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Gambling with State Budgets: Legalized Sports Betting and Lost Lottery Revenue

Author

Listed:
  • Coombs, Kyle

    (Vassar College)

  • Madonia, Greg

    (California State University, Chico)

  • Nencka, Peter

    (Miami University)

  • Smith, Austin

    (Bates College)

Abstract

Legislators often justify legalizing controversial markets, such as sports betting, by citing the potential for new tax revenue to fund popular public programs. However, new revenue from sports betting may cannibalize existing revenue from state-run lotteries, undermining a key rationale for legalization. We study the staggered state-by-state legalization of sports betting following 2018 to examine these substitution effects. Using a difference-in-differences framework applied to state lottery data, we estimate the causal impact of legalization on lottery revenues. We find that sports betting and lotteries are substitutes, with legalization leading to a persistent 10–13% decline in lottery revenue. Because the state captures a much smaller share of each dollar spent on sports betting than on lottery purchases, we estimate a negative—though imprecise—effect on combined state revenue from these two sources.

Suggested Citation

  • Coombs, Kyle & Madonia, Greg & Nencka, Peter & Smith, Austin, 2026. "Gambling with State Budgets: Legalized Sports Betting and Lost Lottery Revenue," IZA Discussion Papers 18724, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18724
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    Keywords

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    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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