Drug Policy

Should the Benefits of Legalizing Pot Be Measured by Tax Revenue?


Jacob Sullum

According to a new report by researchers at Colorado State University, the tax revenue generated by marijuana legalization won't be the windfall some people may have been expecting. The report, produced by the university's Colorado Futures Center (CFC), estimates that annual excise tax revenue will fall far short of the $40 million for school construction anticipated by Amendment 64, the initiative that made marijuana legal for recreational use. They estimate that the 15 percent excise tax authorized by Amendment 64 would instead yield something like $22 million a year, while a special sales tax of 15 percent, as contemplated in a bill the state legislature is considering, would produce $91 million in revenue, on top of $18 million from the regular state sales tax of 2.9 percent. The total of $130 million or so (which does not include revenue from local sales taxes) obviously would not have much of an impact on Colorado's overall budget, which totals more than $20 billion a year. "After meeting the obligations for BEST [the school construction program] and funding the regulatory and other public health and safety budget demands," the report concludes, "revenue from marijuana taxes will contribute little or nothing to the state's general fund."

That conclusion does not trouble me, since I have never been a big fan of the tax-revenue argument for legalization. The ban on marijuana (and other drugs) should be repealed because the government has no business trying to dictate what people put into their bodies, not because prohibition represents a missed opportunity to take people's hard-earned money. In fact, to the extent that revenue comes from special "sin" taxes on marijuana, as opposed to the standard sales and income taxes, I think the right target is zero, since this is just a milder way of punishing people for behavior that violates no one's rights. Still, the assumptions that went into this fiscal analysis, several of which are questionable, raise some interesting issues.

To begin with, I think the CFC researchers may have erred in the way they calculated the revenue from the excise tax, which they applied to the "wholesale cost" of marijuana, by which they mean "the cost of growing marijuana." Based on a RAND Corporation estimate for marijuana cultivation in California, they assume that it costs $600 to produce a pound of marijuana. Applying the 15 percent excise tax to that amount, they get $90 in revenue. Yet H.B. 1318, the marijuana tax bill, says the excise tax would be applied to "the average market rate" for wholesale marijuana, which includes the grower's distribution costs and markup. Using the CFC's figures for those, the excise tax revenue per pound would be $120 instead of $90, or one-third more, in which case the annual revenue would be around $29 million rather than $22 million. Applying the excise tax to the wholesale price rather than the production cost also would boost the sales tax revenue a bit, since it is partly a function of the excise tax.

Changing the assumptions about marijuana sales could have a much bigger impact on revenue projections. The researchers start with numbers from surveys on marijuana use, which they inflate by 20 percent to account for underreporting and apply to Colorado's population. They take into account the impact of lower prices on consumption, but their estimate of the difference in prices between the black market and the legal market seems way too low: just 10 percent. Partly that reflects the impact of taxes, which by their calculation would add about $34 to the retail price of an ounce, making it about 23 percent higher than it would otherwise be. But the low estimate of the price gap between the legal and illegal markets is mostly due to using $206 as the black-market price for an ounce. That is "the average price of an ounce of marijuana of all qualities," as reported on the website The Price of Weed, based on numbers submitted by consumers, as of April 10.

But the black-market price of high-quality cannabis, which is what Colorado's medical marijuana centers (MMCs) sell and what the state-licensed pot shops will offer, is typically between $300 and $400 in the U.S. (as reported on the same site). The current Price of Weed average for high-quality pot in Colorado is substantially lower, just $238, but that figure likely includes marijuana bought at MMCs, which typically charge $25 for an eighth of an ounce, close to the CFC's $185-per-ounce estimate of the after-tax retail price in state-licensed pot stores. Kayvan Khalatbari, co-owner of an MMC in Denver, estimates that black-market prices in Colorado are roughly twice what businesses like his charge. By contrast, the CFC researchers are assuming almost no difference in price. If Khalatbari is closer to the mark, legalization would bring a much bigger drop in price, implying a bigger increase in consumption and more tax revenue. A further boost would come from pot purchases by visitors to Colorado, which the researchers do not include in their analysis because the extent of that market segment is hard to estimate.

In addition to lower prices, legalization itself may have an impact on consumption, since people may be more inclined to buy and consume marijuana when doing so is legal and convenient. That possibility does not figure into the CFC analysis, because the researchers assume any such effect would be canceled out by the elimination of marijuana's "forbidden fruit" appeal. If they are wrong about that, consumption and tax revenue will be higher than they anticipate.

The CFC's numbers imply that roughly 18 percent of Colorado adults will be marijuana consumers after state-licensed pot shops open, compared to a nationwide average of around 14 percent (including the CFC's 20 percent adjustment for underreporting). If the increase in consumption proves to be that modest, it will undercut not only extravagant promises of new tax revenue but also hyperbolic warnings about the dire consequences of treating marijuana more like alcohol. Although opponents of the war on drugs often respond to such warnings by minimizing the extent to which the consumption of currently illegal drugs would rise if they were legal, increased consumption generally should be counted as a benefit. It means that people are getting more enjoyment for their money than they otherwise would, because prohibition either deterred them from using marijuana or kept them from consuming as much as they would have liked. At the same time, lower marijuana prices free up money to spend on other things people value.

An increase in consumption may also raise the costs associated with inappropriate or excessive marijuana use, but even a pure utilitarian has to weigh those costs against the benefits, which include avoiding the harm caused by prohibition. It is therefore telling that The Denver Post sums up the CFC study this way: "Legal marijuana in Colorado may not bring in enough money to cover the societal costs of legalization." In reality, the study makes no attempt to measure "the societal costs of legalization." Even if it did, putting "societal costs" on one side of the ledger and tax revenue on the other would exclude almost all the ways that people benefit when the government stops treating marijuana suppliers and consumers as criminals.

