Lottery tax windfalls, state-level fiscal policy, and consumption

•We study lottery tax windfalls received by state governments.•Windfalls finance higher expenditures on low income households in recessions.•Insignificant impact of lottery tax windfalls in good economic conditions.•Wealth transfers from high to low income households through lottery tax channel.

We find that lottery tax windfalls finance higher state-government expenditures on supplemental security income that increase consumption, but only during bust periods. Wealth transfers from lottery winners to low income households enable fiscal policy to stabilize consumption during bust periods.