Don’t Tax My Dreams: The Lottery Sales Response to Gambling Tax Changes

Abstract

Legalized gambling is a popular source of tax revenue in the United States. However, the ability to increase gambling tax revenue through higher tax rates is limited by the presence of nontaxable and cross-border substitutes. In July 2009, New Hampshire introduced a 10 percent tax on gambling winnings, substantially reducing the expected value of a gamble while leaving other aspects of gambling unaffected; the tax was repealed in May 2011. Using a novel data set and a difference-in-differences framework, I document significant reductions in New Hampshire lottery sales under the tax policy and estimate a price elasticity greater than −1. The response is consistent with informed choice by consumers, and larger changes in border areas provide suggestive evidence of cross-border shopping.