Revenues From Legalization

Economics of Cannabis Legalization (1994) Detailed Analysis of the Benefits of Ending Cannabis Prohibition

June 1994
by Dale Gieringer, Ph.D.
Coordinator, California NORML

The Case For Legalization
The Cheapest Intoxicant
Putting A Value On Cannabis
Computing A Harmfulness Tax
Revenues From Legalization

Revenues From Legalization
    Assuming a tax of $.50 or $1 per joint, we can venture a rough estimate of the revenues that could be raised from legalized cannabis. According to the 1991 National Household Survey on Drug Abuse, some 19.5 million Americans used marijuana at least once in the year, of whom 5.3 million used at least once a week and 3.1 million daily. About one-half of the latter are thought to be multiple daily users, who can be expected to make up the bulk of total consumption.19 Assuming the mean consumption of all daily users is two or three joints per day, current national consumption can be figured to exceed 7 to 10 million joints per day, or 1200 to 1800 metric tons of 6% THC cannabis per year. These figures may well be low, since the Household Survey underestimates actual use. A considerably higher estimate is given by Kleiman, who puts 1986 consumption at the equivalent of 2700 metric tons of 6% THC cannabis; other trafficking-based estimates range as high as 4700 tons.20
    Consumption would surely expand further in a legal market where joints were freely and cheaply available. At the height of marijuana’s popularity around 1979, consumption was over twice that of today. One factor that could significantly expand the demand for legal cannabis in the future would be the development of mild cannabis beverages like bhang, which traditionally constituted the bulk of demand in India. It is therefore not unreasonable to forecast ultimate consumption at 15 - 30 million joints per day, or 2750 - 5500 metric tons of 6% THC cannabis per year.
    The obvious question remains what portion of consumption would be absorbed by home growers. As we have seen, it is probably hopeless to limit personal use cultivation. Home growing would naturally be most attractive to heavy users with little money, who probably account for a major share of consumption. At $2 per joint, a three-joint per day habit would cost over $2000 a year, a hefty incentive for any home gardener. It therefore seems likely that home cultivation would absorb a substantial portion of the consumption of multiple daily users, who are estimated to account for 60% of the total market.21
    We shall estimate the size of the commercial cannabis market by posing two price scenarios. (1) Given a $.50 excise tax and a minimum price of $1 per joint, we will assume that home growing absorbs 20% of consumption (that is, one-third of the consumption of multiple daily smokers), leaving a commercial demand of 12 - 24 million joints per day. This works out to about $2.2 to $4.4 billion per year in tax revenues. (2) Given a $1 excise tax and a price over $2 per joint, we assume commercial consumption would be cut by 40% to 9 - 18 million joints, yielding $3.2 to $6.4 billion per year. We conclude that revenues from cannabis excise taxes might range from $2.2 to $6.4 billion per year. This is comparable to the revenues currently raised through the federal tax on alcohol ($8 billion) and cigarettes ($5 billion).
    By comparison, in the Netherlands, a nation of 15 million people, total domestic sales of soft drugs have been estimated at under 1 billion guilder, or $500 million.22 Extrapolating this to the U.S. population, one arrives at total retail sales of about $8 billion. If one-half of this went to taxes, one would get $4 billion per year.
    Similarly, in Bengal, with a population of 50 million, the Indian Hemp Drugs Commission reported total tax revenues from ganja of 24 million rupees in the year 1892-3, or about $10 million (1892 dollars).23 Extrapolated fivefold to the current U.S. population, this would work out to $700 million in 1992 currency. The tax on ganja was about 8 rupees per kilo in Bengal, or just $.04 per joint in current dollars.24 Were the tax increased tenfold to the level we have proposed, revenues would presumably increase to $7 billion, minus a substantial amount due to decreased demand from higher prices.
    In addition to excise taxes, states could impose sales taxes on cannabis. Unlike excise taxes, sales taxes would be proportional to final retail price, including the added markup for premium brands. Just like alcohol, it can be expected that marijuana would often be sold for substantially more than its minimum price: in a hotel bar, a good sinsemilla joint might well go for $5. Assuming average retail prices of $ 1.50 - $2.50 per joint, and sales taxes between 4% and 6%, the total revenues raised might range from $200 million to $1.3 billion.
    In addition, legalization would create numerous revenue-generating spinoff industries, such as coffee houses, gardening equipment and paraphernalia. The city of Amsterdam, with a million people, boasts 300 coffee houses retailing cannabis.25 Translated to the U.S, this would amount to over 60,000 retailers and 100,000 jobs.
    Finally, the legalization of cannabis would also permit the agriculture of hemp, a versatile source of fiber, protein, biomass and oil, which was once one of America’s top crops. Hemp production might well rival that of other leading crops such as cotton or soy beans, which are currently on the order of $ 6 - 10 billion per year.
    On the other side of the ledger, legalization would save the considerable economic and social costs of the current criminal prohibition system. Current federal drug enforcement programs run at $13 billion per year. State and local programs are probably of similar or greater magnitude: in California, the Legislative Analyst’s Office estimated the cost of state drug enforcement programs at around $640 million per year in 1989-90, plus perhaps twice as much more in local expenditures.26 A sizable chunk of these costs involve cannabis, which accounts for 30% of drug arrests nationwide. Legalization of cannabis would also divert demand from other drugs, resulting in further savings. If legalization reduced current narcotics enforcement costs by one-third to one-fourth, it might save $6 - $9 billion per year.
    The economic benefits of marijuana legalization are summarized in Table 2. The total direct savings to government in taxes and enforcement come to some $8 - $16 billion per year. These figures are somewhat lower than those sometimes bandied about in public discourse, as both legalizers and prohibitionists have a tendency to make consumption estimates that are in our opinion inflated. Nonetheless, the benefits of legalization seem both substantial and undeniable, and deserve to be taken seriously.

Table 2
Economic Benefits of Cannabis Legalization

Excise Taxes$2.2 - $6.4 Billion
Sales Taxes$0.2 - $1.3 Billion
Enforcement Savings$6 - $9 Billion
Hemp Industry$6 - $10 Billion
Others: Spinoff industries, Reduced hard-drug and alcohol abuse

Dale Gieringer is coordinator of California NORML (National Organization for the Reform of Marijuana Laws) and co-founder of the California Drug Policy Reform Coalition. He received his doctorate in Engineering-Economic Systems at Stanford.