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The Economics of Marijuana Legalization

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Now that residents of Colorado and Washington voted to legalize and regulate the sale of recreational marijuana for adults over 21, and 18 states and the District of Columbia all sanction the legal distribution of medical marijuana, pot advocates believe a tipping point is at hand in the country’s relationship with the demon weed.

For years, pot proponents made the moral and ethical arguments that prohibition of any substance, including marijuana, is both an infringement of personal freedom and a misguided policy that helps create a violent, black market sub-culture — much like the prohibition of alcohol did in the last century.

They also challenged the long-term effectiveness of the War on Drugs, pointing out that it has had little success in reducing, much less eradicating, pot usage.

Now these challengers are adding nuance. In an attempt to sway public opinion to their side, more and more anti-drug war warriors point to the economic benefits of making pot legal.

Marijuana by the Numbers

According to federal statistics, about 94 million Americans have tried cannabis at some point in their lives. That’s 40 percent of the U.S. population age 12 or older.

Estimates suggest that about 25 million Americans are active pot smokers, consuming some 31 million pounds of marijuana a year.

Yet, according to the U.S. Department of Justice’s Bureau of Justice Statistics, American taxpayers spend more than $1 billion a year incarcerating citizens for using pot: nearly one out of every eight drug prisoners in the country is locked up for skirting marijuana laws.

In 2010 alone, more than 850,000 people were arrested for marijuana-related offenses – and most charges were for simple possession.

Jon Gettman’s 2007 study “Lost Taxes and Other Costs of Marijuana Laws” found that the U.S. marijuana industry is a $113 billion annual business that costs taxpayers $31.1 billion in lost tax revenues. Gettman, who has a Ph.D. in public policy from George Mason University, suggests that $10.7 billion could be saved each year from the country’s $193 billion in annual criminal justice expenditures if marijuana arrests – 5.54 percent of all criminal apprehensions – were stopped.

Last spring, more than 300 economists, including three Nobel Laureates, signed a petition supporting a paper by Harvard economist Jeffrey Miron, who argued the government could save $7.7 billion a year by not having to enforce marijuana prohibition. The report also found that taxing pot at rates comparable to those levied on tobacco and alcohol could raise $6.2 billion annually. That’s a total of $13.9 billion in savings and income.

Economist Stephen Easton penned an article in Businessweek that suggested the financial benefits of pot legalization may be even bigger than what Miron predicted. Eatson guesses that legalizing the drug could bring in $45 to $100 billion a year.

Taxing Medical Marijuana Brings in Cash

Although the above numbers are all speculative and admittedly somewhat disparate, there are some actual, hard figures reported by states and cities that have had medical marijuana laws in effect for some years. In 2011:

  • The city of Oakland, Calif., collected $1.4 million in taxes from medical marijuana dispensaries – nearly 3 percent of all business tax revenue.
  • The state of Colorado collected $5 million in sales taxes from the medical marijuana business.
  • Denver collected $3.4 million from sales tax, application and license fees for its medical marijuana dispensaries (of which the city has more of than it has Starbucks coffee shops).
  • Colorado Springs, Colo., collected more than $700,000 in taxes from the marijuana industry.
  • Oregon raised an estimated $6.7 million in taxes which it used to pay for other state health programs.

In 1996, California became one of the first states to legalize medical marijuana. It is estimated that between $700 million and $1.3 billion worth of medical pot is being sold yearly, bringing the state sales taxes of between $58 million and $105 million.

While California voters rejected the most recent attempt to legalize recreational marijuana, the state’s tax collectors estimated that legalization would have brought in about another $1.3 billion in needed revenue. Pot is California’s biggest cash crop today, ringing up an estimated $14 billion in — except for sanctioned medical marijuana — illegal sales.

It’s Always the Economy

It’s still too early to gauge the economic effect that legalized marijuana will have on the coffers of the two states that have voted to allow it, but the future looks promising. Estimates for Washington: $2 billion in tax revenue will be raised over the next five years; for Colorado: $600 million in taxes and savings over the same time period.

With numbers like that, pot proponents likely will not have to make the philosophical, moral or legal  arguments much longer to win their debate. All they will have to do is point to the balance sheet.

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About The Author

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].