Texas Lottery’s payoff only covers five days of school
AUSTIN — Contrary to popular belief, the 32-year-old Texas Lottery never paid much of the tab for the state’s public schools.
But nowadays, on a percentage basis, the state-run games of chance are underwriting even less of public education’s cost — even though the lottery continues to gain popularity.
The lottery transfers a little more than $2 billion a year to Texas schools, which — after state, local and federal funds are tallied — is enough to pay for about five days of a typical 180day school year.
That’s down from about 10 days’ worth more than a quartercentury ago, after the voterblessed state lottery began operating at full steam.
“It doesn’t even get us to Labor Day,” said Dick Lavine, a tax policy expert at the liberal-leaning Every Texan think tank who analyzed revenue proposals for the state House Research Organization when the lottery was approved in 1991.
Texas sold its first lottery ticket the following year.
Ever since, the lottery has delivered to state coffers a steady — if static, after inflation is considered — chunk of money. Ticket sales, meanwhile, grew to a record $8.7 billion in the fiscal year that ended this past Aug. 31 — exceeding the rate of inflation and reflecting some of the state’s rapid population growth as well as the games’ enduring popularity.
At the time of the lottery’s creation, some — though not all — politicians touted it as a boon to education, even though it was actually intended as a modest part of a budget crisis fix. The perception that the lottery would pay for a lot of the state’s education costs persisted, however.
Voters dedicated the net proceeds to public schools in 1997, and 15 years ago, lawmakers directed the Texas Lottery Commission to create scratch ticket games to benefit veterans programs.
Meanwhile, lottery sales for scratch tickets and draw games keep setting records.
Less than one-quarter of gross sales, however, wind up supporting public purposes — in fiscal 2023, $2.1 billion for schools and $30 million for veterans programs.
At the same time, in 2022, the latest fiscal year for which figures are available, public schools cost $78 billion in local, state and federal money, including debt service for new buildings. That’s four times what schools cost at the lottery’s creation — when enrollment was 3.5 million kids, not 5.5 million.
Texas A&M University System Chancellor John Sharp, who as state comptroller ran the lottery when it first launched, said he and some fellow Democratic politicians in the late 1980s tried unsuccessfully to rein in public expectations for how much balm a lottery would provide for the state’s then-recurrent budget crises.
“Some people, such as the governor (Democrat Ann Richards), pointed that out, but it was still the narrative and is still the narrative
— ‘OK, this is going to pay for schools,’ ” Sharp recounted recently.
When it comes to financing the state budget, the lottery has always been a bit player, Sharp said.
“It isn’t (even) a pimple on a rat’s behind,” he said.
‘Panacea’ mindset
As American voters began to rebel against higher taxes in the late 1970s, states increasingly turned to lotteries as a way to generate new revenue without cutting services or raising taxes, according to Jonathan D. Cohen, author of a 2022 book on American state lotteries, “For a Dollar and a Dream.”
A “panacea mentality” took hold as states such as Texas not only passed lottery legislation but kept adding lottery games, he said.
“People hear $1 billion or $2 billion, and that sounds like a lot of money, and it is,” said Cohen, program officer at the American Academy of Arts & Sciences.
“But of course, it’s a pretty small fraction of the state education budget and the state budget overall,” he said.
Lotteries and other forms of gambling — including casinos and sports betting that other states have adopted, though not Texas — usually don’t result in net increases of state support for education or other causes designated as their beneficiary, said John T. Holden of Oklahoma State University’s Spears School of Business.
“Even though gambling expansion is often presented as a new funding mechanism for things like education, over time, that money simply replaces other allocations to education — the net amount often being the same,” said Holden, a management professor who studies the gaming industry.
Cohen, the historian, said state officials and their vendors that operate lotteries have no incentive to educate the public about the games’ comparatively small contribution to state budgets.
“The lottery commission, their job is to sell tickets, right?”
he said.
Steve Helm, spokesman for the Texas Lottery Commission, when asked about the declining share of a school year the lottery pays for, said the agency simply follows orders from the Legislature.
“The Texas Lottery’s role as a funding source for public education is a legislative decision,” Helm said in an email.
Where lottery dollars go
While ticket sales have increased year after year, prize payouts have climbed, too. Prizes as a percentage of sales grew from 56% in 1995 to a projected 68% this year. That cuts into the size of the transfers to state programs.
To sustain lagging interest, lotteries have to continue jacking up prizes, experts said. Helm said Texas’ lottery “faces competition from other gaming activities, both legal and illegal, in Texas and in surrounding states.”
High-priced scratch ticket games are increasingly dominant. In May 2022, Texas became the first U.S. lottery jurisdiction to introduce a $100 scratch ticket, the “$20 Million Supreme.”
“As sales of higher price point games increase, so does the overall payout,” Helm said.
