Michigan Lottery

The issue of privatizing the Michigan Lottery has come up several times over the years, and there are compelling reasons on both sides of the argument. In its current form, the lottery provides huge amounts of money to the public school system. And, even if as a percentage it’s a small amount (it’s roughly 6%), it’s still a huge sum of money that would be very difficult to replace – especially in the difficult economic times that Michigan is seeing right now.

The problem is that lottery sales seem to be dwindling. Growth for the past ten years has averaged 2%, with some years actually logging less sales than the year before. In 2003, Michigan Lottery contribution to the public school budget was $27 million less than it was in 2002. Why? Competition, for one. Private casinos are on the rise, along with internet gambling and sports wagering. For another, the Michigan economy is having big problems right now, and that leaves less money for “extras” such a Michigan Lottery tickets.

The issue with privatization is that it would severely limit the future revenues that the state would see from the lottery in trade for a one-time, huge infusion of money from its sale. Some estimates have that number in the billions, while others think more along the lines of a billion without the “s”. Some revenue could be replaced by applying the state sales tax the sale of Michigan Lottery tickets, but it would certainly never reach the level that we currently see.

So the main argument against privatizing the Michigan Lottery is that it’s a bandaid fix to a long term problem. A huge cash influx that could cover budget shortfalls for the next two or three years would get the current government off the hot seat, but we all know it’s only temporary, and we’ll be dealing with the same problem down the road. Except this time, the state will have comparatively little lottery revenue and no lump-sum cash from the sale to fix the problem.

The Michigan Lottery has contributed over $14 billion to the public school system over the past 34 years, and slowing growth or not, that’s a huge amount of money. To raise that magnitude of funding with our 6% sales tax, a privatized Michigan Lottery would have to sell $12.5 billion worth of tickets. Compare that with their 2007 ticket sales of $2.3 billion, run the numbers, and decide for yourself.

All lottery winnings are subject to local, state, and federal income taxes just like any other income you may earn during the year. If you winnings are large, you may be required to make estimated tax payments Internal Revenue Service before the end of the year. This is common a common practice that is usually taken care of for you by your employer. If you talk to any small business owner, they can tell you all about quarterly taxes.

How Much Do I Need to Pay in Taxes?

Depending on what your financial situation is, you could pay as much as 50% in taxes on your lottery winnings. That includes state, local, and federal taxes. If you opt to receive your payout in installments, you must account for annual payments and any amount marked as interest on the unpaid portion of installments in income, as received. If you elect to receive the payout as a lump sum, you must include the entire lump sum in income in the year received. By law, if you win $5000 or more in the Michigan Lottery, 28% must be withheld for federal income tax purposes.

Huh?

That’s right, it’s a complicated mess when you win a lot of money from the state lottery. And it gets even worse if you bought the ticket with a group of people and want to distribute the money after the fact. If you’re not careful, you’ll get taxed for the initial winnings, and then the disbursement as charitable gifts. This is why it’s very important to properly form a lottery club if you regularly purchase tickets with a group of people.

Estate Tax on Michigan Lottery Winnings

With huge jackpots it gets even more complicated, as the payout may be over a logn period of time. If a lottery winner were to pass away near the beginning of that payout period, their estate would be valued at the present value of the total of all lottery winning payments yet to come. That means, it’s possible that your family may have to pay a huge amount of estate taxes on lottery winnings that they won’t have access to. You can see the problem – they may not have the means to pay the taxes.

Proper Planning

The bottom line is, know what you’re doing. If you’ve won a large payout, get professional help from an estate planner and tax attorney. The IRS does not accept any excuse when it comes to tax payments, and will have no mercy when prosecuting you to get the money they believe you owe.

The Michigan Lottery has been in existence for 35 years as of 2007, with annual sales of over $2 billion for that fiscal year.  Over 1/3rd of that total, almost $750 million, was paid out to the state School Aid Fund, a fund created in 1972 to support public education throughout the state.  That payout accounts for 100% of the net profit that the lottery generates.  Michigan Lottery retailers received commissions of just less than 10% of total sales, and prize payouts accounted for $1.3 billion, nearly 2/3rds of the total sales.  Other expenses that the commission incurs are operating expenses, direct game expenses (tickets, distribution, and the like), and an annual $1 million contribution to the compulsive gambling hotline.

While $750 million sounds like, and is, a huge amount of money to contribute to the state school system, in the big picture it’s only a fraction of the Michigan Department of Education’s annual operating budget.  In fact, based on a 180 day operating schedule, $750 million would pay for less than 20 days of operating expenses in 2007.  The remainder of the education budget is funded through the state’s sales tax, income tax, and property taxes that are specifically earmarked for education.

The Michigan Lottery offers eleven direct-games for players, Mega Millions, Classic Lotto 47, Fantasy 5, Keno!, Daily 3, Daily 4, Millionaire Raffle, Super Raffle, Club Keno, Pull Tabs, and Instants.  Online-only games include Millionaire Raffle and Super Raffle, and many second chance and raffle opportunities.

The vast majority of revenue (over 60%) for the Michigan Lottery comes from two sources:  Daily Games and Instant Games.  Following at a distant second and third are Club Keno and Mega Millions, at a combined 30%.

Retail Commission Structure

Michigan Lottery retailers receive a 6% commission on all tickets sold.  There is a somewhat-involved earning structure on winning tickets sold, the highest being a Mega Millions winner at a $50,000 commission for the retailer.  Depending on the game and the size of the payout, commissions can either be a percentage or a flat rate.

Online Lottery

The Michigan Lottery has an online lottery presence called Player City.  They offer numerous games there, both first and second chance.  They claim almost 150,000 users of the website, which includes coupons offers, chat opportunities, and member rewards.

Claiming Prizes

Prizes up to $600 may be claimed at your local lottery retailer, while prizes above that must be claimed at your regional lottery office.  These can be found in Detroit, Lansing, Saginaw, Wyoming, Sterling Heights and Dearborn Heights.  If your prize is greater than $50,000 you must claim it at the Michigan Lottery headquarters in Lansing.