Drug Policy

Would Legal Marijuana Mean an Excise Tax Bonanza?

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Today I was supposed to appear on KPCC, an NPR afiliate in Los Angeles, to discuss Jon Gettman's report on marijuana production in the U.S. (mentioned by Dave Weigel earlier today). In preparation, I started collecting numbers on the fiscal and economic impact of marijuana legalization, which the producer said would be the segment's focus. He just called me back to say they don't need me after all (the segment was "overbooked"), so I thought I'd share what I planned to say on the radio with you, Gentle Hit & Run Reader, lest my research be for naught. The excise tax revenue from legal marijuana, which especially interested the KPCC producer, probably would not amount to much, because almost all of the $36 billion that Gettman estimates the U.S. marijuana crop is worth to growers (which translates into something like $63 billion at the retail level) can be attributed to the "risk premium" associated with prohibition. It's the war on drugs that makes marijuana "America's biggest cash crop."

Dale Gieringer of California NORML has estimated that marijuana may cost as much as 100 to 300 times as much in the black market as it would if it were legal (not counting taxes). Even if the multiple is more like 50 or 25, the value of the cannabis crop would plummet if prohibition were repealed. You also need to consider patterns of consumption. About 45 million Americans smoke cigarettes, typically consuming close to a pack a day (an average of 17 cigarettes per day for daily smokers, who represent four-fifths of smokers), for a total of 378 billion cigarettes in 2005. Total state and federal excise tax revenue from cigarettes (not including payments under the Master Settlement Agreement that resolved state lawsuits against the major tobacco companies) is about $15 billion a year. According to the National Survey on Drug Use and Health, about 15 million Americans smoke pot each month—one-third the number of cigarette smokers—and the typical level of consumption is occasional. The average pot smoker does not consume even a joint a day, let alone 17. Assuming similar production costs for both kinds of dried psychoactive plants, the total retail value of marijuana would be a small fraction of the total retail value for cigarettes. So unless marijuana tax rates were set much higher than cigarette taxes, which would tend to perpetuate a black market, the excise tax revenue would be quite modest at current consumption levels. Gieringer suggests a tax of 50 cents to $1 per joint, which is extremely heavy even compared to the cigarette taxes that prevail in New York City ($3 a pack, or 15 cents a cigarette, on top of the federal excise tax of 39 cents a pack). Even a levy as big as Gieringer proposes would bring in revenues that "might range from $2.2 to $6.4 billion per year," according to his estimate. 

Given much lower prices and removal of the legal barriers to obtaining marijuana, consumption almost certainly would rise, as new consumers entered the market and current consumers smoked more often. But it's doubtful that consumption would rise enough for marijuana to generate anything like the excise tax revenue from cigarettes, mainly because, given the differences in the two drugs' effects, pot smokers (as a group) are never going to smoke as heavily as cigarette smokers. With a tax rate comparable to the U.S. average for cigarettes, we might be talking about hundreds of millions of dollars a year, or maybe a billion or two, as opposed to $15 billion.

Yet the big drop in marijuana prices, the very development that would make excise tax revenue surprisingly modest, would put billions of dollars in consumers' pockets, allowing them to get the same value for much less money. And to the extent that marijuana consumption rose, that too should be counted as an economic benefit, since people would be getting more enjoyment from the product than they did at artificially inflated prices. 

From the government's (and taxpayer's) point of view, the real fiscal benefit from abandoning the war on marijuana would come from no longer arresting, prosecuting, and jailing pot smokers, sellers, and growers. Drug law enforcement costs something like $40 billion a year, and marijuana accounted for 43 percent of drug arrests in 2005. That doesn't mean legalizing marijuana would save two-fifths of the money spent on the drug war, since marijuana offenders are much less likely to be imprisoned than other kinds of drug offenders. But the savings certainly would be substantial. And that's not counting all the indirect costs, such as marijuana offenders' legal expenses, loss of freedom, forgone income, and so on.

In short, the focus on the excise tax bonanza that legal marijuana supposedly would bring—a theme that is often emphasized by opponents of the war on drugs—is misplaced. Which is just as well, since I'm not a big fan of excise taxes.