Draw games that stoke interest with large payouts, such as a $34 million Texas Lotto winning ticket sold at an H-E-B grocery store in Austin on Dec. 30 or the $95 million jackpot won on a ticket sold in Colleyville last April, also give back big shares of total sales.
With more than two-thirds of each dollar spent on Texas Lottery tickets paid out in prizes and nearly one-quarter going to public schools, the other significant expense involves overhead.
About $254 million a year, or 3% of total sales, goes to the commission and its main vendor, which throughout the lottery’s history has been IGT Global Solutions Corp., formerly known as Gtech.
Retailers receive commissions and performance bonuses totaling slightly more than 5% of gross sales.
“7-Eleven gets 5 cents of every
$1 you spend,” said Cohen, referring to commissions the state’s more than 20,000 licensed retailers make.
Makings of a myth
In interviews, several people who closely watched the debate over the lottery’s creation said it’s hard, after Texas’ rapid economic expansion in recent years, to appreciate how desperate state leaders were in the mid-1980s as state revenue tanked amid a slump in the real estate and oil industries.
In 1986, Houston Democratic Rep. Ron Wilson vowed to start filing lottery bills after Gov. Mark White, a Democrat, announced that declining crude oil prices would force 13% cuts to state spending. White, though, resisted adding the lottery to the agenda of special sessions on the budget crisis.
His successor, Gov. Bill Clements, a Republican, proclaimed himself neutral on a lottery, but it made little difference. The Democratic-controlled Legislature wouldn’t pass a lottery. As had White, Clements eventually chose to swallow two successive hikes in the state sales tax rate rather than slash spending more deeply.
Compounding the fiscal crisis were state and federal court orders on prisons, school finance and various state-run institutions. They tied legislative budget writers’ hands, recalled Dale Craymer, who in the late 1980s served as revenue estimator for then-comptroller Bob Bullock.
“It was a very difficult time,” Craymer said. “You couldn’t just cut the budget.”
In the 1990 race to succeed Clements, who didn’t run again, Democratic Attorney General Jim Mattox made passage of a state lottery his signature issue.
“Either more taxes or a lottery,” said Mattox, who called for using the lottery proceeds for teacher salaries, public schools and a war on drugs.
Richards, then state treasurer and Mattox’s opponent in the Democratic primary, muted her prior criticism of the lottery, saying it could be part of the state’s needed budget fix.
Mattox and Richards “contributed to the fairy tale” that a lottery would help schools, recalled former East Texas Sen. Bill Ratliff.
“It was always, always going to be a minor source of revenues,” said Ratliff, a Mount Pleasant Republican who opposed the lottery as a state-sanctioned “bilking” of the poor.
Richards defeated Mattox for the nomination, then reclaimed the Governor’s Mansion for the Democrats. In her first months in office in 1991, estimates of the state’s revenue shortfall kept growing.
The ‘voluntary tax’
Leading conservative Democrats such as Bullock, who had become lieutenant governor, began flirting with a state income tax.
“There were vultures circling the air about an income tax,” said former Senate Finance Committee Chairman John Montford, a Lubbock Democrat. Montford said he preferred letting voters consider a lottery.
Putting off decisions until a planned summer special session, Richards and legislative leaders got help from consolidating programs and other savings proposed midyear by Sharp, the new comptroller. Some were the accounting tricks used in all subsequent budget crises, such as delaying payments and hoarding dedicated taxes.
Even with much of the problem solved, the lottery lingered as a tantalizing possibility.
“For all intents and purposes, it was free money, a tax on the willing or ‘voluntary tax,’ ” said Craymer, by then Richards’ budget director.
Former Gov. John Connally, whom Richards had tapped to head a blue-ribbon task force on revenue, called it a potentially “lucrative source of income.”
While Connally wanted to apply lottery proceeds to lowering local property taxes, Wilson, the Houston state representative, proposed in his initial bill that the money be dedicated to public schools.
When Wilson’s lottery bill was debated on the House floor, however, proceeds were directed to the state’s general fund, which pays for most programs. The Senate kept it that way.
After voters approved a lottery in the fall of 1991, its proceeds weren’t earmarked for education. It remained that way for six years, until then-sen. Jane Nelson, R-flower Mound, offered a successful constitutional amendment doing that.
Adjusted for inflation, the $1.015 billion netted for the general fund by the lottery in 1995 would be equivalent to $2.029 billion last fall — not much less than the $2.161 billion it yielded in 2023.
HD Chambers, who runs Texas School Alliance, a superintendent-led group of about 40 of the state’s biggest school districts, said the myth that the lottery spun off gargantuan sums for schools persisted.
“People thought it was just going to take the place of everything and pay for public education,” he said. “It’s never carried the weight.”