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Local price variation and the tax incidence of state lotteries

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  • Thomas A. Garrett
  • Natalia Kolesnikova

Abstract

This paper explores the seemingly innocuous practice of ignoring the local price vector in empirical models of lottery demand. We argue using consumer theory that local consumption prices should be included and that the failure to consider local prices results in income elasticity of lottery demand estimates that are biased downward. Using a sample of MSAs, we find that, in accordance with our theory, local prices are a significant determinant of lottery sales and the income elasticity of demand for lotteries is greater in magnitude when the local price vector is considered. The degree of lottery regressivity is thus overstated when local prices are omitted. One notable finding is that the tax incidence of lotteries changes from regressive to progressive once the local price vector is included.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-035.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-035

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Keywords: Gambling industry ; Taxation;

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  1. Kearney, Melissa Schettini, 2005. "State lotteries and consumer behavior," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2269-2299, December.
  2. Alm, James & McKee, Michael J. & Skidmore, Mark, 1993. "Fiscal Pressure, Tax Competition, and the Introduction of State Lotteries," National Tax Journal, National Tax Association, vol. 46(4), pages 463-76, December.
  3. James Alm, 2004. "Introduction," Review of Economics of the Household, Springer, vol. 2(3), pages 231-235, 09.
  4. Black, Dan A. & Kolesnikova, Natalia & Sanders, Seth G. & Taylor, Lowell J., 2011. "Are Children "Normal"?," IZA Discussion Papers 5959, Institute for the Study of Labor (IZA).
  5. Mary O. Borg & Paul M. Mason & Stephen L. Shapiro, 1993. "The Cross Effects of Lottery Taxes On Alternative State Tax Revenue," Public Finance Review, , vol. 21(2), pages 123-140, April.
  6. Philip J. Cook & Charles T. Clotfelter, 1991. "The Peculiar Scale Economies of Lotto," NBER Working Papers 3766, National Bureau of Economic Research, Inc.
  7. Garrett, Thomas A. & Marsh, Thomas L., 2002. "The revenue impacts of cross-border lottery shopping in the presence of spatial autocorrelation," Regional Science and Urban Economics, Elsevier, vol. 32(4), pages 501-519, July.
  8. Charles T. Clotfelter & Philip J. Cook, 1989. "Selling Hope: State Lotteries in America," NBER Books, National Bureau of Economic Research, Inc, number clot89-1, June.
  9. Dan Black & Natalia Kolesnikova & Lowell Taylor, 2009. "Earnings Functions When Wages and Prices Vary by Location," Journal of Labor Economics, University of Chicago Press, vol. 27(1), pages 21-47, 01.
  10. Quiggin, John, 1991. "On the Optimal Design of Lotteries," Economica, London School of Economics and Political Science, vol. 58(229), pages 1-16, February.
  11. Mikesell, John L., 1994. "State Lottery Sales and Economic Activity," National Tax Journal, National Tax Association, vol. 47(1), pages 165-71, March.
  12. Tosun, Mehmet Serkan & Skidmore, Mark, 2004. "Interstate Competition and State Lottery Revenues," National Tax Journal, National Tax Association, vol. 57(2), pages 163-78, June.
  13. Stuart A. Gabriel & Stuart S. Rosenthal, 2004. "Quality of the Business Environment Versus Quality of Life: Do Firms and Households Like the Same Cities?," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 438-444, February.
  14. Garrett, Thomas A. & Coughlin, Cletus C., 2009. "Inter–temporal Differences in the Income Elasticity of Demand for Lottery Tickets," National Tax Journal, National Tax Association, vol. 62(1), pages 77-99, March.
  15. Charles T. Clotfelter & Philip J. Cook, 1987. "Implicit Taxation in Lottery Finance," NBER Working Papers 2246, National Bureau of Economic Research, Inc.
  16. Jonathan Guryan & Melissa S. Kearney, 2008. "Gambling at Lucky Stores: Empirical Evidence from State Lottery Sales," American Economic Review, American Economic Association, vol. 98(1), pages 458-73, March.
  17. Richard Cebula & Christopher Coombs, 2008. "Recent Evidence on Factors Influencing the Female Labor Force Participation Rate," Journal of Labor Research, Springer, vol. 29(3), pages 272-284, September.
  18. Garrett, Thomas A. & Sobel, Russell S., 1999. "Gamblers favor skewness, not risk: Further evidence from United States' lottery games," Economics Letters, Elsevier, vol. 63(1), pages 85-90, April.
  19. Farrell, Lisa & Morgenroth, Edgar & Walker, Ian, 1999. " A Time Series Analysis of U.K. Lottery Sales: Long and Short Run Price Elasticities," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 513-26, November.
  20. Forrest, David & Gulley, O. David & Simmons, Robert, 2000. "Elasticity of Demand for UK National Lottery Tickets," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 853-64, December.
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