You can download the CFC report here. In case you wonder how fiddling with its underlying assumptions affects the tax revenue projections, the authors provide a handy interactive calculator here.

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  1. It is therefore telling that The Denver Post sums up the CFC study this way: “Legal marijuana in Colorado may not bring in enough money to cover the societal costs of legalization.”

    Did any lawmaker ever seriously argue that marijuana prohibition was immoral in of itself? Thanks for the reminder that freedom is only allowed when it benefits ‘society’.

    1. What costs? No more spending on marijuana prohibition, no more people arrested and put in prison for smoking or selling it, and at worst a minor increase in the number of people using a relatively benign drug?

      1. You monster, did you forget about TEH CHILDRUNZ??!!?

        1. Don’t be silly, they’re going to keep getting it through the black market channels like they always have.

          1. BLACK market? Racist!

          2. That was sarcasm

            1. I know, I know, but I find the deadpan inability to tell sarcasm to be a source of a great deal of humor. Besides, in high School it was easier to find pot than tobacco or alcohol. So supplying the children won’t be an issue.

  2. ” but even a pure utilitarian has to weigh those costs against the benefits”

    i’ll admit utilitarian calculus gets difficult fast, but i think it is pretty safe to say that the benefits of legalization far outweigh the costs.

    1. You can say that again.

      1. lol The server agreed with you.

  3. ” but even a pure utilitarian has to weigh those costs against the benefits”

    i’ll admit utilitarian calculus gets difficult fast, but i think it is pretty safe to say that the benefits of legalization far outweigh the costs.

    1. Typical stoner double post. Sure the benefits for Cheech and Chong libertarians are going to be desirable, but what about the costs to little Timmy on the playground who’s suddenly going to be shooting up the marijuana while parents and law enforcement stand by helpless to intervene?

      1. I gave mj 3 tries(by itself), made me panic everytime, I greatly prefer alcohol.

        I will say that after a good amount of drinking I can smoke a bit without worrying and while it won’t make me high I feel very good the next day. So I guess it’s not completely useless to me.

  4. http://newsone.com/2412446/obama-war-on-drugs/

    Oh you guys haven’t heard? Obama ended the drug war!

    1. Didn’t he already do that a long time ago? How many times does he have to put that damn thing down?

      1. All I know is that Zombie Nixon must be pretty pissed that Zombie Reagan’s getting credit for his idea.

        1. Isn’t Nixon more technically a revenant than a zombie? He still had his brain and wouldn’t seek replacement.

          1. Isn’t his entire head in a jar though?

  5. “Should the Benefits of Legalizing Pot Be Measured by Tax Revenue?”

    No. This always annoyed me when Gary Johnson kept making this argument about taxing and regulating marijuana.

    1. I agree, but the fact is most of the public doesn’t, which is why legalization advocates have to use arguments like “tax and regulate” which is a giant step in the right direction.

      1. It’s also because the public loves making other people pay more taxes. Hence “Tax the rich” and “Legalize it and tax the shit out of it”.

      2. One must tip the slippery slope in the direction you want it to move. Hense the first step being the palatable one to the opposition here.

        1. The problem is that a lot of the opposition are conservatives, who aren’t real big fans of taxes and regulations.

          1. The argument is supposed to appeal more to nanny-state liberals and moderates who are more open to the idea of legalizing marijuana

  6. Next on the list of unintended consequences: Colorado starts actively promoting pot use in order to increase tax revenue.

  7. How will these taxes not be wildly evaded? It seems to me the only people who would by from the dispensaries are actual sick people who do so to use their insurance. Why would the typical pot smoker ever buy from a legal outlet and pay the tax? It is not like if I am ever caught the police will be able to tell where the pot came from. And there is already such an underground pot scene people would have no problem buying their own.

    I really wonder about those revenue estimates and how any money they do collect won’t just be a tax on the sick.

    1. really depends on how much they tax it, but most people don’t buy tax free moonshine anymore, and while there is a large cigarette black market the taxes are crazy and it usually only works because there is a nearby legal place with less taxes.

    2. Of course not John, it will be like cigarettes in NY, where everyone happily complies and no one buys smokes that haven’t had state taxes levied.

      1. Well they do buy cigs that have state taxes, just not necessarily from the state in which they live.

        1. To kinnath’s point, about 40% of smokes in NY have actual state tax. Sometimes it’s just easier.

    3. Casual users looking for quality control may like going to a licensed retail shop rather than buying on the street from somebody’s pal.

      For instance, a late-middle-aged guy visiting his sister in the middle of Colorado might want to pick up a small bit of the stuff during his a vacation, not that I would actually know anybody like that.

    4. There is the possibility that the legal distribution of MJ will undercut the pricing model of illegal distribution to the point that illegal distribuion will fade away.

      But a sufficiently high tax on legal distribution will inhibit the market from wiping out the illegal distribution supply chain.

  8. What about tourism? I’m booking flights motherfuckers.

    1. I can imagine every hotel in every resort town in CO will have a shuttle service or a delivery service set up with the local dispensaries.

      1. Not officially, but freelancers will provide that service unofficially to the guests.

  9. Even if pot wasn’t taxed at all (even exempted from sales tax), it would still not make any moral or economic sense to lock people up for being in the same room as a plant.

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