Benefits of Marijuana Legalization in California

California NORML Report
by Dale Gieringer, Ph.D. - Updated October 2009

Marijuana Legalization Could Yield California Taxpayers
Over $1.2 Billion Per Year
Additional Spinoff Benefits Up To $12 -$18 Billion

While California struggles to address the state's swelling budget deficit, the legalization of marijuana looms as an attractive way of raising revenue for the state.

California NORML estimates that a legally regulated market for marijuana could yield the state at least $1.2 billion in tax revenues and reduced enforcement costs. A basic $50/ounce excise tax (roughly $1/joint) would yield about $770 - 900 million per year plus another $240-360 million in sales taxes. In addition, the state would save over $200 million in enforcement costs for arrests, prosecutions and prison. Additional benefits would accrue from increased employment and spinoff industries. Total retail sales of marijuana could be on the order of $3-$5 billion, with total economic impact of $12-$18 billion including spinoff industries such as coffeehouses, tourism, plus industrial hemp.

California NORML's analysis of the benefits of marijuana legalization are as follows:

  • An excise tax of $50 per ounce of marijuana would raise about $770 - 900 million per year.
  • Retail sales on the legal market would range from $3 - $4.5 billion, generating
    another $240 - 360 million in sales taxes.
  • Legalization would save over $200 million in law enforcement costs for arrest, prosecution, trial and imprisonment of marijuana offenders. Need for CAMP helicopter surveillance would also be eliminated.
  • Based on experience with the cigarette tax, total revenues of $1.5 - $2.5 billion might ultiimately be realized.
  • Based on experience with the wine industry, the total economic activity generated by legal marijuana could be nearly four times as great as retail sales, around $12 - $18 billion. Amsterdam-style coffeehouses would generate jobs and tourism. If the marijuana industry were just one-third the size of the wine industry, it would generate 50,000 jobs and $1.4 billion in wages, along with additional income and business tax revenues for the state.
  • Industrial hemp could also become a major business, comparable to the $3.4 billion cotton industry in California.

Details of California NORML's analysis follow below.

Revenue from Taxation of Legal Marijuana

(A) Consumption: More than 1.95 million Californians

According to the US Dept of Health & Human Services SAMHSA 2007 survey of drug use, 1.95 million Californians admit to having used marijuana in the past month. Insofar as these figures are based on self-reporting of illicit activity, they are probably on the low side.

According to a 2002-4 SAMHSA survey, daily users constitute 20% of this population, or about 400,000 Californians.

The bulk of consumption is accounted for by "regular" users, who consume marijuana at least several times per week. Included is a small minority of very heavy smokers (10 or more joints per day), who push the average consumption figures upwards. According to a British survey by the Independent Drug Monitoring Unit [1], "regular" users average 2 oz of cannabis per month or about 2 grams per day (a gram yields one or two joints). The population of regular users is somewhat larger than that of daily users.

Assuming 500,000 - 600,000 "regular users" in California averaging 2 grams per day, consumption by this group accounts for 1.0 to 1.2 million grams per day. Assuming the remaining ~1.5 million monthly users average one joint every week, this adds another 200,000 grams per day. Total marijuana consumption by Californians may therefore be reasonably estimated at 1.2 to 1.4 million grams per day, or about 0.95 to 1.1 million pounds per year.

(B) Economic Revenues from Taxation: a $2.7 - $4.5 billion market

The total value of the domestic marijuana market can be estimated on the basis of its current retail price. Depending on quality, retail price of a single gram (one or two joints) ranges around $10 - $15 ($280 - $420/ounce) for domestic bud, or as low as $5-7 for Mexican grass. For comparison, the prevailing price on the quasi-legal Dutch market is $6/gram. At $10/ gram, the total value of California's domestic marijuana market comes to about $ 4.5 billion per year.

In a legal market, prices could be expected to fall. If they fell to current Dutch prices, the retail value of the current market would be $2.7 billion. However, this decrease would be at least partly offset by an increase in consumption. In sum, the total domestic market might reasonably be estimated at $2.7 - $4.5 billion in California. (By way of comparison, in the Netherlands cannabis is reported to be a 2 billion Euro business generating some 400 million Euros in tax revenues per year [5]. )

Excise taxes could be used to regulate the price of marijuana and generate revenues for the state. At current levels of consumption, an excise tax of $1 per gram of marijuana would yield $430 - $510 million per year. A higher tax of $50 per ounce (roughly $1 per half-gram joint) would yield around $ 770 - $900 million, about the same as California's current excise tax on cigarettes.

