California misses out on Powerball tax revenue windfall

The winner of the $2 billion Powerball jackpot on Tuesday could pick up their cash prize without owing any state taxes, because California doesn’t tax lottery winnings.
Business owner Joe Chahayed holds a check outside Joe’s Service Center in Altadena, northeast of Los Angeles Tuesday, Nov. 8, 2022. His sons, Joe Chahayed, Jr., are at his left, and his son Daniel Chahayed, at his right. CA Lottery officials, far left, David Kauls, CA Lottery Sales Manager, and Carolyn Becker, Deputy Director Public Affairs and Communications, present a CA Lottery’s retailer selling bonus check for “One Million US dollars,” to Joe’s Service Center for selling the Powerball winning ticket. (AP Photo/Damian Dovarganes)

The lucky winner of the record-setting Powerball jackpot on Tuesday could pick up a $997.6 million cash prize — or over $2 billion in annual payments over 30 years — without owing any state taxes on their haul.

That’s because the winning ticket was sold in Los Angeles County, and California doesn’t tax lottery winnings, state officials confirmed to Pluribus News. Not even when the lottery makes someone a billionaire.

The California State Lottery was established by a constitutional amendment approved by voters in 1984. That initiative specified that neither lottery ticket sales nor winnings could be taxed by the state or localities.

Delaware is the only other state that doesn’t tax lottery winnings specifically, according to the Tax Foundation, a conservative-leaning Washington, D.C. think tank. Seven states with lotteries don’t tax any form of income.

The California exemption means the lottery winner — assuming he or she lives and pays taxes in the Golden State — does not owe the high taxes on their windfall that other millionaires in the state must pay.

If the Powerball winner had earned $997.6 million in ordinary income, he or she would have owed 12.3% in California income taxes after the first million plus an additional 1% surcharge on income after the first million to fund mental health services. That’s roughly $132.7 million in state taxes, according to the California Department of Finance.

California did receive an education funding boost from the sale of Powerball tickets. About 80 cents of every $2 Powerball ticket sold in California goes to fund public schools, said Carolyn Becker, deputy director of public affairs for the California Lottery.

Ticket sales skyrocketed this year as the jackpot grew, she said, raising $156.3 million for education. “That’s the most we’ve ever raised from one growing jackpot,” she said.

Making winnings tax-free is supposed to encourage lottery ticket sales and thus raise more money for schools, said Kayla Kitson, a tax policy analyst for the California Budget and Policy Center, a left-leaning think tank based in Sacramento.

But taxing winnings would also raise money for education, she noted, by increasing income tax dollars flowing into the state’s general fund.

“It’s really unclear if it’s effective in encouraging ticket sales enough to make up for that lost revenue,” she said of the tax exemption.

The Powerball winner will have to pay federal taxes. The federal government withholds 24% of lottery and other gambling winnings over $5,000. Winnings are also subject to federal income taxes.

Every state participates in the Powerball lottery except Alaska, Alabama, Hawaii, Nevada and Utah, which do not have state lotteries.