Skip to content
Quick Start for:


GG 26
Increase Lottery Revenues

Summary

To increase their lottery revenues, many states participate in multi-state games, which can offer large base prizes and “rollover” jackpots that can grow into the hundreds of millions of dollars, generating nationwide interest and increasing sales. Texas does not participate in a multi-state lottery and is losing revenues to bordering states that do. The Texas Lottery Commission should join a multi-state lottery game.

Background

The Texas Lottery has been in operation since 1992. It offers both instant tickets and online games. Players who purchase instant tickets scratch off a latex covering to see if they have “instantly” won a prize. Online games require players to purchase tickets in advance from a retailer via a computer terminal; live drawings are held periodically to determine winning numbers. Texas’ current online games include Lotto Texas, Texas Two-Step, Pick 3 and Cash 5. (Texas Two Step was introduced in 2001 to replace Texas Million, which suffered from declining sales.)

Lotteries are self-supporting. Ticket sales cover all lottery expenses and prize payouts. State revenues from the Texas Lottery amount to about 32 percent of sales. In fiscal 2002, these revenues totaled $956 million (Exhibit 1).[1] Revenues from the lottery are appropriated to the Foundation School Fund. Unclaimed prize money up to $40 million each biennium is deposited in an account for the UTMB Teaching Hospital; any unclaimed prize money over that amount is given to the Tertiary Care Facility account.[2]

Exhibit 1
Lottery Ticket Sales, Fiscal 2002

Texas Lottery Game Ticket Sales % of Total Sales
Lotto Texas $ 593,992,551 20%
Texas Two Step $ 82,979,431 3%
Pick 3 $ 236,420,695 8%
Cash 5 $ 121,671,252 4%
Instant Tickets $ 1,931,209,488 65%
Total Sales $ 2,966,273,417 100%
Total State Revenue $ 956,587,389 32%
Source: Texas Lottery Commission, Unaudited Sales FY2002.

The Texas Lottery’s sales rose continuously until 1997, when a legislative reduction in prize payouts and other factors caused a sharp decline in sales. The Lottery Commission persuaded the 1999 Legislature to reinstate prize payouts to their previous levels. Since that time, lottery sales have increased modestly but in 2001 still were almost $1 billion below their previous annual high.

The Texas Lottery attempts to continuously improve and change its games to combat “player fatigue,” a loss of interest reflected in declining sales. The lottery has replaced struggling games with new ones; increased the Lotto Texas matrix—the pool of numbers from which winning ones are selected—to increase jackpot sizes; and added additional draws to provide more opportunities to play.

Many states facing similar struggles to maintain sales have collaborated to host multi-state games, which provide a larger player base, generate larger jackpots and thus increase interest in the game. Texas law is silent as to whether the lottery may participate in a multi-jurisdictional game.

Multi-state lotteries

Online lotteries are pari-mutuel in design; that is, the number of players participating determines the size of the prizes that can be offered. Multi-state lotteries were created by smaller states that lack the player bases needed to generate large jackpots on their own. Each state pays a portion of the jackpot based on sales in that state, and retains its portion of revenues earned. Multi-state lotteries usually offer larger starting jackpots than most individual state lotteries. Online game jackpots continue to grow after every drawing that fails to produce a winning number, and multi-state “rollover” jackpots can accumulate into the hundreds of millions of dollars.

Several multi-state lotteries operate in the U.S., but the best known are Powerball and Mega Millions (formerly the Big Game) (Exhibit 2). Powerball is offered by 23 states and Washington D.C., with a combined total population of 68.3 million. It offers twice-weekly draws with base jackpots starting at $10 million and has produced jackpots as high as $295.7 million.[3] Mega Millions is offered by ten states with a total population of 93.9 million. Base jackpots begin at $10 million and have risen as high as $363 million.[4] In comparison, the Lotto Texas base jackpot is $4 million and has risen as high as $85 million.[5]

Exhibit 2
Powerball and Mega Millions

Game Participating States Minimum Jackpot Largest Jackpot Player Base
Powerball Arizona, Colorado, Connecticut, Washington, D.C., Delaware, Indiana, Idaho, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, West Virginia, Wisconsin $10 million $295.7 million 68.3 million
Mega Millions Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio, Virginia and Washington $10 million $360 million 93.9 million
Sources: State lottery Web sites and the Texas Lottery Commission.

States that have joined multi-state lotteries have enjoyed increases in overall revenues ranging from 8 to 78 percent. A multi-state lottery will have a negative effect on other online games offered by the state, as players switch their money to the new game. The large jackpots, however, attract new players and encourage players to spend more, and in practice more than offset any loss to current games (Exhibit 3).