Other economic studies have attempted to evaluate the revenues from a marijuana excise tax. According to a study by Caputo and Ostrom [2], a nationwide excise tax would yield $3.44-$12.25 billion (inflation adjusted to current dollars). Adjusted for population, California's share would come to $400 million - $1.5 billion. Similar results were obtained by Gieringer [3], who estimated $3.2 - $6.4 billion based on a nationwide $1 per joint tax, or $400 - $800 million for California. Doubling the tax to $2 per joint could bring the total up to $1.5 billion in California.

Sales tax would boost total revenues over $1 billion

In addition to the excise taxes, sales taxes could generate another $240 - $360 million, depending on the size of the total domestic market ($3- $4.5 billion). Added to a $50/oz excise tax, total revenues would be $1 - $1.2 billion

Another way to estimate the total tax revenues from marijuana is by drawing a parallel with California's current tax on cigarettes. Fully one-half of the current price of cigarettes is accounted for by taxes and fees. On a $3.60 pack, consumers pay a $0.87 excise tax, $0.28 in sales tax, and another $0.74 for the tobacco settlement. A similar 50% level of taxation in a legal $3 - 5 billion marijuana market would yield $1.5 - $2.5 billion.

Spinoff Industries with Total Impact of $12 - $18 Billion

A legal market would generate additional benefits in the form of tourism and spinoff industries, such as coffee shops, paraphernalia, and industrial hemp. A comparable example would be California's wine industry, which generates $51.8 billion in economic activity according to the Wine Institute [4]. With $12.3 billion in retail sales, the wine industry generates 309,000 jobs, $10.1 billion in wages, and $2 billion in tourist expenditures.

Extrapolating these figures to a legal marijuana market with 25% - 35% as much retail sales, one might expect $12 -$18 billion in total economic activity, with 60,000 to 110,000 jobs, and $2.5 to $3.5 billion in legal wages, which would generate additional income and business taxes for the state. With California taking the lead in marijuana legalization, especially strong spinoff benefits could be expected. For instance, Amsterdam-style coffeehouses would create jobs and be a magnet for tourism.

Another spinoff industry of note would be industrial hemp, which California used to grow in the Delta and Imperial Valley. The hemp industry in California could rival the size of the cotton industry, which now generates $3.4 billion in revenues per year according to the National Cotton Council.

COST OF MARIJUANA ENFORCEMENT IN CALIFORNIA IS OVER $200 MILLION PER YEAR

The cost of marijuana enforcement in California currently can be estimated at over $200 million per year, as follows.

State prison

(1500 prisoners @ $49 K per year - 2009 est.) $73.5 million

Jail costs (est. 40% of prison population) $29.4 million

Felony prosecution, court & probation

(est. 8500 felony prosecutions (2008), SF DA's office est. $9250 per case) $78.6 million

Felony arrests 17,000 arrests (2008) @ $732/arrest* $12.4 million

Misdemeanor court costs: $100 court time/case, 61,000 cases) $6.1 million

Misdemeanor arrests ($300/arrest,* offset by fines) ----- $0

California Marijuana Suppression Program (OCJP) $3.8 million

TOTAL: $203.8 million

Not counted above are costs of non-helicopter surveillance and investigation by local sheriffs and police. Also not counted are the substantial costs of criminal penalties to prisoners and their families.

* Arrest costs based on report by State Office of Narcotics and Drug Abuse to the Cal. legislature "A First Report of the Impact of California's New Marijuana Law" (1977), adjusted for inflation.

Sources:

[1] M. Atha and S. Blanchard, "Self-reported drug consumption patterns and attitudes towards drugs among 1333 regular cannabis users," Published by the Independent Drug Monitoring Unit 1997. Cited in Leslie Iversen, The Science of Marijuana, Oxford Press. 2000, pp. 217-9.
[2] Caputo and Ostrom, "Potential Tax Revenue from a Regulated Marijuana Market", American Journal of Economics and Sociology, Oct 1994.
[3] D. Gieringer, "Economics of Cannabis Legalization," in Ed Rosenthal, ed. Hemp Today, Quick Publishing, Oakland 1994.
[4] California Wine Institute, California Wine Industry Statistical Highlights, 2008.
[5] Crossroads Magazine (Masstricht), NIS News, May 5, 2008.