Supplement or Supplant? Estimating the Impact of State Lottery Earmarks on Higher Education Funding

In the wake of declining state support for higher education, many state leaders have adopted lottery earmark policies, which designate lottery revenue to higher education budgets as an alternative funding mechanism. However, despite the ubiquity of lottery earmarks for higher education, it remains unclear whether this new source of revenue serves to supplement or supplant state funding for higher education. In this paper, we use a difference-in-differences design for the years 1990-2009 to estimate the impact on state appropriations and state financial aid levels of designating lottery earmark funding to higher education. Main findings indicate that lottery earmark policies are associated with a 5 percent increase in higher education appropriations, and a 135 percent increase in merit-based financial aid. However, lottery earmarks are also associated with a decrease in need-based financial aid of approximately 12 percent. These findings have serious distributional implications that should be considered when state lawmakers adopt lottery earmark policies for higher education.