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Revenue Implications of Legalizing Marijuana

  • Jan 22, 2013 | Gail Cole

 What Are The True Revenue Implications of Legalization?

Proponents of legalizing marijuana argue that the regulated sale of pot will be a good source of revenue. Is it true? 

Washington State
In Washington State, where Initiative 502 made the possession of up to an ounce of marijuana legal on December 6, 2012 (adults only), it is estimated that approximately $4,295,000 in revenue will be generated by the legalization of marijuana over the next five years. Costs of administering the program will be approximately $2,754,000 during the same time period. (I-502 Fiscal Impact Statement).

The I-502 Fiscal Statement admits that "the total amount of revenue generated to state and local government could be as low as zero… " if the federal government steps in. On the other hand, "estimated total revenue generated to the state could be as high as $1,943,936,000 over five fiscal years."

Estimates for the revenue generating powers of Amendment 64, which was formally added to the state Constitution on December 10, 2012, vary widely. The Colorado Center on Law & Policy thinks that legal marijuana could "generate over $32 million in new revenue for the state budget, [and] over $14 million in new revenue for local governments" prior to 2017. In addition, it claims there would be savings of "more than $12 million in state and local law enforcement spending." The Huffington Post quotes Brian Vicente, co-director of the Campaign to Regulate Marijuana Like Alcohol, as saying that marijuana sales in Colorado "are expected to produce close to $50 million in new tax revenue annually."

The Numbers
Both Colorado and Washington plan to regulate the sale of marijuana much like the sale of alcohol, but the real impact of legalization on use is unknown. "Whether marijuana’s status as a legal or illegal drug influences how it is used remains unclear." Making the issue more interesting is the fact that marijuana remains illegal under federal law. (The New York Times).

Forbes asked the question, "Dude, Would Legalizing and Taxing Weed Solve Our Budget Woes?" It links to two 2010 studies on the subject:

  • A report by the Cato Institute on The Budgetary Impact of Ending Drug Prohibition estimates that legalizing drugs would save roughly $41.3 billion per year in government expenditure on enforcement of prohibition… and yield tax revenue of$46.7 billion annually, assuming legal drugs were taxed at rates comparable to those on alcohol and tobacco." "8.7 billion of this revenue would result from the legalization of marijuana…," which is the only thing on the table right now.
  • A RAND Corporation study on marijuana legalization in California suggests that "tax revenues could be dramatically lower or higher than the $1.4 billion estimate provided by the California Board of Equalization." The report reminds that "there is considerable uncertainty about the impact of legalizing marijuana in California on public budgets and consumption… ."

If people smoke more pot when its legal, will they consume less alcohol? Will tax revenue generated by pot cut into tax revenue generated by alcohol?

Overall, the consensus seems to be that "legalizing dope will trim spending and generate some new taxes." It may not be the windfall some think it will be. The Forbes article wryly concludes with, "Legalizing dope … won't prevent us from going over the fiscal cliff. On the other hand, maybe we won't care as much."

Not So Fun Facts
In the United States, approximately 750,000 people are arrested each year for marijuana-related offenses. Some 40,000 inmates "have a current conviction involving marijuana, and about half of them are in for marijuana offenses alone."

The average annual cost per inmate in a New York State prison is $60,076.

Broader Implications
Licensing fees and sales tax are not the only possible sources of revenue when marijuana is legalized. Consider the jobs that will undoubtedly be created by producers, processors, and retailers.

Proponents of legalization continue to reference the fiscal pros of legalizing marijuana. In Hawaii, supporters of the recently introduced Personal Use of Marijuana Act (House Bill 150) say that $3 million would be saved from a reduction in law enforcement costs if marijuana is made legal. Furthermore, "if you taxed and regulated it, it could be eleven million dollars or even more in tax revenues." (hawaiinewsnow.com).

photo credit: warrantedarrest via photopin cc

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.