifically, states are looking into privatizing their state lotteries in hopes of increasing revenues. The hope is that the increased revenues will be able to stave off increases in taxes or further cuts to existing programs, say Leonard Gilroy and Harris Kenny of the Reason Foundation.

The idea is for states to sell contracts to private companies and allow them to create a business plan. At the forefront of this new trend is Illinois, which handed over its lottery to Northstar Lottery Group and got a $36 million boost in net lottery revenues. Additionally, New Jersey began to seek bidders for a contract that could generate $120 million in upfront revenues and higher net annual revenues.

There are several reasons why a privately run lottery is better:

  • First, private companies combine effective incentives, skills and technology to maximize the value of the lottery. This in turn allows for better products that attract new players.
  • Second, private companies have an incentive to maximize efficiency and profit to meet the demand, whereas publicly run lotteries don't focus on a bottom line.
  • Additionally, operations in the public sector are more expensive since they require higher employee benefit costs than those in the private sector.

Northstar Lottery Group gives a glimpse of the benefits of lottery privatization:

  • Despite falling short of its $825 million revenue target, it still returned $726 million to Illinois.
  • This is in contrast to the $690 million the state generated a year before in net revenue.
  • Furthermore, Northstar expanded ticket sales to over 1,000 new retailers, which increased the instant ticket sales by 27 percent.

Opponents argue that the government does a good enough job on its own. But given the highly lucrative nature of a lottery, it is true that there will always be a profit despite not being very efficient.

Furthermore, private lottery management focuses on the growth of net revenues. This is done by tying the manager's compensation to its performance of increasing lottery revenues -- as is the case with Northstar -- which gives further legitimacy to the argument that privately-run lottery systems have more incentives to grow.

Source: Leonard Gilroy and Harris Kenny, "To Avoid Massive Tax Hikes, Privatize State Lotteries," Real Clear Markets, August 23, 2012.

 

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