$2.04 billion Powerball jackpot winner will only pay California this much in state taxes?

All week long, the good residents of Altadena, California, have been eyeing neighbors, counting co-workers who call in sick, and ringing up ex-spouses to size up who may have the single winning $2.04 billion Powerball ticket sold at a Mobil gas station in this Los Angeles suburb.

Everybody is waiting for the country’s newest billionaire to come forward. Cousins of cousins will suddenly turn up at their doorstep. So will the IRS.

But there’s a surprising reason why the mystery winner is lucky they bought the richest lottery ticket ever sold in the history of the planet here instead of, say, Louisiana or Kentucky: They won’t have to deal with the state taxman in the Golden State.

California doesn’t charge a cent in state income tax on lottery winnings, no matter the amount. In this case, it’s like winning a second $123 million jackpot.

Thirty-six other states take their cut of the winnings – including New York, Arizona and Virginia.

How California, often maligned as a tax-happy state, ended up being one of nine Powerball participating states – including red-state rivals like Florida and Texas – that lets lottery winners slide is part of the interesting backstory of how voters here first rejected, then approved lottery sales. Ironic that the record $2.04 billion jackpot drawing fell on the same day voters resoundingly rejected a pair of measures that would have legalized gambling on sports.

California’s lottery system, including the state tax exemption, was first implemented after voters approved Proposition 37 in 1986.  The language exempting state taxes, which was included in the ballot measure, appears to have been a calculated addition by supporters of the measure who were being pilloried for adding a “new and expensive tax” on Californians.

“Contrary to our opponents’ falsehoods: No lottery revenue would go to the state,” supporters argued at the time. “EVERY PENNY OF LOTTERY PROFITS would go to PUBLIC EDUCATION.”

Back in 1964, California voters shot down an earlier proposal to create a state lottery system after opponents used taxes as a scare tactic against what was known as Prop 16. “NOT A PENNY OF THAT MONEY WILL GO FOR EDUCATION,” former San Francisco Police Commissioner Don Fazackerley and others argued at the time. “It is more likely to increase your taxes because of increased welfare and police costs.”

Nowadays, luck helps determine which communities and businesses profit from the sudden influx of lottery winners. In Altadena, Joe Chahayed reaped a reward of $1 million since his Joe’s Mobil gas station is where the winning Powerball ticket was sold. He said he hopes the jackpot winner ends up being a local who decides to reinvest in the community.

“This is a very poor neighborhood,” Chahayed told the Orange County Register. “The poor people deserve it.”

Though the jackpot ended up totaling $2.04 billion, the winner could end up netting about $758 million after federal income taxes, assuming they decide to take a one-time cash option, as most winners do, instead of opting for the entire jackpot split into 30 annual installments.

“We’re talking about a life-changing amount of money, and I don’t think that’s hyperbole in this case,” said Carolyn Becker, communications director for the California State Lottery.

How rich are we really talking about? The winner would have to win 123 equally record-sized Powerballs to take the top spot on Forbes’ list of the richest Californians. Google co-founders Larry Page and Sergey Brin currently lead the state tally, with net worths estimated at $93 billion and $89 billion respectively.

The state of California loses out on hundreds of millions of dollars of potential revenue every year by not taxing lottery winnings. From June 2020 to June 2021, the California state lottery dispensed $5.6 billion in winnings. Even if California taxed those winnings at the median income tax rate of 6%, that would net the state about $336 million in yearly revenue. That’s more than double what the state just allocated to the office leading the state’s response to the fentanyl crisis.

California does, however, have other ways of benefiting from the lottery. The state netted $156.3 million – or 40% – from lottery ticket sales for public schools over the course of this record Powerball lottery run. These dollars are used to help schools across the state, including paying teacher salaries, purchasing new equipment for science labs and replacing outdated textbooks with ones modern enough to acknowledge the existence of the internet.

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Hard to imagine, but if no winner steps forward to claim Tuesday’s record prize, California – and all the other Powerball states and territories – will receive all the money back that they contributed to the prize. That’s somewhere around $265 million in California, which also would be sent to public schools. Though that additional money could be an unexpected boon, Becker said that schools are already benefiting tremendously from the money raised off ticket sales.

“We already have winners in California,” she said.

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