Want Marijuana Legalized? Get Politicians Addicted
October 28, 2009
Marijuana and taxes are in the news with Obama’s decision last week to end federal raids on dispensaries legal under state law. One argument—or concession—made by opponents of marijuana prohibition is the potential tax revenue to be reaped from the enormous and mostly underground industry.
With the estimated retail value of the U.S. marijuana market at $113 billion, the local, state, and federal governments are forgoing $31.1 billion in potential sales tax each year. At the same time, marijuana arrests cost taxpayers $10.7 billion annually.
A much more modest estimate came from economist Jeffrey Miron in a 2005 paper:
Revenue from taxation of marijuana sales would range from $2.4 billion per year if marijuana were taxed like ordinary consumer goods to $6.2 billion if it were taxed like alcohol or tobacco.
…Replacing marijuana prohibition with a system of legal regulation would save approximately $7.7 billion in government expenditures on prohibition enforcement — $2.4 billion at the federal level and $5.3 billion at the state and local levels.
On the state side, the California Assembly Public Safety Committee will be meeting today to discuss taxing and regulating marijuana. Chair of the committee, Tom Ammiano, is author of AB 390, the Marijuana Control, Regulation, and Education Act. If passed, it’s estimated to give California an extra $1.34 billion through a sales tax and $50 per ounce excise on the plant.
Of course, as noted here before, a high tax or burdensome regulation might have the same effect as prohibition (as one sees with cigarettes). A problem with AB 390 is that it levies a $50 per ounce excise tax regardless of potency. That would be like taxing all alcoholic beverages the same per gallon, rather than having different rates for spirits, wine, and beer as is done on the state level, where rates are lower for beer and wine than for spirits. With an indiscriminate excise tax, the effective tax rate goes down for higher quality marijuana. This might nudge people to buy stronger pot.
According to a High Times market analysis—seriously—the average U.S. price of an ounce of marijuana was $345. But this includes all types, with lower quality having a lower market price—the worst quality maybe around $200 per ounce. With a $50 per ounce tax, those who would have purchased the $200 per ounce quality before the tax now either pay a 25% tax, buy stronger stuff, or go to the black-market. (This assumes prices remain the same after legalization, though they might decrease as supplies increase.)
If one wants marijuana to be legal to any extant, and stay legal, maybe the best thing to do is tax it. Give the state a new vein. Even better, get a special–interest interested in the tax money. Guarantee all dispensary taxes end up in a good sounding cause with a union behind it—schools would be great. Especially in California, where balancing a budget is not easy, this would protect against future attempts to roll back legalization. Imagine the governor telling voters: “We could re-criminalize pot…but we’ll have to fire a lot of teachers.”
It’s already happening to an extent on the local level. Oakland passed a 1.8% business tax on club sales last summer. City Council Member Rebecca Kaplan says:
We expect to raise about $1 million or so next year from the tax as it gets implemented, and potentially more into the future. And what that means is 10 city workers who will be able to keep to jobs who would otherwise be laid off. That means park being maintained, libraries opened, the things that the community really needs.
You heard it. It’s either marijuana prohibition or libraries.
Was this page helpful to you?
The Tax Foundation works hard to provide insightful tax policy analysis. Our work depends on support from members of the public like you. Would you consider contributing to our work?Contribute to the Tax Foundation
Let us know how we can better serve you!
We work hard to make our analysis as useful as possible. Would you consider telling us more about how we can do better?Give Us Feedback