Legalize Marijuana for Tax Revenue
The entire U.S. should follow California’s lead—introducing referendums to make marijuana legal, thereby putting the current criminal drug producers and sellers out of business and enabling government to collect tax on pot sold via legitimate channels. Pro or con?
Editor’s Note: The following is an update of a Debate Room edition that originally appeared in 2009
Pro: Fund Crime—or Taxes?
As California readies for its November referendum, the first public test of the marijuana-legalization issue, it makes sense for Americans to have a look in the rearview mirror. The current prohibition on marijuana consumption exactly parallels the 1920s alcohol prohibition.
Every year, a widely consumed illegal substance makes potential criminals of millions and actual criminals of hundreds of thousands. And like booze during Prohibition, this substance, marijuana, is the easy revenue of organized crime, contributing tens of billions of dollars to growers, who commit a variety of bad acts both at home and abroad.
How much money is made from this single illegal substance? In fairness, nobody knows for sure. "Illegal" means hard data are difficult to come by. We do know, however, that according to recent figures, U.S. consumers number anywhere from 25 million to 60 million (depending on how likely survey respondents are to tell the whole truth), and at an average cost of $5 per cigarette (and factoring in one per day for each user), total spending on marijuana may add up to $45 billion to $110 billion a year.
What about possible tax revenue? From Canada we’ve learned that the production cost of (government-sponsored) marijuana is roughly 33¢ a gram. Currently, U.S. marijuana consumers pay at least $10 per gram retail for illegal marijuana. If the cost of retailing and distribution is the same as for legal tobacco cigarettes, about 10¢ a gram, then selling the (legal) product at exactly the same price as on the street today ($10 per gram) could raise $40 billion to $100 billion in new revenue. Not chump change. Government would simply be transferring revenue from organized crime to the public purse.
It is a proven technology. We did it in 1933 when Prohibition ended. It took 50 years for the U.S. to bring in Prohibition and 11 to get rid of it. Certainly, no lawmakers who voted for Prohibition guessed it would fail on such a large scale—just as anti-marijuana laws have. The existence of the California referendum shows support is growing to decriminalize marijuana. Even if the referendum fails this year, it serves as a signal that the U.S. is looking toward a future that doesn’t repeat the mistakes of the past.
Con: A False Economy
Gee, how about collecting taxes from legalized marijuana as a way of helping to deal with the deficit? Sounds great. Doesn’t work. Now our friends in California, who have a history of approving propositions costing billions of dollars with no offsetting revenue, have decided they can pay for their folly by getting tax from marijuana. Californians are great people, but I’m not sure we should use their business models as a way to fix the deficit problem in the U.S.
There are about 170 million users of alcohol in the U.S. and 16 million users of marijuana. This 10-to-1 ratio exists because alcohol is legal and marijuana is not. If we legalize marijuana, everyone agrees (even anti-prohibitionists) that we will have far more users. Ooooh, just think of all that revenue. Except we already have a working model for a legal intoxicant we collect taxes for. Let’s see how well that works:
Studies show that the U.S. collects about $8 billion yearly in taxes from alcohol. The problem is, the total cost to the U.S. in 2008 due to alcohol-related problems was $185 billion, and the government pays about 38% of that cost (approximately $72 billion), all due to consequences of alcohol consumption, according to the National Institute on Alcohol Abuse & Alcoholism. For every dollar the government collects in alcohol taxes, it expends about $9 (for such things as Medicare and Medicaid treatment for alcohol-related health troubles, long-term rehabilitation treatment, unemployment costs, and welfare). Does that seem like a model to emulate?
The legalization of alcohol is grandfathered in, and it is unlikely that major changes will be made. The last thing we should do is replicate this irrational business model. True, even though studies show both drugs are similar, many believe alcohol is worse. But even if we see only half the damages with marijuana, we cannot ignore the math: $4.50 for every $1 we collect is not a good business model.
If we need revenue that badly, why not legalize gambling and prostitution in California? My guess is those would raise more revenue than marijuana. How about a really radical idea—don’t legalize marijuana, prostitution, or gambling, and try spending less!