Could Legalizing Marijuana Help Balance the Budget?

There is a growing consensus here in the United States that we need to get our budget in order, and soon.  The deficit is rising higher and higher, the national debt is steadily building, and there's not much agreement on what to do.  Rather, there's not much political will to do what most people readily agree should be done: some combination of cutting public spending and raising taxes that will be painful in the short term (to say nothing of harmful to some politicians' careers) but ultimately in the best interest of the country as a whole.

But what if there were a tax that, if put into place, would be gladly paid by those being taxed, could conceivably generate large profits, and would decrease government spending?  Impossible, you say?  The ravings of a deranged madman intent on world domination, you claim?

Perhaps.  But those are some of the claims being made about legalizing marijuana for recreational use.  The argument goes like this: in spite of the US government's best efforts, marijuana use has been fairly widely used, even back to when it was first outlawed in the 1930's.  Much like Prohibition of alcohol during the 1920's (which, interestingly enough, was repealed at about the time marijuana was outlawed), the laws against marijuana use have only criminalized a personal act that harms nobody but the user, made criminals out of otherwise law-abiding citizens, and allowed the criminal element to make use of marijuana sales as a source of illicit funds.  By legalizing marijuana, we can not only eliminate these issues but also generate a rather sizable new source of income for the government, to boot.

So, the question, as posed in an oddly phrased way in the inspiration for this blog entry, becomes ‘Is it worth legalizing and taxing marijuana as a method of reducing the debt?'

The Economics of Legalization

If we focus on the economics of legalization as opposed to other issues like morals, ethics, and possible addictions, it seems like it should be pretty easy to figure out how much income the government could derive from legalization.  Alas, the illicit nature of marijuana currently makes it difficult to get accurate numbers; the Justice Department itself notes that it's nigh impossible to get accurate estimates of how much marijuana is sold in the US due to the clandestine nature of the business.

There are various ways to make reasonable guesses at the total amount of marijuana both grown and imported; if we extrapolate from amount of marijuana seized yearly (around 1100 metric tons) and assume that represents about 10% of the marijuana in the US, we can estimate about 11,000 metric tons of marijuana imported or produced domestically in the US each year.  (That's 11.0 billion grams of marijuana, a figure that we'll need in just a minute.)

That’s all well and good (and a sign of just how popular marijuana, the various products such as Area 52's gummies, and other derivatives available has become), but the real question is how much revenue could be derived. This is another tricky one; we can't tell for certain how much the use of marijuana will change if legalized.  We might see a huge increase, the levels could stay steady, or use might even decrease (perhaps it won't be ‘cool' anymore).  A 2005 report by Jeffrey Miron of the Harvard School of Economics suggests that the government could generate tax revenue between $2.4 billion (if marijuana was taxed at rates comparable to most normal goods) to $6.7 billion (if taxed at similar rates to alcohol and tobacco).

A much more optimistic estimate suggests using the entire premium currently commanded by drug dealers (the amount above the actual cost of production and distribution) as the tax rate, a nearly 400% rate of return for the government.  This tax rate would be around $7 per half gram of marijuana, yielding a potential total tax revenue of $154 billion on the 11 billion grams of marijuana we estimated being sold in the US.  (Assuming that (a) our assumptions about the amount of marijuana sold in the US currently are accurate, (b) that there is negligible effects on the amount of marijuana sold after legalization and taxation, and (c) that we can impose and collect taxes at that high of a level.)

But wait, that's not all; there are also costs associated with keeping nonviolent marijuana users incarcerated and spending money for police and other services to capture them in the first place.  Again, it's hard to say for certain how much these costs would change if marijuana was legalized (would these resources no longer be needed at all, or simply end up shifted to other uses, fighting different drugs, for instance), but our friend Miron claims that we could save $7.7 billion on enforcement costs ($2.4 billion at the national level, $5.3 billion at the state and local levels).

As To Balancing the Budget…

We now know how much we can expect to generate by legalizing and taxing marijuana , around $13 billion total (from Miron's highest figures; about $5 billion if we use his low figures and just look at the federal government income) or as much as $154 billion (with a much more aggressive tax); is that enough to cover the budget deficit?  Not even close.  The US budget deficit for 2010 was 1.17 trillion (that's Trillion with a T-R); even if the $154 billion figure is accurate (and it seems quite high from where I sit, especially compared with our other estimate), it won't even be enough to get the deficit under $1 trillion, let alone provide a silver bullet to balance the budget without spending cuts or other taxes.

This doesn't mean that we shouldn't consider legalizing marijuana; a potential boost to federal, state and local pocketbooks to the tune of $5-13 billion dollars (perhaps much, much more) is certainly a help.  There's also plenty of non-income related reasons to seriously consider legalization (as several states have or might in the future); from providing more freedom from government intrusion in our private lives to decreasing street crime, the advantages of legalizing marijuana seem to pretty handily outweigh the disadvantages.

Other Benefits

Legalizing marijuana can also help local economies grow. This can lead to tax revenue for the federal budget.

Should the US legalize and tax marijuana, even if it's unlikely to be a major factor in balancing the federal budget?  Are the benefits worth the problems that could arise?  Should the potential economics of legalization be a major consideration when discussing legalization, or should money issues be trumped by health, safety and moral concerns?


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