In December of 2017, Congress passed a $1.5 trillion tax cut. Tax experts are still analyzing the impact of these changes, but it appears that the lotteries themselves aren’t directly affected. However, consumers should see a boost in their paychecks, which bodes well for lotteries.
Hypothetically, this means more money in people’s pockets. The National Association of Convenience Stores (NACS) believes the tax cuts are good for convenience stores and lotteries. “Getting back to the basics, if people are feeling good and they have a reason to spend it, they will. We generally know that people don’t pay down their loans when they get more money or they don’t save more; they tend to spend more. That’s an opportunity for lottery,” Jeff Lenard, VP, Strategic Industry Initiatives, NACS said.
“Discretionary goods are income elastic [a big jump in income produces a relatively big increase in how much someone buys of something, inelastic would be the opposite]. Something like lottery, which is an entertainment category, you would think that it would be income elastic,” echoed Frank Badillo, Director of Research, MacroSavvy.
“I think if people are going to have more expendable cash in their pocket in any way shape or form, a portion of that is going to go to entertainment and we squarely fit into that category,” Chris Rogers, Director, Products & Marketing, Arizona Lottery said.
Unlike the Bush tax cuts of 2001/2003, there could be a lot less discretionary income for most Americans. While the average household hypothetically should get roughly a $1,610 tax cut in 2018, outliers appear to have a large effect on that number. For instance, for a household earning $50,000-$75,000, the average tax would be about $870.
“The returns are small [for consumers] and in the end there is no clear windfall. We aren’t sure how that is going to balance out. People might get a little bit more take-home pay but is it going to cost them more in terms of a mortgage or interest deduction?” Badillo asked.
Furthermore, the costs for older Americans could be far greater than the tax return. The tax plan repealed the provision of the Affordable Care Act that requires most Americans to have health insurance. Younger, healthier Americans may choose to not have health insurance. An AARP Public Policy Institute analysis found that 50 to 64 year olds would face an average premium increase in the individual market of up to $1,500 in 2019.
The Tax Cuts and Jobs Act of 2017’s primary focus was to give tax relief to corporations. By reducing the corporate tax rate from 39% to 21%, the administration and legislators are hoping to make America more appealing for corporations to invest here. The theory is that over the long run the additional revenue will trickle down to employees.
That remains to be seen, and the impact varies by sector. The reason could be related to the fact that while the corporate tax rate is 39%, the average effective tax rate is 22% (the rate companies are actually taxed at through subsidies and loopholes). In fact, many industries are already being taxed well below the new tax rate, like coal. Retail, however, was being taxed at around 35%. Grocery stores and convenience stores, which make up 72% of total U.S. lottery retailers in the U.S. (La Fleur’s 2017 World Lottery Almanac), are taxed at 33% according to Aswath Damodaran, a finance professor at New York’s University’s Stern business school.
The National Retail Federation (NRF) and NACS are understandably excited. “Passage of tax reform is a major victory for retailers who currently pay the highest tax rate of any business sector, and for the millions of consumers they serve every single day. Our priorities were clear: reform must jumpstart the economy, encourage companies to invest here in the United States, increase wages and expand opportunities for employees, and protect our small business community, of which the vast majority are retailers. That’s exactly what this legislation will achieve,” Matthew Shay, President and CEO, NRF, stated.
“Convenience stores are more likely to succeed by reinventing yourself and investing in the business. Most likely any windfall from taxes would go back into the business and that may be an opportunity to help tell a story where it fits into any sort of capital reinvestment or otherwise,” Lenard said.
“One of the things that I would anticipate from this is if lottery retailers were able to have more reserves and more money, they would be able to make more investments into their operation, whether that means updating existing stores or expanding to new locations . . . I see either one as a win for the lottery from that perspective,” Rogers said.