Legalize the plant and watch the tax money roll in.
For years, this has been a central argument of marijuana legalization advocates. But, as lawmakers in Washington and Colorado are finding out, calculating the economic benefits of legalization may not be that simple.
On one side of the issue are those who believe, much like legalization advocates, that taxation and levy revenues from legal marijuana sales will provide large amounts of much-needed funds to states.
“We all know where the money from nonmedical marijuana sales is currently going,” said a narrator in a pro-legalization commercial in Colorado last year. "It doesn't need to be that way. If we pass Amendment 64, Colorado businesses would profit, and tax revenues would pay for public services and the reconstruction of our schools."
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Congressman Jared Polis (D-Colorado) believes marijuana sales could add up to an additional $100 million in revenues for the state.
“I’ve seen some estimates in the high tens of millions, as much as $100 million for [Colorado],” he said. The congressman added that these additional funds could help make a “substantial dent in needed school improvements, particularly in poorer districts.”
Dale Gieringer, director of the California National Organization for the Reform of Marijuana Laws, feels even more optimistic about the economic benefits of legal marijuana sales. Gieringer estimates that legalizing weed would add up to an additional $1.2 billion in revenues for California alone. His study assumed marijuana would be priced between $280-$420, that all sales would include a traditional sales tax, and that a levy of $50 per ounce would be included. He added that legalization would stimulate an extra $12-$18 billion in new economic activity in his state.
However, not all legislators and economists are on board with this math. Some claim that price competition with the black market and regulation costs will prevent marijuana from being the revenue jackpot many see it as.
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Harvard economics professor Jeffery Miron is a part of this crowd.
“There is a lot of exaggeration about how big the revenue can be,” he said. Miron believes the real reason advocates want to legalize marijuana is “to be allowed to smoke in peace.” He believes supporters of legalization are “nervous about making that argument. They’re afraid that argument won’t win the day, so they have focused in many cases on the revenue side.”
In contrast to Gieringer’s estimates, Miron believes nationwide legalization would result in a total of $6.4 billion in revenues. He believes $4.2 billion in revenue would go to the federal government and $2.1 billion would be spread amongst states.
The inevitable issue of pricing arises when estimating tax revenues from legal marijuana sales. Many assume that if legal, marijuana would be sold at prices similar to current black market rates. Rosalie Pacura, co-director of the RAND Drug Policy Research Center, isn’t so sure about this assumption.
“When you go to legalize, you have reduced risk in producing and distributing the drug. That’s a real component of the monetary price of marijuana,” she said. “You have to know more about the structure of the demand curve, which we don’t have any data on because this is black-market; it’s all conjecture,” Pacura added.
As a result of these reduced risks in producing and distributing marijuana, Pacura expects prices in Colorado and Washington to drop by 70-85%.
Pacura also talked about the importance of keeping legal prices competitive with black market prices.
“You want to make sure the black market doesn’t have an advantage over the regulated market,” she said. “Because if it does, then the whole concept fails and people will continue to buy marijuana illegally — so there has to be a price advance for the legal market”
Some are concerned that the cost of regulating legalized recreational use will outweigh tax revenues from sales. Washington congressman Dave Reichart is one of these people.
“I don't think the revenue they raise will be near enough to cover the cost of regulating pot stores,” he told POLITICO. “What I’m hearing from the police chiefs and sheriffs is that this is going to cost us more money to monitor those rules and regulations.”
With some claiming that legalization would provide huge economic benefits while others caution that it would be a financial burden, it’s apparent that much is uncertain about the financial impact of legalized marijuana. After all, states like Colorado and Washington are entering uncharted territory by legalizing the drug.
Colorado estimates that marijuana sales will provide an extra $24 million in tax revenue in 2013. Meanwhile, Washington estimates that by 2017 the legal-marijuana industry will add $567 million in tax revenue. But, black market prices, taxing methods, and demand from the consumer market could affect these figures greatly.
Other states should be paying attention to outcomes in Colorado and Washington, because lawmakers at the national level are calling for revised marijuana legislation as well. Congress members Earl Blumenauer, Ron Paul, Barney Frank, and Rand Paul, to name a few, have all recently spoken in support of revising marijuana legislation.
"There are a lot of young people who do this, and then later on in their twenties they grow up and get married and they quit doing things like this,” Rand Paul told Chris Wallace on "Fox News Sunday." “I don't want to put them in jail and ruin their lives."