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A Toke and a TaxIf governments legalize marijuana, how much revenue can they raise from it?

By Jeremy Singer-VinePosted Wednesday, June 10, 2009, at 6:31 PM ET

The worse the economy gets, the better marijuana looks—not necessarily for its psychedelic properties, but for its revenue potential. As more cities and states face budget deficits, the idea that legal, regulated marijuana could reel in a bounty of taxes is gaining traction. This development has confounded legalization advocates, rendering their FAQs nearly irrelevant and plunging them into an unfamiliar debate: OK, say we legalize pot. How should we tax it?

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The question is, not surprisingly, popular in California, which has a $24 billion deficit. In February, one lawmaker introduced a bill to tax and regulate cannabis sales to any adult over 21 at any licensed establishment—and in April, a poll found that 56 percent of Californians supported the idea. In May, Gov. Arnold Schwarzenegger said it was "time for debate" about legalizing and taxing marijuana. Other states facing similar fiscal woes, such as Illinois, are considering proposals that would legalize and tax either medical or all marijuana. Sensing opportunity, marijuana-reform lobbyists have enticed legislators with promises of fat tax revenues, as high as $1 billion annually in California.

Reform advocates are nearly unanimous in support of a marijuana tax similar in structure to taxes on tobacco and alcohol if it coincides with the drug's legalization. "This is the only constituency out there that's going to say, 'Bring it on; tax us,' " says Aaron Houston, director of government relations for the Marijuana Policy Project. But that's about where the agreement ends. The debate has been vicious at board meetings of the National Organization for the Reform of Marijuana Laws. "There's a lot of blood all over the table," says Allen St. Pierre, NORML's executive director. "It's probably one of the most contentious issues that the board takes up."

Tax debates often get heated, but a marijuana tax is particularly divisive because it's so speculative. (After 70-plus years of illegality, little is known about the economics of the drug.) A cannabis tax could be like an excise tax (a point-of-sales tax added to any sales tax, as exists in many places for gasoline, alcohol, cigarettes, and, potentially, soda), or it could be a pricey license to sell the product. Either method would increase the cost to consumers, who would in turn buy less of the product—a public health benefit in either instance. And unless people buy drastically less soda or pot, the government will pocket some extra cash. So far, it seems like a win-win situation.

But there are complications. One is the thriving black market for marijuana, with sales valued, albeit shakily, as high as $100 billion a year. A high tax could keep the market underground, robbing the government of tax revenue. The theory is that John Q. Pothead would be willing to pay a premium so he can "go to a regulated establishment that can assure some level of safety and labeling," says Houston of the Marijuana Policy Project. But make the premium too high, he says, and users will just go to "that shady guy" on the corner. The problem is that nobody really knows what the optimum premium is.

Speculation aside, there is one place where a marijuana tax is a reality: Oakland, Calif., which taxes sales of medical marijuana at 9.5 percent, the same rate as other goods in Alameda County. (Technically, 20 states require a tax stamp for marijuana sales, but the purpose of that policy is merely to add tax evasion to the list of penalties for drug dealing.) Additionally, the dispensaries pay a 1.8 percent business-receipts tax, as well as payroll taxes, to the city. Richard Lee, president of a "marijuana business school" called Oaksterdam University, says dispensary owners gain legitimacy by paying taxes. "The more we pay, the more the city needs us and wants us," he says.

Still, even a pro-tax professor at a marijuana business school has his limits. When Oakland proposed an even higher business-receipts tax, Lee and other dispensary owners balked.

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Jeremy Singer-Vine is a former Slate intern.

Illustration by Mark Alan Stamaty.

COMMENTS

Marijuana may be less physically harmful than alcohol and tobacco, but it certainly impairs judgment and motor skills as much as alcohol and more than tobacco. Won't legalization result in exponentially more impaired motorists? Impaired parents (hence, child neglect)? Impaired professionals and students? I have no moral problem with legalizing weed. I've just always thought it seems so completely impractical. Any money governments made taxing it would just be spent dealing with the social results of increased use.....right? I would love to get sensible and balanced feedback on this position (not just impassioned rejection of the whole notion).

-- live4ward
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Actually all the studies and evidence I have seen indicate that in jurisdictions where laws criminalizing marijuana are not enforced (e.g. Santa Clara County in the early '90s) teenage deaths from driving drop precipitously (they are at home playing video games) and murder rates go down slightly (less alcohol abuse, fewer fights between dealers). Pot criminalization began because White constituencies and their representatives were concerned that their kids were visiting Black neighborhoods to get the stuff. Watch Reefer Madness to see all the code images and refer to excellent research by Stanford law professor Lawrence Friedman. Criminalization enraged NYC mayor Fiorello LaGuardia who supported studies that showed that marijuana caused insignificant public health problems. There are many studies that show that pot smokers (who should not be on the road stoned) are far less dangerous than cell phone users or, of course, drinkers. I am a criminal defense attorney, and, as I mentioned in another post, I would lose a lot of my income if legalization happened (please wait 'til I retire). But I have to say after years of consideration and many conversations with judges and cops, even if there were not the huge tax profits and savings on jail costs and court costs and police costs, not to mention social service costs when breadwinners are imprisoned, the net result would be a social benefit. Add the blow to some really nasty criminals who would go out of business and the addicts of really harmful substances who might switch to this relatively benign alternative... and I have long concluded that criminalization of pot is ridiculously stupid. Oh yeah, if you are arrested in western NC, mention this post and I'll give you a discount.

-- malyoung
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If pot is legalized, you can grow your own in your back yard or in your basement with some gro-lights. Then the government gets no tax money.

And that is why they won't legalize it. Sure, you can make your own wine and moonshine, but it's easier to grow some dope. They don't call it 'weed' for nothing.

-- Guylinder
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Creating high fines for growing marijuana without a license will be another revenue stream. Really though, since the Carter administration made it legal to make your own beer, still not that many people actually do this at home. Many of those who do start out making beer at home end up opening a microbrewery and doing so professionally. A similar trend may develop in marijuana growing.

-- here2help
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