Another great year for the lottery down in Tennessee :

The Tennessee Lottery has had another record fiscal year, with a return of $284.2 million to education, bringing the total raised since inception to over $919 million. Gross sales for the fiscal year, which ended June 30, were over $1 billion—gross sales since inception are over $3.3 billion.

Why is Tennessee one of many states running a gambling operation? For the children, of course! After paying out prizes, a percentage to retailers, and operating costs, the tidy profit is available for education funding. Sounds like a great deal -- keep taxes low, provide money for students, make a few people fabulously rich, and give the rest of the players a momentary thrill for only a dollar or two. It's not like anyone is being forced to buy tickets, after all, and clearly the money is going to a good cause. What's not to like?

Tennessee is actually being fairly responsible about allocating the lottery funds in line with their intended purpose: During the past fiscal year, Lottery funds were used to assist nearly 60,000 students at higher education institutions in the state, to fund 290 Pre-K classes, and to fund grants to 126 after-school programs. While many of the 42 states with lotteries market them as strengthening schools, only 24 earmark a portion of proceeds for education. A CSM article reported mixed results for funding education via lotteries:

Many times, says the Rev. Richard McGowan, a professor at the Carroll School of Management at Boston College, "you're really allowing the state to spend the money in other places rather than the schools. It's not a bonus for the schools but a substitution."

[...] The study demonstrated that, after Ohio's 1974 promise to devote all lottery winnings to public schools, state spending on education dropped from 42 percent of its total budget in 1973 to 29 percent in 1994.

Sometimes states really do maintain their previous education funding and use lottery winnings to provide additional money directed towards specific programs such as scholarships; sometimes states use the lottery cash to replace previous funding and either cut taxes or spend the additional money elsewhere.

Suppose the money is essential for education: is a lottery the most fiscally responsible and efficient way to secure the funds? Probably not .

First, high taxes on specific products violate the principal tenet of sound tax policy, what economists call "neutrality."

Second, good tax policy requires taxes that easily understood. Taxpayers should know if a product is taxed and how much. Lotteries allow politicians to mislead taxpayers about the amount of tax they're paying.

Third, many studies have shown lotteries to be regressive, meaning low-income people spend more on lotteries as a percentage of their income.

Lotteries might even be a bad deal for retailers; if customers spend their cash on low-margin tickets (most states pay retailers around 7%) instead of high-margin snacks/drinks, the stores could lose more money than selling tickets provides in increased traffic. And this is before even discussing the costs of compulsive gambling.

If more money is required for education, states should either cut spending from less essential areas or raise taxes to increase income. A lottery is not an ideal solution. It takes money from people least able to afford losing it and either gifts the state with extra "free" money (bloating the government while allowing politicians to claim they aren't raising taxes) or, in the unlikely event that state spending is held relatively constant, shifts the tax burden from those with more money to those with less (precisely opposite of the intent of our progressive income tax system).

Of course, none of the states are likely to drop the lottery anytime soon. As the Tennessee article illustrates, they're quite happy with the results.