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Would you rather have a smaller slice of a larger pie or a larger slice of a smaller pie? This question captures the dilemma created by profit mandates and prize payout caps in lotteries. These legislative restrictions require lotteries to guarantee a specific profit level to the state, often achieved by reducing prize payouts. Lower prizes frustrate players, leading to fewer ticket sales. Policymakers must then ask themselves: How do these restrictions affect the lottery’s returns to good causes? Which gets us the most pie for our slice?
Texas, California, and Oklahoma lotteries provide three of the industry’s best case studies on restrictions on prize payouts. In each case, loosening or removing strict mandates revived public interest and ultimately generated a larger windfall for the good causes these lotteries support.
Texas
Texas may provide the best modern example of the immediate ramifications of restricting prize payouts. The lottery launched in 1992 and quickly grew into one of the largest in the country. However, lawmakers, anxious to guarantee a certain profit margin for education, approved a 1997 mandate capping prize payouts at 52%.
Players quickly grew wise. In its 1999 annual report, the lottery reported a 30% drop in returns to the state. 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 It repealed the prize payout cap to halt the freefall.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 Senator Ken Armbrister, who authored the 1999 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’s 128.0% increase. (This excludes Texas and lotteries that launched in this time frame).
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 voters created the state lottery in 1984, the law mandated that 34% of gross revenue go to public education, locking prize payouts at around 50%.
In 2010, the state enacted reforms under the Lottery Modernization Act. The lottery could raise prize payouts above 50% as long as it maintained at least $1 billion a year in total funding for schools, ensuring that each sales increase also boosted absolute dollars for education.
California wasted no time retooling its games. From 2010 to 2014, lottery sales grew 65.5%, compared to the industry average of 16.9%. Returns to the state increased 23.8%, compared to 15.5%.
By 2016, California State Comptroller Betty T. Yee highlighted the undeniable impact of the repeal in her report on its effect on education: “The review group has concluded that AB 142 has furthered the purpose of the Lottery Act to maximize Lottery revenues available to supplement funding for public education. Specifically, 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 went live in 2005 with a 35% profit mandate. Over time, that requirement effectively capped prize payouts in 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 outlined in its 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, Oklahoma Lottery’s Director of Marketing and Administration at the time (now the 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, removing the 35% mandate and replacing 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, such as reading programs and STEM education.
There was an immediate impact. Returns grew by 18.8% the following year. By FY24, returns had increased by 64%—nearly twice the industry’s overall return growth during that period.
So Which Slice?
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 again, evidence shows that strictly limiting prize payouts backfires. The financial reality is that a lottery must operate like any other consumer-driven product. It must offer a competitive option in a landscape where consumers have countless entertainment choices.
Examples from Texas, California, and Oklahoma all show that this strategy works, but these are only some of the most notable cases. Florida, Pennsylvania, Louisiana, and other state lotteries have demonstrated that eliminating or reducing restrictions on 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.