The Right Opinion

Powerball's Other Big Winner: The Taxman

By Jeff Jacoby · Dec. 10, 2012

There may have been two winning tickets for that $587.5 million Powerball jackpot last month, but there were three big winners.

Mark and Cindy Hill of Dearborn, Mo., opted to take their half of the big prize in a lump sum of $193,750,000, and it's likely that whoever bought the other winning ticket in Fountain Hills, Ariz., will do the same thing. But a whopping share of the jackpot will go to a greedy uninvited partner who didn't even bother to play: Uncle Sam.

The Internal Revenue Service treats lottery winnings as ordinary income, and a nine-figure income is subject to the highest federal tax rate of 35 percent. That means the first thing the Hills had to do after landing their big prize was surrender $67 million of it to the US Treasury. The lucky owner(s) of the Arizona ticket will fork over the same amount. There are also state taxes to kiss goodbye. In Missouri, where the income tax rate is 4 percent, the Hills will be charged almost $8 million; the Arizona winner will pay at least 5 percent: nearly $10 million.

Admittedly, few of us will lie awake at night in despair over the Powerball winners' tax bill. Even after rendering unto Caesar what is Ceasar's, the big winners will clear more than $110 million each. Money may not buy happiness, but $110 million can certainly buy a reasonable facsimile of it. “I think we're going to have a pretty good Christmas,” said Cindy Hill.

Yet the taxman doesn't just take a bite out of the biggest winners. The IRS helps itself to a hefty chunk of every smaller jackpot too. Three elderly gents in Oklahoma who bought a winning $1 million ticket each took home $236,667 after taxes, the Tulsa World reported last week. Sure, that's a lot better than throwing away a losing ticket. But when the government sells you a chance to win a million dollars that actually pays only 700 grand, it hasn't really sold you a chance to win a million dollars, has it? The tax bill of the happy new multimillionaires in Missouri and Arizona may not inspire much sympathy. But it's a easy to imagine the difference an extra $100,000 might have made to the families of those three senior citizens.

Income taxes paid on lottery prizes are only the tip of the iceberg. The billions netted by the IRS from Powerball, MegaMillions, and their forerunners over the years are dwarfed by the tens of billions raked in by state lotteries every year. In 2011-2012, the nation's 44 state lottery commissions cleared $60.8 billion in their ticket sales; according to the Los Angeles Times, 32 of those states broke their previous sales records. Ticket proceeds nationally were up 8.7 percent from the year before. But unlike private casinos, where payouts of 90 percent or more at slot machines and other games are common, state lotteries typically pay out an average of only 60 percent of their revenue in prizes. In 2010, the Tax Foundation calculated the average nationwide tax rate represented by lottery tickets at a steep 43.7 percent – not including those aforementioned taxes on winnings.

It's a rotten deal for players, only partly mitigated by the fact that no one is forced to buy a lottery ticket. Private lotteries are illegal. If they weren't, the state-run ripoffs wouldn't stand a chance. And what excuse is there for Powerball to be a government cartel? There may be a few enterprises that are practical to operate only as a government-owned or -licensed monopoly – highways and fire departments, for example – but lotteries certainly aren't one of them.

This isn't merely an academic quibble. State lotteries prey with particular pitilessness on the poor. Indiana University researcher John Mikesell observed in 1994 that lottery sales tended to rise with unemployment rates; a more recent analysis in Connecticut found that residents of the state's poorest cities accounted for a disproportionately large share of lottery customers. The “cruel truth” about state lotteries, write three Business Insider editors (in a piece citing these and many other studies), is not just that people who can least afford to buy tickets are the likeliest to buy them. It is that the government, spending public funds, “goes out of its way to tell them it is a good idea.”

By all means, be happy for the lucky folks who bought those winning Powerball tickets. Just don't make the mistake of thinking that state lotteries are about them. Lotteries are designed to enrich the government. The really big winner is always the tax collector.

(Jeff Jacoby is a columnist for The Boston Globe. His website is www.JeffJacoby.com).

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15 Comments

Howard Last in Wyoming said:

I can't understand why anyone would buy a ticket for the powerball lottery. The chances of winning are astronomical, almost as large as the national debt. They would do a lot better buying a ticket for a lottery of a million. The change to their life style would not be that much different and the odds are several orders of magnitude less. Instead of buying a lottery ticket join the next Bernie Madoff scheme that comes along

Monday, December 10, 2012 at 1:13 AM

Anton D Rehling in Olympia, WA replied:

people buy into the fraud for the same reason they buy into Obama, Hope.
Hope that they will not have to work for a living and hope someone else will pay their way through life.

Monday, December 10, 2012 at 12:30 PM

enemaofthestatistquo in Monroe, GA said:

The Lottery is a game of Chance and Probablity, It has little to do with supply and demand, because if you have the price of a ticket the machine will generate your chance. The odds of winning are astronomical & fluctuate on the order of 50million to one on all games because the range of numbers is the determining factor- for ticket machine generated. Scratch off preprints, which are also not supply and demand, but chance and probability because when tickets run out there is always another preprint scratch off game available to buy. So what I don't understand & I think any government sponsored gaming should be priced at is no more than $1 per chance/ticket. Also, the jackpot on draw games should be announced once and remain the same amount until after the next drawing and only be added to should there be no jackpot winner. Powerball now is $2 per chance and some scratch games in GA for as little as $5000 wins are $2,3,4,5, even $10 for $100,000. That is despicable , When the matter was voted upon the slogan was "most fun you can have for a dollar" and everyone was led to believe the price would remain at that price for all games.

