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California is fiscal paradise for Powerball winners

The United States of Powerball

If the record-breaking Powerball jackpot has you dreaming of how you would spend the winnings — you are not alone. But where you live plays a big role in how much of the prize you would get to keep.
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If the record-breaking Powerball jackpot has you dreaming of how you would spend the winnings — you are not alone. But where you live plays a big role in how much of the prize you would get to keep.

Whoever wins the $1.5 billion Powerball jackpot will beat odds that are longer than being elected president or bitten by a shark, but the winner will be even luckier if he or she hails from California.

California is one of just three states that exempt lottery winnings from state income taxes – so long as the winner is a state resident who bought the ticket in California. That’s an especially big deal given that California has some of the nation’s highest taxes.

“If you make a lot of money in California some other way, you pay a lot, but not if you win the lottery,” said Gerald Prante, an economics professor at Lynchburg College in Lynchburg, Virginia, who has studied the tax implications of lotteries.

If a Californian turns out to be the sole winner of Wednesday night’s drawing and chooses to take the money as a one-time $930 million lump sum – the option most lottery winners go with, rather than taking the full $1.5 billion in installments over 30 years – the state will be giving up about $100 million in tax revenue by exempting the winnings from the state income tax, according to Prante.

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“It’s a pretty big chunk at these jackpot levels – and these jackpot levels are going to be more common in the future because of the changes in Powerball,” he said.

The giant jackpot is no coincidence. The Multi-State Lottery Association raised the ticket price from $1 to $2 in 2012, doubling the jackpots. Then, in October, there was a crucial rule change that reduces the odds of winning the jackpot from 1 in 175 million to 1 in 292 million.

“If the odds of winning are lower that means fewer people are going to win, so it’s more likely the jackpot is going to be built up,” Prante said. “That is unless people start getting smart and understand that the odds have been reduced and reduce the number of tickets they buy. People are looking at the jackpot, though, and they don’t really think about the odds.”

California is really leading the charge here.

Alex Traverso, spokesman for the California Lottery

Some 150 million Powerball tickets have been sold in California, said Alex Traverso, a spokesman for the California Lottery. On Sunday and Monday alone, California sold nearly $43 million in Powerball tickets. The next highest state total was Florida’s, with $24 million.

“So California is really leading the charge here,” Traverso said.

Traverso said the exemption of lottery winnings from state income tax was written into the California State Lottery Act in 1984. There’s been occasional chatter since about dropping the exemption, especially at the height of the state budget crisis a few years ago, but nothing serious, he said.

Pennsylvania and Delaware are the other states that exempt lottery winnings from their income taxes.

California does get some money from Powerball, with 40 percent of the state’s sales going toward California’s education system, Traverso said. Total lottery sales, including Powerball and instant winner Scratchers, added $1.39 billion to California schools spending last year.

While it sounds like a lot, Traverso said lottery sales made up just 1 to 1.5 percent of state education spending.

Sean Cockerham: 202-383-6016, @seancockerham

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