If governments legalize marijuana, how much revenue can they raise from it?

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June 10 2009 6:31 PM

A Toke and a Tax

If governments legalize marijuana, how much revenue can they raise from it?

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Jeffrey Miron, a Harvard economist and proponent of broad drug decriminalization, suggests that we look to alcohol and cigarette taxes as a model for a potential cannabis tax. Even with so-called "sin taxes" of up to 90 percent of the total price, illegal markets, once widespread, account for a tiny fraction of total sales. Miron warns that initial marijuana taxes at such a level "would just be a total mess" due to the expansiveness of the black market and ease of growing marijuana at home. Instead he recommends starting with a low tax—perhaps at 25 percent of the total price—and then gradually increasing it.

Of course, these relative numbers beg the question: What will the initial, untaxed price be? According to Lee, marijuana averages about $300 per ounce in the Bay Area (and the bill currently under consideration in the slate Legislature would tax pot at $50 per ounce—far higher than Oakland's dispensaries are paying now). A few reform advocates have tried to crunch the numbers. Dale Gieringer, who coordinates NORML's California branch, estimated in 1994 that free-market, untaxed pot would cost just 5 cents to 10 cents per joint, a potency-constant measure. Even adjusted for inflation, that's still at least 100 times cheaper than today's marijuana prices, according to Gieringer.

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But if history and the proposed soda tax are any guide, marijuana may end up among the most expensive intoxicants. Federal and state health departments have been "nudging" the public for decades to reduce the demand for tobacco, which has decreased roughly 4 percent for every 10 percent increase in price. Politicians and economists defend these Pigovian taxes as balancing the public health costs of cigarettes, as they would for marijuana. (Much of this argument would depend on whether legalizing marijuana causes a rise or a decline in alcohol consumption.)

A steep excise tax would particularly infuriate libertarians, a critical constituency of the reform movement. The general tenet that "the government shouldn't be meddling with our minds, shouldn't be trying to nurture our behavior" extends to marijuana, says David Boaz, executive vice president of the Cato Institute and a former NORML board member.

Whatever they do, governments that tax marijuana will have to balance a trio of related goals—reducing budget deficits, eradicating the black market, and improving public health. Inevitably, one goal will get the short end of the spliff. Harvard's Miron predicts that governments will give priority to reducing deficits in the current round of pot-reform debates. It's not the best argument for legalization, says Miron, who has estimated that U.S. governments could save almost $13 billion annually if they no longer arrested, prosecuted, or imprisoned marijuana buyers or sellers. But in an era of falling tax revenue, it may be the most effective one.

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