Lottery tax windfalls, state-level fiscal policy, and consumption

We find that lottery tax windfalls finance higher state-government expenditures on supplemental security income that increase consumption, but only during bust periods. Wealth transfers from lottery winners to low income households enable fiscal policy to stabilize consumption during bust periods. © 2015 Elsevier B.V. All rights reserved. Measuring the impact of government fiscal policy on consumption is a challenge since fiscal policy is endogenous with respect to economic conditions. We utilize 147 multi-state PowerBall and MegaMillions lottery prices between 1998 to 2009 to circumvent this endogeneity.1 ✩ We thank Phillip Dybvig and Tracy Wang as well as seminar participants at Claremont McKenna College, Michigan State University, and the South-West University of Finance in Economics (Chengdu) for their helpful comments and suggestions. ∗ Corresponding author. E-mail addresses: [email protected] (Z. Da), [email protected] (M. Warachka), [email protected] (H. Yun). 1 Approximately 25% of lottery revenue is collected by state governments as a sales tax. In contrast to this stable source of revenue, 60%of lottery revenue becomes http://dx.doi.org/10.1016/j.econlet.2015.01.028 0165-1765/© 2015 Elsevier B.V. All rights reserved. Our study of lottery tax windfalls examines the possibility that the relation between fiscal policy and consumption depends on the state of the economy (Parker, 2011) by exploiting heterogeneity in consumption, economic conditions, and fiscal policy across states. We find evidence of a supplemental security income (SSI) channel inwhich lottery taxwindfalls enable state governments to increase SSI payments during bust periods that increase consumption. SSI payments are discretionary expenditures that target low income households. Althoughminimumpayments are required by the federal government, the amount of these supplemental payments and their eligibility requirements are decided by individual states. prize money that is the basis of a lottery tax windfall. Operating expenses account for the remaining 15% of lottery revenue. 10 Z. Da et al. / Economics Letters 129 (2015) 9–12 Table 1 State characteristics. This table reports each state’s effective tax rate on lottery winnings and average consumption growth based on retail sales. Supplemental security income (SSI) expenditures as a percentage of total expenditures are also reported. ACIR is a variable between zero and ten that increases with the stringency of a state’s balanced budget amendment, while the deposit (DEP.) and withdrawal (WITH.) rules of state-level budget stabilization funds are ranked between one and five. A state is fiscally constrained unless its ACIR index is strictly below two and the sum of these rule rankings is strictly below three. State Lottery Lottery tax Effective tax rate Consumption growth SSI spending ACIR index DEP. rules WITH. rules Fiscally constrained