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Mega Millions Jackpot: Taxes on Lotto Could Top $180 Million

Gambling is not typically a great economic development strategy. It's a zero-sum game in which the house always win, and it diverts resources from more productive areas. Lotteries are a form of gambling. And they have been easily caricatured as a regressive tax on the naïve. The odds are always extremely long of winning, and people on the lower rungs of the income scale tend to play more.

But the explosive rise in the Mega Millions jackpot may be changing that. In fact, the random series of events that have led nobody to win in several days may provide a bit of economic stimulus and help contribute to ameliorating chronic budget deficits in ways that effectively tax the rich as well as the poor.

The Mega Millions jackpot is like a snowball rolling down hill. The bigger it gets, the more mass it gains and the more attention it attracts. As lottery payouts get bigger, more people jump in. On March 27, the jackpot was estimated at $363 million. On Friday, March 30, it had risen to $640 million — almost doubling in three days. So people who ordinarily would not play the lottery decide to take a flyer, even if they realize the odds grow longer. When the jackpot hits $640 million, that should be enough to pique the interest of billionaires. As my colleague Henry Blodget tweeted today, the savvy folks at BusinessInsider just bought 5 tickets.

So how is it a form of stimulus? Mega Millions describes what happens to the money. Mega Millions says that the payout is 50 percent of ticket sales. And the lump sum payment on the$640 million jackpot is $462 million. That means this jackpot has attracted some $924 million in ticket sales.

Now, Mega Millions says that 15 percent of total sales are spent on commissions to retailers and on lottery operating costs — wages, marketing, rent. The current jackpot will thus throw off some $69.3 million in commission and payments that go directly into the economy. In addition, the frenzy is generating a lot of foot traffic for points of sale. And that is helping to stimulate sales. People come in to a Kwik-e-Mart to buy a few tickets, and while they're waiting on line will grab a soda, a few sticks of beef jerky and a bag of chips.

The taxpayers of the states that participate in Mega Millions and of the nation as a whole are also likely to benefit. Some 35 percent of the revenues raised from ticket sales go to the states. So a jackpot that attracts $924 million in ticket sales yields a quick $323.4 million in painless additional revenues.

Then there are taxes that will be paid on the winnings. The lump sum pay out for this jackpot is $462 million. Let's assume the lucky winner pays the 35 percent top federal income tax rate, and a five percent state income tax rate. That's $161.7 million for the Internal Revenue Service, and another $23.1 million for a lucky state.

As with the jackpot itself, the payoff for taxpayers rises with each passing day.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com

His next book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May and is available for pre-order.