Monday, December 10, 2012 at 4:26 AM

Tod the tool guy in brooklyn ny said:

Tax collectors were always despised and loathed. In Jesus' time, they were listed as the dreggs of society, along with whoremongers and harlots! God uses the IRS. Christ said,"Render to Caesar what is Caesar's, and render to God, what is the Lords." The 16th amendment of Socialist Woodrow Wilson allows Uncle Sam to confiscate income. "Can you say REPEAL?"

Monday, December 10, 2012 at 6:27 AM

Alvis in Plant City, Florida replied:

99.99% of all lottery players know absolutely nothing about federal income taxes. They relinguish withholding not knowing that the lottery is not operating under federal jurisdiction. They don't know that as a non-federal individual you are not obligated or made liable for any tax in the Internal Revenue Code. They just listen to other people which such information is nothing but hearsay. If they would just study the plain language of the Code and the Regulations, they could use a million of that lottery win and challenge the lottery on withholding and win back every cent withheld and then some for court costs. But no, most if nearly all lottery winners won't know the law and will give up a substantial sum to the corrupt IRS and a corrupt Federal Government. You must be "made liable" for any tax to owe it and lottery players of the 43 states of the Union never owe the tax.

Sunday, May 19, 2013 at 9:29 AM

Tom Mumford in Manchester, Connecticut USA said:

Lotteries: a tax on people that are not good at math.

Monday, December 10, 2012 at 6:57 AM

A Voice in the Wilderness . . . in Claremont, CA replied:

I've been a little blunter - a tax on the stupid.

Tuesday, December 11, 2012 at 8:20 PM

Carol in SC said:

You say, "the people who can least afford to buy the tickets are the likeliest to buy them." I totally agree with that statement. Not only is it correct, but they are probably also subsidized in some way by taxpayer dollars, which means we (taxpayers) are also paying for those lottery tickets.
I know of a person that receives nearly $800 per month SSD payments for "mental issues", deposited to her "pay card". This money is primarily spent on lottery tickets and cigarettes. The person works as a waitress and makes very good money - which, of course is under-reported to Social Security, lest they lose or lower the amount they receive.
The "safety nets" are no longer sifting through applicants, meant to catch and hold people who may otherwise slip into the bleakest of situations. Instead, they are like a basketball net – easily stretchable, and open ended.

Monday, December 10, 2012 at 8:48 AM

Wayne in Hinesville, GA replied:

Carol, I have to echo what you said about the lady and the lottery tickets. I stopped at a converience store the other day and the lady in front of me bought $50 worth of lottery tickets. She then went to her car which had four small children ranging in ages from approx. 1 to 7 years old. The kids were dirty and their clothes were ragged. I would almost bet she was on welfare and paying for the tickets with taxpayer money. PARASITES!

Monday, December 10, 2012 at 9:14 AM

READY4ACHANGE in ILLINOIS replied:

So, does that mean that if one of these parasites win the lottery, we the taxpayers will get a check written to us? Or will the winner now state it is "her" money?? It is funny how we can have "MY" money and "THEIR" (taxpayer) money.

Monday, December 10, 2012 at 11:28 AM

wjm in Colorado said:

I play the lightning lottery. It costs nothing, and I have a better chance of winning. Not being a devil worshiper, Democrat, or islamist, if struck, my reward is Heaven. That is money well not spent.

Monday, December 10, 2012 at 12:26 PM

Tapdaddy in Indiana said:

The annoying part of lotteries to me is those astronomically huge winning pots. All they do is reinforce the idea, that illiterate people have concerning the government and money, the government just needs to print more money. It don't matter.

Monday, December 10, 2012 at 3:34 PM

enemaofthestatistquo in Monroe, GA replied:

Here in GA, several years past the local $million Lotto, (before affiliating with Powerball & MegaMillions), would start @$2M & grow as tickets were sold,. One period over several weeks, the Jackpot was won every week so the Lotto stayed at $2m for several consecutive weeks,. I thought that was just fine, many people having spent a dollar per ticket had suddenly, had a life changing occurrence. In the local major Atlanta newspaper there is a column called the Vent where people may call/write a short cultural/political Rant/Vent. One Person actually wrote that people should quit winning so the Jackpot could build. Maybe they wewe just ticked that the Hope scholarship funds & education appropriations were not getting adequate funding from the looto players and taxes would be raised (like that wouldn't happen anyway, OR the Person thought was worried should they win the Jackpot would be too small. Sidebar- some years ago the Lotto(s) expanded their numbers which caused the probability of winning to become even more astronomical, since my personal luck is so bad, I figured my chances of winning actually improved.

Monday, December 10, 2012 at 9:14 PM

pete in CA said:

A fine is a tax for doing bad.
A tax is a fine for doing well.
You just can't win!

Monday, December 10, 2012 at 5:55 PM

Lyna in AL said:

Once read that while the art of taxation is "maximum feathers with the minimum squawk" the art of the lottery is to persuade the pigeon to pluck himself and present his feathers on a silver platter. Or, as noted before, a lottery is a tax on math illiterates.

Monday, December 10, 2012 at 10:01 PM