CWERB - Special Report: Economic Impact of the Wisconsin Lottery

The Wisconsin Lottery is a state-run operation, authorized by a constitutional amendment in April 1988 with the objective of providing property tax relief. The Wisconsin Lottery was originally a separate state agency and in October 1992 became a part of the Wisconsin Gaming Commission. In July 1996 the Lottery became a division of the Department of Revenue.

Like other lotteries throughout the United States, the Wisconsin Lottery offers a product mix of scratch-off instant, pull-tab instant and on-line games with a variety of different game themes and play styles. As many as 30 to 40 instant ticket games are offered at any given time as well as 5 on-line games.

The Lottery markets its products through approximately 4200 retail outlets throughout the state, including convenience stores, grocery stores, gas stations, restaurants, liquor stores, and nonprofit organizations. Approximately 60% of retailers sell both on-line and instant tickets, 28% sell only instant tickets and 12% are nonprofit. Since 1995, for-profit retailers have received a 5.5% commission of total sales. In addition, nonprofit organizations may apply to sell pull tab tickets on a temporary basis and receive a higher commission rate of 30%.

Funding of the Lottery’s administrative operations comes from the sale of Lottery products. Total revenue from sales from Fiscal Year 1989 through Fiscal Year 1997 has been approximately $3.8 billion. Most of the Lottery’s revenue is spent on prizes to players and property tax relief. During Fiscal Year 1996, for example, 57% of revenue went to prizes and 31% to property tax relief. The remaining revenue was distributed among retailer commissions, on-line vendor fees, other administrative expenses and Department of Revenue and Department of Justice administrative costs (Figure 1).

The total economic impact of spending attributable to the Lottery in the State of Wisconsin depends on the assumptions that are made regarding these expenditures. In this paper, three scenarios are proposed, making assumptions of what would happen if the Lottery did not exist. Based on these three scenarios, the estimated economic impact ranges from $1 billion to $7.5 billion (Figure 2). The true answer lies somewhere in-between the highest and lowest estimates and requires a more in-depth study. However, these initial estimates serve to lay a foundation for further discussion regarding the economic benefit of spending attributable to the Wisconsin Lottery.

For every dollar spent by the Lottery on vendor contracts, on Lottery employees, and on retailer commissions, there are multiplier effects throughout the economy. Jobs are provided for people who work for subcontractors and directly for the Lottery staff. Retailers who sell Lottery products may use money from commissions to hire more workers or make investments in their business. For the purposes of this paper, a multiplier of two was used for Lottery expenditures based on published multipliers provided by the U.S. Department of Commerce (U.S. Department of Commerce, 1992).

Scenario A: Estimated Economic Impact $1 Billion

Scenario A assumes that if the Lottery did not exist most people would look for other entertainment venues and spend those dollars in-state. A total of $1 billion is the estimated economic impact of the Lottery in this scenario (Table 1). This includes total expenditures ($521 million) plus a multiplier effect of two.

A breakdown of expenditures in this scenario shows retailer commissions ($201 million), money paid to Wisconsin companies through Lottery contracts ($127 million), salaries and fringe benefits of Lottery employees ($44 million), and state taxes due to prizes and delinquencies owed to the state ($149 million)[1]. This conservative estimate excludes prizes and the amount available for property tax relief because it views prizes and property tax relief as transfers among households, which do not have a net impact on the economy.

Scenario B makes the same assumptions as Scenario A with the exception that it includes property tax relief in the estimation of economic impact. This scenario does not view property tax relief as a transfer among households, because not all property tax owners play the Wisconsin Lottery. If this assumption holds true, then the total amount set aside for property tax relief ($1.2 billion) between Fiscal Year 1989 through Fiscal Year 1997 also has a multiplier effect in the economy. In Scenario B, the total estimate for economic impact becomes $3.5 billion (Table 1).

Scenario C makes the assumption that if the Lottery did not exist most people would continue to play the Lottery and would probably leave the state to do so. The economic impact of Scenario C is approximately $7.5 billion (Table 1). This estimate includes Scenario B[2] in addition to the total amount of prizes that the Lottery has provided between Fiscal Year 1989 and Fiscal Year 1997 ($2.1 billion). A multiplier effect of two was applied to prizes in this scenario.

There have been few studies that have examined the economic impact of U.S. lotteries. A study was conducted which examined the economic impact of the Wisconsin Lottery in its earlier years (Grant Thornton, 1994). This study, which did not include Indian casinos, used assumptions similar to Scenario B. According to the study, the estimated economic impact of the Lottery in 1992 was $559 million.

There are data available which compare U.S. lotteries in terms of total sales, state personal income and government revenue generated from state lotteries (McQueen, 1997). Wisconsin, for example, ranked 25^th out of 37 states in terms of Fiscal Year 1996 lottery sales. The Wisconsin Lottery’s total sales as a percent of personal income were close to the national average of all U.S. lotteries as was government revenue as a percent of lottery sales.

It is difficult to assess the precise economic benefit of spending attributable to the Wisconsin Lottery without additional data. For example, one important piece of data needed is the amount of out-of-state players who cross the border to play the Wisconsin Lottery. This information would be important if the out-of-state players contributed significantly to total Lottery ticket sales. Also, prizes generated from multi-state games such as Powerball may contribute more in winnings within Wisconsin than in-state ticket sales for that game.

Player satisfaction must also be taken into account when placing value on the Wisconsin Lottery. The estimate for economic impact does not include the important immeasurable and intangible benefit attributable to players who enjoy playing the Lottery and who choose to spend their money on it. This observation may be even more important if Lottery sales are included and compared with entertainment spending. However, such comparisons are difficult due to lack of data on all gaming venues in Wisconsin.

Depending on the assumptions made, the total economic impact of the Wisconsin Lottery during Fiscal Years 1989-1997 is between $1 billion and $7.5 billion. The true answer likely lies somewhere between these estimates and would require a more in-depth study that examines spending by out-of-state players, competition from other gaming venues, such as Indian casinos, and the extent of competition for consumer dollars from other forms of entertainment.

It is noteworthy to point out that all of the $3.8 billion in revenue from Fiscal Year 1989 through Fiscal Year 1997 has originated from the sale of Lottery tickets. Thus, the Wisconsin Lottery does not receive money from the state’s general program fund. It is a self-sustaining operation reliant on its sales.

Among the immeasurable and intangible benefits of the Wisconsin Lottery is that it provides entertainment to those people who enjoy playing the Lottery. This is an important consideration when judging the value of the Lottery. Thus, because of those citizens who choose to spend their money on playing the Lottery and have fun doing so, the Lottery will continue to have value.

The authors would like to thank Dan Brodkey, Dennis Collier, Shirley Eckes-Meyer, David Peterson (Department of Revenue), Bruce Harville (Grant Thornton), William A. Strang (University of Wisconsin—Madison, School of Business) and Bill Zillmer (Wisconsin Department of Commerce) for their contributions to this paper.

Grant Thornton, “Economic Impact of Gaming in Wisconsin,” Madison, Wisconsin, March 1994.

McQueen, Patricia A. “Performance Barometers,” International Gaming & Wagering Business (IGWB), April 1997.

U.S. Department of Commerce, Economic and Statistics Administration, Bureau of Economic Analysis, “Regional Multipliers: A User Handbook for the Regional Input-Output Modeling System (RIMS II),” Washington, D.C., Second Edition, May 1992.

[1] The Lottery deducts from prizes money owed to the state such as delinquent taxes or child support. State income tax liability in this paper has been estimated for prizes using a tax rate of 6.93%.

[2] State taxes and state delinquencies were subtracted from Scenario B so as not to double count with prizes.