Filtering Through the Smoke
Legalizing Marijuana Would Slash Its Price, but the Effects on Use and Revenues Are Hazy
Californians are considering two proposals that would make the state the only jurisdiction in the world to fully legalize marijuana, including its commercial production for nonmedical purposes.
The first proposal is state Assembly Bill 2254, often called the Ammiano bill after its sponsor, Assemblyman Tom Ammiano (D-San Francisco). The bill would legalize marijuana for those 21 and older, reduce marijuana possession from a misdemeanor to just an infraction for those under 21, allow home cultivation of up to six plants, and require the state’s Department of Alcoholic Beverage Control to regulate marijuana possession, sale, and cultivation in ways similar to the laws now regulating alcohol. The bill would initially impose a statewide excise tax of $50 per ounce on marijuana sales and require the funds to be spent “exclusively for drug education, awareness, and rehabilitation programs.” This $50-per-ounce excise tax may be reduced if revenues exceed spending on these programs.
The second proposal is Proposition 19, which will appear on the state’s November ballot. Proposition 19 would legalize marijuana use for those 21 and over and allow adults to cultivate marijuana plants for personal consumption in an area of up to 25 square feet. In contrast to the Ammiano bill, which would establish a state regulatory regime, the ballot proposition would empower each of the state’s more than 500 cities and counties to choose whether and how to regulate and tax commercial production and distribution within its jurisdiction.
California Governor Arnold Schwarzenegger has suggested that it is “time for a debate” about legalization. While such a debate is indeed taking place in the run-up to the November election, the debate is occurring mostly in the absence of impartial information about the effect of marijuana legalization on price, consumption, and tax revenues.
The price of marijuana after legalization would fall dramatically because there would be less legal risk for suppliers, more automation, and economies of scale. Farm field and greenhouse production would be extremely inexpensive. Even under a scenario in which production would be confined to “grow houses” that look (from the outside) identical to other residential houses, we would expect the price to drop by more than 80 percent, from the currently prevailing $300–$450 per ounce of sinsemilla (a high-grade form of marijuana) in California to about $40 per ounce.
Consumption would increase under legalization, but it is unclear by how much. The scientific evidence shows that potential and current marijuana users respond to price changes, so we expect that a large price decrease would lead to a consumption increase. We would also expect consumption to increase because legalization would reduce legal risks, lessen the stigma for some consumers, and boost availability and promotion. Factoring in all these effects, we cannot rule out increases in consumption of 50 to 100 percent or more. It is important to note, however, that even if marijuana prevalence were to increase by 100 percent, the prevalence rate would resemble that of the 1970s.
When the Ammiano bill was introduced in 2009, the state’s Board of Equalization estimated that a $50-per-ounce tax would generate nearly $1.4 billion in tax revenue annually from marijuana sales (about $1 billion from the excise tax and about $400 million in sales taxes). Although based solely on the Ammiano bill, this total sum has been used to indicate the revenue that could come from the passage of Proposition 19 as well. But there are four reasons why this figure may be too high.
First, the Board of Equalization assumed that prices would fall more modestly, so it estimated greater sales tax revenue per ounce sold. Second, the board assumed there would be no tax evasion from the $50-per-ounce excise tax; we find this highly unlikely. Third, if legalization were to increase the market share of higher-potency marijuana, then we would expect fewer ounces to be purchased per hour of intoxication; this, in turn, could reduce excise tax revenues per hour of intoxication by almost 50 percent relative to the board’s estimate. Fourth, the excise tax may not be set at or stay at $50 per ounce.
High or Low?
There are also reasons why the $1.4-billion revenue estimate from marijuana sales may be too low. Even with a $50-per-ounce excise tax and any costs associated with smuggling marijuana out of California, the price of sinsemilla produced legally in California would be lower than current prices throughout most of the United States. In fact, legalization in California could depress marijuana prices and increase consumption throughout much of the country, although such “exports” would be illegal under California law.
Thus, if marijuana were legalized in California and regulations made it easy for marijuana smugglers to buy legal, taxed marijuana — instead of purchasing it before the taxes were collected — then California could reap a lot of revenue, because there are six times as many marijuana users in the rest of the United States as in California. Such a windfall would depend not only on California regulations being permissive with respect to volume purchases, for example, but also on how the federal government and other states would react. California could also generate additional tax revenue from those who might travel to the state as drug tourists.
There is also the question of whether legalization would reduce law enforcement costs. Current estimates of the state’s costs of enforcing marijuana laws vary widely, from $200 million to nearly $1.9 billion a year. We estimate that these costs are likely in the lower range, probably less than $330 million a year. Our analysis recognizes that misdemeanor and felony offenses have different costs, that marijuana offenders are less likely to be prosecuted than are other drug offenders, and that the former receive shorter sentences when convicted.
But if marijuana is legalized, we should not assume that the freed-up law enforcement resources would be returned to the general fund. These resources would likely be used for other law enforcement purposes rather than be refunded to taxpayers. Moreover, there would be new administrative and enforcement costs of managing marijuana distribution and addressing tax evasion.
There are other uncertainties. Spillover effects on the use of alcohol or other drugs could have budgetary consequences as large as those stemming directly from changes in marijuana use. Or, if the federal government retaliated by withholding certain federal funds in the same way that some federal highway funds in the 1980s were made contingent on states setting the minimum age for purchasing alcohol at 21, those losses could offset the fiscal benefits of marijuana legalization.
While uncertainty abounds, we hope that presenting the relevant data concerning prices, consumption, tax revenues, and enforcement costs in a systematic fashion can lend some clarity to a hazy debate.