December 17, 2013
No. 407
Fiscal Fact
Lottery Tax Rates Vary Greatly By State
By
Lyman Stone & Joseph Henchman
Introduction
With the Mega Millions jackpot reaching a record $586 million, Americans in 43 states and the District of
Columbia are lining up to buy tickets for Friday's drawing. Everyone knows that winners must choose
between a lump sum payment and installment payments, but where you purchase your winning ticket also
matters, due to state income and withholding taxes.
As with wage income, some amount of lottery winnings is withheld for the government before you calculate
your total tax bill when filing your income tax the following year. While lottery winnings of $600 or less are
not reported to the IRS, winnings in excess of $5,000 are subject to a 25 percent federal withholding tax. In
other words, if one person wins the jackpot and chooses the $316 million lump sum “cash option,” $79
million will go straight to the IRS. Next April, the jackpot winner or winners can see if any of that amount
gets refunded or if they owe even more.
The same is true at the state level. While lottery winnings are subject to state income tax in most states,
withholding tax varies from zero (California, Delaware, Pennsylvania, and the states with no state income
tax) to over 12 percent in New York City. (See Table 1, below.) Arizona and Maryland have withholding
rates for non-residents, so an out-of-state winner who bought a ticket in those two states could face double
withholding.
Tax Foundation Fiscal Fact No. 407
December 17, 2013
Table 1: Lottery Withholding Tax Rates by State
State
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Withholding Tax
Rate (%)
No lottery
No lottery
5.0% (residents);
6.0% (non-residents)
7.00%
None
4.00%
6.70%
None
No income tax
6.00%
No lottery
7.80%
5.00%
3.40%
5.00%
5.00%
6.00%
5.00%
5.00%
8.75% residents;
7.00% non-residents
Massachusetts 5.00%
Michigan
4.35%
Minnesota
7.25%
Mississippi
No lottery
Missouri
4.00%
State
Withholding Tax Rate (%)
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
6.90%
5.00%
No lottery
No income tax
3.00%
6.00%
8.82% (plus 3.648% for New
York City or 0.897% for
Yonkers)
7.00%
3.99%
4.00%
4.00%
8.00%
None
7.00%
7.00%
No income tax
No income tax
No income tax
No lottery
6.00%
4.00%
Washington
West Virginia
Wisconsin
Wyoming
District of Columbia
No income tax
6.50%
7.75%
No lottery
8.50%
States rely heavily on lottery revenue, collecting an average of $59 per person in profit aside from any
income tax collections. (See Table 2, below.) While no government labels its lottery as a tax, lottery profits
are an implicit tax. After prizes have been awarded and operating costs have been covered, the remaining
money is transferred to state coffers. To the extent this revenue is used for general government purposes, it is
a tax. Further, because state lotteries pay out an average of only 60 percent of gross revenues in prizes
(compared to about 90 percent for casino slot machines or table games), state-run lotteries are only viable as
a monopoly, in conjunction with a ban on private lotteries.
Some argue that while it is a tax, it is a voluntary one since the revenue is handed over to the government
enthusiastically. But this argument confuses the purchase of a product with the payment of the tax on the
product. While it is true that the purchase of the product is voluntary, the tax portion of the ticket price is
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Tax Foundation Fiscal Fact No. 407
December 17, 2013
not, just as a sales tax is compulsory on the purchase of clothing or books. The voluntary nature of the
purchase does not make the tax any less of a tax.
Table 2: State Implicit Lottery Tax Revenue Per Capita, Fiscal Year 2011
State
U.S. Average
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Implicit Tax
Revenue Per
Capita
$59
No Lottery
No Lottery
$22
$32
$36
$22
$83
$361
$63
$87
No Lottery
$23
$52
$30
$24
$23
$49
$30
$38
$80
$133
$71
$23
No Lottery
$50
Rank
37
28
27
38
10
1
16
9
34
19
31
33
35
22
30
26
11
6
12
36
21
State
Implicit Tax
Revenue Per
Capita
Montana
$11
Nebraska
$17
Nevada
$17
New Hampshire No Lottery
New Jersey
$47
New Mexico
$106
New York
$20
North Carolina $139
North Dakota
$46
Ohio
$9
Oklahoma
$65
Oregon
$24
Pennsylvania
$144
Rhode Island
$69
South Carolina
$339
South Dakota
$58
Tennessee
$130
Texas
$70
Utah
$40
Vermont
No Lottery
Virginia
$50
Washington
$55
West Virginia
$20
Wisconsin
$316
Wyoming
$31
Rank
42
41
41
23
8
40
5
24
43
15
32
4
14
2
17
7
13
25
20
18
39
3
29
Note: The implicit tax revenue is the portion of lottery revenue kept by the state, or the "profit." It
does not include federal or state income tax on winnings.
Source: U.S. Census Bureau, Tax Foundation calculations.
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Tax Foundation Fiscal Fact No. 407
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December 17, 2013
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