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Would you rather have a single slice from a large pie or a bigger slice from a smaller pie? This question illustrates the dilemma of profit mandates and prize payout caps. Profit mandates are legislative or policy requirements that direct lotteries to maintain a specific level of profit for the state, typically achieved by reducing prize payouts. While these mandates may seem like guaranteed revenue for state coffers, history shows they often backfire. High-profit requirements lead to lower prize payouts, frustrated players, and overall sales decline, resulting in a smaller pie. The problem is that it is also accompanied by less money for good causes.
The Texas, Florida, California, Oklahoma, Louisiana, and Pennsylvania lotteries are some of the best case studies when it comes to restrictions on prize payouts. In each case, loosening or removing strict mandates revived public interest and ultimately delivered more for the good causes these lotteries support.
Texas
Texas may provide the best modern example of the immediate ramifications of a restriction on prize payouts. The lottery was launched in 1992, and it quickly grew into one of the largest lotteries in the country. However, lawmakers got anxious to guarantee a certain profit margin for education, so in 1997 they approved a mandate that capped the prize payout at 52% of sales.
Players quickly grew wise. In its 1999 annual report, the lottery showed returns to the state dropped by 30%. The state legislature did an abrupt about-face. It repealed the prize payout cap to halt the freefall. The bill passed the House 139–2 and cleared the Senate unanimously. Former Texas Sen. Ken Armbrister, who authored the 1999 Texas payout cap repeal in the Senate, put it best: “Lottery doesn’t operate that way. Vegas doesn’t make their money that way. Bingo doesn’t make their money that way—they make their money out of enhancement of the pool.” It took years to recover from the mistake, but by 2001, returns began to recover with a 27.2% year-over-year increase. From 2000 to 2024, the Texas Lottery returns to good causes have increased by 168.7% compared to the rest of the industry combined, 128.0% (this excludes Texas and lotteries that began in this time frame).
Florida
Florida’s lottery started with a 35% profit mandate. In the 1990s, lawmakers increased it to 38%, believing a bigger guaranteed share meant more revenue for education, but by the early 2000s, sales stalled. When Florida eliminated strict profit percentages for its scratch-off games in 2002, government profits increased by 18% the next year.
In 2005, Florida removed its fixed cap on draw games as well. Once again, government transfers increased by 12.2% the following year. Florida then jumped into second place for the largest government transfer among all lotteries nationwide—a position it has maintained ever since. As Florida Senate Gaming Committee Chairman Steven Geller summarized during a 2008 discussion: “We want the Lottery run in a business-like way to maximize dollars for education. Sometimes that means bigger prizes to draw in more players—it’s a balance, but ultimately it’s about increasing the net for our kids’ schools.”
California
California presents a different example, as the lottery started with a profit mandate, as opposed to a payout cap. However, the two are effectively the same. When California voters created the state lottery in 1984, the law mandated that 34% of the gross revenue had to go to public education, which locked prize payouts to around 50%.
In 2010, the state enacted the Lottery Modernization Act. The lottery was allowed to raise prize payouts above 50% as long as total funding to schools did not drop below $1 billion a year, and each increase in sales meant an increase in absolute dollars for education.
California wasted no time retooling its games. By fiscal year 2014, California Lottery sales grew by 65.5% compared to the industry average of 16.9%. Returns to the state increased by 23.8%, compared to 15.5%.
By 2016, Betty T. Yee, the California State Comptroller, noted the undeniable evidence in her report on the repeal’s effect on education: “By augmenting the share of sales revenues allocated to prizes, lottery ticket sales have risen, resulting in a substantial increase in the total net revenues available to supplement funding for California’s public schools.”
Oklahoma
Oklahoma is the most recent lottery to remove a strict profit mandate. The lottery was established in 2004, and it went live in 2005 with a 35% profit mandate. Over time, that requirement effectively capped prize payouts at the low 50% range.
While the lottery returned about $76 million in 2007, returns quickly declined. By 2017, the total amount going to schools had dropped to around $53 million. The lottery reported in the annual report that prize payouts had dipped to 48% of total sales. “We had, for 12 years, pretty much the lowest payouts in the country,” Jay Finks, the lottery’s Director of Marketing and Administration at the time (now Executive Director) explained in 2018, “and that fuels a loss in sales, a loss in playership, and less money to education at the end of the day.”
In 2017, Oklahoma’s lawmakers passed House Bill 1837, which removed the 35% mandate and replaced it with a new structure that guaranteed the first $50 million of net revenue to education. Any profits above that baseline were earmarked for special initiatives like reading programs and STEM education.
There was an immediate impact, with returns growing by 18.8% the following year. By FY2024, returns had increased by 64%—nearly twice the industry’s overall return growth during that period.
Louisiana
Louisiana is the most recent state to reduce a lottery’s profit mandate. The state originally set the lottery’s mandate at 35%. But between 2016 and 2020, government transfers increased by less than 1%. The legislature decided to reduce the mandate to 25%. However, it also stipulated that 2023 revenues had to be higher than they were in 2020, otherwise the mandate would automatically revert to 35%.
Louisiana quickly saw the benefits of loosening its profit mandate. Within the first full year under the new law, sales surged beyond the previous record high, and total transfers to education easily eclipsed FY2020 levels. By FY2023, government transfers increased to $212.1 million, an 18% increase from 2020. The mandate did not revert.
Pennsylvania
Pennsylvania represents a distinct case, largely because its legislature temporarily reduced the profit mandate multiple times over the past two decades, requiring ongoing renewals.
The lottery’s base profit mandate is set at 30%. The state first lowered it to 27% in 2008, extending the test in 2011. The legislature further reduced it to 25% in 2014 and 20% in 2019.
Between 2019 and 2021, net revenue rose by 14%, prompting the legislature to extend the mandate again—this time through 2029. However, this recurring renewal process is far from ideal in an intensely competitive gaming market, where iGaming, casinos, sports betting, and unregulated machines all offer significantly higher payouts. Over the last five years, unregulated gaming machines, paying back well over 80%, have diverted an estimated $200 million from the Pennsylvania Lottery. Acknowledging this challenge, Gov. Josh Shapiro, in his February 2025 budget address, called for altogether repealing the 20% minimum profit margin. Revenue Secretary Pat Browne summarized the state’s stance in 2023 legislative testimony, describing the fixed mandate as “in direct conflict with the Lottery’s mission of generating profit dollars.” Given mounting competitive pressures and gubernatorial support, Pennsylvania could be the next state to remove its profit-floor constraint.
Definitive Evidence
It may be tempting for a state legislature to view a high profit percentage as the best way to fund vital public programs. It appears to be a straightforward way to extract a large portion of each lottery dollar. However, time and time again, it has been shown that strictly limiting prize payouts backfires. The financial reality is that lotteries must operate like any other consumer-driven product. It must be able to offer a competitive option in a landscape where consumers have many entertainment choices.
Examples from Texas, Florida, California, Oklahoma, Louisiana, and Pennsylvania all show that eliminating a profit mandate is the best strategy, but these are only some of the most notable cases. Florida, Pennsylvania, Louisiana, and many other state lotteries have demonstrated that eliminating or reducing restrictions around prize caps or profit mandates increases returns for players, retailers, and the state. If the goal is to benefit schools and other state-funded initiatives, those programs ultimately gain when the legislature allows the lottery to find its competitive sweet spot.