Gambling with State Budgets: Legalized Sports Betting and Lost Lottery Revenue

Kyle Coombs, Greg Madonia, Peter Nencka () and Austin Smith ()
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Kyle Coombs: Vassar College
Greg Madonia: California State University, Chico
Peter Nencka: Miami University
Austin Smith: Bates College

No 18724, IZA Discussion Papers from IZA Network @ LISER

Abstract: Legislators often justify legalizing controversial markets, such as sports betting, by citing the potential for new tax revenue to fund popular public programs. However, new revenue from sports betting may cannibalize existing revenue from state-run lotteries, undermining a key rationale for legalization. We study the staggered state-by-state legalization of sports betting following 2018 to examine these substitution effects. Using a difference-in-differences framework applied to state lottery data, we estimate the causal impact of legalization on lottery revenues. We find that sports betting and lotteries are substitutes, with legalization leading to a persistent 10–13% decline in lottery revenue. Because the state captures a much smaller share of each dollar spent on sports betting than on lottery purchases, we estimate a negative—though imprecise—effect on combined state revenue from these two sources.

Keywords: public economics; sports gambling; lottery; tax substitutes (search for similar items in EconPapers)
JEL-codes: H21 H71 L83 (search for similar items in EconPapers)
Date: 2026-06
New Economics Papers: this item is included in nep-pub and nep-spo
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