Just How Much Tax Money Can Legal Marijuana Generate?

Now that marijuana legalization is a viable political discussion in the United States, the subject of taxation of the blessed herb has become a contentious one. Many want to know just how much legal marijuana will be taxed, while some wonder if it will generate enough revenue to make a difference in the budget shortfalls faced by most states.

Tax“‘Nobody has any idea (about revenue),” says Jeffrey Miron, a Harvard economist and analyst at the Cato Institute.  “There’s only one good way to find out what the revenue would be, and that would be for all levels of government to legalize it and then we see what happens.”

But many elected officials want hard numbers, even if they are only estimates. They still see cannabis as some kind of negative that needs to be cancelled out by a positive.

“Our overall conclusion was while there is some revenue here, this is not a panacea for fiscal imbalance going forward,” says Phyllis Resnick, lead analyst and author of a recent report out of Colorado on possible tax revenues in the state. “Our conclusion at the end was there is at least a risk, even with a high revenue number, once you take all this into account, there is not going to be a significant amount left over relative to the size of the (state’s budget) gap,” which could be  in the $3 billion range in a decade.

Most legalization advocates agree that marijuana legalization won’t solve every budget problem at the state or federal level; these budget gaps are enormous in some cases and will only be closed through a series of measures designed to cut spending and raise tax revenue.

One thing is for sure: cannabis legalization can aid in both of these areas. Not only will tax money be raised, but law enforcement resources will be saved when police stop worrying about marijuana users. But unless the industry for legal marijuana is able to grow, the full potential for tax revenue will never be realized.

There are also other factors to be considered when trying to estimate revenue.

“My intuition tells me there will be a cross border effect,” said Scott Drenkard, an economist with the Tax Foundation who has studied the issue of cannabis taxation. “It will be cheap and available. That’s something to consider. There is going to be a tourism boom of some sort. It won’t be illicit.”

But he added, “It’s hard to know because it’s an entirely new product on the legal market.”

coloradopottax-chart2Another interesting data point: Tax rates on marijuana as a percentage of retain price will be lower than tobacco, but higher than alcohol. (See chart at right). Too much? Too little?

So much remains to be seen when it comes to how cannabis legalization will play out in each state. All you can do is try to keep up with all the news.

– Joe Klare

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