1. Lottery Tax Windfalls, State-Level Fiscal Policy, and Consumption Zhi Da University of Notre Dame Mitch Warachka Claremont McKenna College Hayong Yun Michigan State University

2. Parker (JEL, 2011) Central Question: How much, if any, fiscal stimulus is appropriate when facing a deep recession? (page 704) Unfortunately, we have very little evidence on whether the government multiplier differs with the state of the economy (page 704) Research sometimes finds evidence of larger effects of government spending in recessions, the evidence is statistically weak, highlighting the real reason for our lack of knowledge: lack of data. (page 705)

3. Prior Research Tax rebates by the federal government were examined by: Johnson, Parker, and Souleles (AER, 2006) Parker, Souleles, Johnson, and McClelland (AER, 2011). Both studies were limited to bust periods and were not random across time. Insufficient data to evaluate alternatives to tax rebates such as higher government spending. Stimulus payments are complicated by Ricardian equivalence as rebates were financed through debt issuance.

4. Motivation for Multi-State Lotteries States receive a tax windfall whenever their residents win a multi- state lottery (inter-state transfer of funds). Lottery tax windfalls occur in all economic conditions. Lottery tax windfalls can facilitate increased spending and / or tax reductions by state governments without the issuance of debt. Lottery tax windfalls enable the impact of fiscal policy on consumption during bust and boom periods to be examined in the absence of Ricardian equivalence. Thus, our study allows for time-varying household borrowing constraints. Our study also exploits heterogeneity across states regarding the severity of economic fluctuations and fiscal policy.

5. Lottery Data 43 states participate in multi-state lotteries. 41 states are fiscally constrained by their balanced budget amendment and / or budget stabilization fund rules. 37 of the 41 fiscally constrained states participate in multi-state lotteries (Utah is an exception). Our main sample consists of the 41 fiscally constrained states. Of these 43 states that participate in multi-state lotteries, 34 impose specific taxes on lottery winnings. No major distinction between states with and without lottery taxes since individual income tax collections increase in states whose residents win a multi-state lottery.

6. Sample of Lottery Data www.portalseven.com contains the location of PowerBall and MegaMillion winners www.portalseven.com 30-Mar-12$656 Million The Three AmigosMaryland Merle and Patricia ButlerIllinois AnonymousKansas 24-Jan-12$72 MillionMarcia AdamsGeorgia 27-Dec-11$208 MillionDaniel BrucknerNew York 1-Nov-11$78 MillionCharles HairstonCalifornia 30-Sep-11$114 Million Group of 6 peopleCalifornia The Jones FamilyNorth Carolina

7. Preliminary Results Lottery tax windfalls are counter-cyclical. More frequent and larger during busts than booms. Lottery tax windfalls are significant relative to government spending on Supplementary Security Income (SSI). SSI payments for low income households consisting of individuals over 65 and disabled individuals. These households are predicted to have the tightest borrowing constraints. Lottery tax windfalls also coincide with higher individual income collections by state governments.

8. Methodologies State-year panel regressions with state and year fixed effects to examine: - lottery wins on SSI in boom / bust periods - interaction of lottery wins and SSI on consumption in boom / bust periods State-firm panel regressions with state and firm fixed effects to examine: - lottery wins on the revenue and cash flow of “local” firms Standard errors clustered at the state level. Dummy variable denotes a resident of state i winning the lottery in year t. These dummy variables are independent of the amount won AND the decision to choose a lump sum or annuity.

9. Main Results Not surprising that an individual lottery winner would increase their consumption! However, less obvious results pertaining to the government’s fiscal policy are: Lottery tax windfalls coincide with higher state-level SSI spending and consumption, but only in bust periods. Without a lottery tax windfall, SSI spending and consumption are both lower in bust periods. Lottery tax windfalls increase state-level personal income and individual income tax collections, but only in bust periods. Lottery tax windfalls increase the revenue and cash flow of retail firms whose operations are limited to the state, but only in bust periods.

10. Firm-Level Evidence Examine firm-level revenue and earnings to confirm whether lottery tax windfalls increase consumption in bust periods. 66 single-state retail firms in 23 states. 58 single-state retail firms in 20 fiscally constrained states. Lottery tax windfalls increase revenue and earnings, but only in bust periods.