Exhibit 3
Revenue Changes Due to the Introduction of a Multi-state Lottery Game

  Pick 3 Cash 5 Lotto Overall Change Due to Multi-state Lottery
Arizona N/A -23.0% -41.0% + 8.0%
Georgia +6.6% - 0.9% -18.0% + 7.0%
Louisiana +1.0% N/A -14.0% +78.0%
Michigan +5.0% -18.0% -24.0% +12.0%
New Jersey -1.0% -17.0% -32.0% +14.0%
Sources: Comptroller survey and Multi-State Lottery Association.

Both Powerball and Mega Millions have rules on how unclaimed prize money should be distributed that conflict with current Texas statutes regarding the disbursement of these funds. This issue would have to be resolved before Texas could join a multi-state lottery.

Revenue loss to border states

Texas is losing revenue to two of its border states, New Mexico and Louisiana, which participate in Powerball. The popularity of Powerball has increased “border play,” play by out-of-state consumers who cross the border to buy lottery tickets, in New Mexico and Louisiana. Such play often occurs when a neighboring state offers larger jackpots that those available in the player’s home state.

A comparison of interior-county versus border-county sales in New Mexico and Louisiana illustrates this trend. Exhibit 4 shows average sales per vendor for each draw in interior versus border counties for two recent Powerball drawings, one relatively small ($10 million) and another of the size achievable only by multi-state lotteries ($280 million).

Exhibit 4
Average Draw Sales per Vendor

Average Draw Sales New Mexico - Interior New Mexico - Border Louisiana - Interior Louisiana - Border
$10M Jackpot $ 3,769 $ 2,909 $10,981 $ 9,180
$280M Jackpot $71,614 $97,899 $59,009 $196,801
Percentage Increase 1,800% 3,265% 437% 2,044%
Source: GTECH Lottery Marketing, Powerball Border Analysis, February 12, 2002.

In both states, border counties saw a significantly greater increase in sales than did interior counties.

When individual cities are ranked by their percentage increase in sales, it is easy to see how important border play can be. In New Mexico, 16 of the 20 cities experiencing the highest increase in sales are situated on or near the Texas border; in Louisiana, 17 of the top 20 are on the border (Exhibit 5).

Exhibit 5
20 Cities Experiencing the Greatest Percentage Increase in Sales

Recommendation

State law should be amended to require the Texas Lottery Commission to participate in a multi-jurisdictional lottery.

Participation in a multi-jurisdictional game would increase lottery revenue to the state of Texas. While a multi-state game would decrease revenues to some existing Texas online games, the revenues from the multi-state game would more than make up for any loss.

When choosing which multi-state lottery to join, the Texas Lottery Commission should consider the size of its player base, the days on which the draws occur, the size of its jackpots and the participation of adjoining states.

Fiscal Impact

Texas sales from a multi-state lottery game are estimated at about $435.6 million annually. The state’s revenues would be about $147 million. Joining a multi-state lottery would suppress sales of several other online games. In addition, increased lottery spending would reduce the amount of annual state sales tax collections by $15.6 million. Assuming a start date of January 1, 2004, this recommendation should result in a net increase to state revenues of $37.5 million in the first year and $64 million in each of the following years. The Lottery Commission would need to be appropriated funds to pay retailers and the lottery vendor, and for agency expenses that result from the implementation of a multi-state game. The dollar amount is based on a set percentage of game sales.

Because other states participating in a multi-state lottery must approve Texas’ entry into the game, any appropriation of the expected gains must be contingent upon the state’s acceptance into the game.

Fiscal Year Gain to General Revenue
2004 $37,500,000
2005 $64,000,000
2006 $64,000,000
2007 $64,000,000
2008 $64,000,000


Endnotes

[1]Texas Lottery Commission, “YTD Sales Comparisons by Product,” Austin, Texas; and Texas Lottery Commission, “Texas Lottery Commission Transfers to the State,” Austin, Texas.

[2]Tex. Gov’t Code Ann. § 466.408 (Vernon Supp. 2001).

[3]Texas Lottery Commission, Self-Evaluation Report to the Texas Sunset Advisory Commission (Austin, Texas, August 2001), p. 126; and Multi-state Lottery Association, “How to Play Powerball,” http://www.musl.com/pbhowtoplay.shtm. (Last visited September 17, 2002.)

[4]Mega Millions, “About us,” www.megamillions.com/aboutus/lottery-faq.asp, (Last visited October 7, 2002); and e-mail from the Georgia Lottery Corporation, March 8, 2002.

[5]Kathryn A. Wolfe, “51 Million Reasons to Celebrate,” Houston Chronicle (March 17, 2001), p. A-1.