Marijuana Could Be a Gusher of Cash If We Treated It Like a Crop, Not a Crime

By Steven Wishnia, AlterNet. Posted September 11, 2008.

If marijuana were legal but taxed like alcohol and tobacco, how much money could it bring in to cash-strapped state governments?

One 2006 study called cannabis the top cash crop in the nation, worth more than corn and wheat combined. It was the leading crop in 12 states, outstripping grapes in California and tobacco in North Carolina, and one of the top three in 18 others, coming in just behind apples in Washington and cotton in Georgia. So with states facing massive deficits, could reefer revenues help?

The answer is unclear, but it could be lucrative for governments, especially when combined with the savings from ending prohibition. As the U.S. marijuana market is illegal, there are no sales figures. Estimates of its size range from $10.5 billion a year to $113 billion. But three studies done by economists and policy analysts say ganja taxes could bring in anywhere from $2.4 billion to $31.1 billion in revenue, depending on how big the sales really are. About one-third of that would go to the states.

"There's not enough really good data on it, so it's probably best to look at it in ballpark figures," says Jon Gettman, a Virginia policy analyst who has worked with the National Organization for the Reform of Marijuana Laws and the Marijuana Policy Project. "But there's a consensus that there's an awful lot of marijuana out there and that it's very valuable."

"The Budgetary Implications of Marijuana Prohibition," a 2005 study by Harvard economics professor Jeffrey A. Miron, makes the most conservative projections of the three studies. It calculates possible pot tax revenues at $2.4 billion. That's assuming that prices would drop about 25 percent under legalization, that pot-related economic activities were taxed at the national average of 30 percent, and that the federal Office of National Drug Control Policy's estimate that the domestic cannabis market is worth $10.5 billion is accurate. If herb were taxed more heavily, as alcohol and cigarettes are, that could bring in as much as $9.5 billion -- although excessive "sin taxes" could cause pot smokers to cut down or grow their own, diminishing revenues.

States with higher rates of marijuana use, such as California and New York, would collect a somewhat higher proportion of taxes than states with lower rates, such as Pennsylvania and Texas. Miron estimates that California would take in $105 million at ordinary levels of taxation.

However, others in the field believe that the government's $10.5 billion figure is absurdly low. Dan Hamburg, a former congressman from Northern California's sinsemilla belt, says the Mendocino County Board of Supervisors estimates bud production in that county alone at between $1 billion and $1.5 billion, worth far more than timber and grapes. California's medical marijuana dispensary owners claim they pay $100 million a year in state sales taxes.

The methods used to estimate the size of the marijuana market involve a great deal of speculation. Determining the supply involves taking the amount of domestic and imported marijuana seized by law enforcement, guessing what percentage of the total amount of homegrown and smuggled weed that represents, and extrapolating from there. Additional variables include how much a single plant can yield -- anywhere from less than an ounce to more than a pound -- and the retail price, which can be loosely sensed from the reader-contributed snippets in High Times magazine's monthly market quotations ("Chicago, Purple Kush, $450/oz") and the Drug Enforcement Administration's STRIDE index, which narcotics agents use to figure out how much to pay for the drugs they try to buy. Demand can be estimated from government and academic household surveys of drug use -- but these are far from specific, especially when you use the limited data on frequency of use to try to figure out how much people spend on pot.

"It's hard to match the supply-and-demand data," says Gettman. "Sometimes you don't know what it is, but you know what it's not." He estimates the value of the U.S. weed market at $113 billion, based on a supply of more than 14 million kilos, an average retail price of about $220 an ounce, and between 25 million and 40 million pot smokers.

That number seems high. It would require 40 million people to spend an average of $55 a week on weed. But Gettman cites United Nations data that has estimated U.S. cannabis cultivation at 10 million to 14 million kilos for the past several years. The federal government has reduced its estimate of domestic production from 10 million kilos in 2002 to between 2.8 million and 6.6 million kilos in 2006, but those figures, he says, are "complete politics." They're based on the assumption that law enforcement eradicates 30 to 50 percent of all the pot plants grown in the United States, and that plants average a pound each.

As for demand, "there is a small amount of people who go through an incredible amount of pot." On the other hand, many of the heaviest ganja users are growers and dealers who go into the business in part so they can essentially get free pot and don't have to pay retail prices for the amounts they smoke.

Gettman's 2006 study "Marijuana Production in the United States" estimated the domestic crop at 10 million kilos, worth a total of $35.8 billion.

California NORML's estimates are in that ballpark. In 2003, the group figured that if 600,000 to 700,000 people in the state smoke two cigarette-size joints every day and 1 million smoke one joint every 10 days, then the total market in the state would be $3 billion to $5 billion under legalization -- at the lower end if prices dropped to the Dutch average of about $170 an ounce, at the higher end if consumption increased. State sales taxes would generate $240 million to $400 million, and a $56-an-ounce excise tax could bring in another $1 billion. If pot were taxed at the same 50 percent rate as cigarettes, total revenues would be $1.5 billion to $2.5 billion. Nationally, California NORML claims, a $56-an-ounce tax would bring in $6 billion to $13 billion.

Miron dislikes the concept of such "sin taxes," saying it's a bad idea to tax what's "politically unpopular." But he says they're generally effective if consistent throughout a federal system, where people can't go to a state with lower costs. If the tax is too high, however, people might try to evade it by growing their own. Miron thinks that won't be significant. "Some people are going to buy tomatoes in a supermarket, and some are going to grow their own," he says. "Most people will opt for convenience."
On the other hand, given that home growing has become widespread and well-entrenched in the last 30 years, potheads fetishize strains like White Widow and Bubbleberry, and herb costs significantly more than tomatoes, it's likely that many people would do their own gardening if the danger of prison and forfeiture were lifted.

Legislators active on cannabis issues have not investigated the revenue possibilities much. "I don't think I could even begin to put a number on it, because there are so many variables," says a staffer for New York State Assemblymember Richard Gottfried, who has sponsored several unsuccessful medical marijuana bills recently. Instead, they focus on the money that would be saved by not prosecuting marijuana users or that could be gained by farming industrial hemp.

Massachusetts state Sen. Patricia Jehlen, sponsor of a bill to reduce the penalty for possession of less than an ounce to a $250 fine, calls trying to project pot tax revenues "speculative," but she says decriminalization would save the state $24 million a year.

Miron's study estimates that "legalizing marijuana would save $7.7 billion per year in government enforcement of prohibition," with $2.4 billion of that going to the states. Gettman's 2007 report says "marijuana arrests cost taxpayers $10.7 billion annually."

Northern California's Humboldt and Mendocino counties, where marijuana is a crucial part of the economy, have been frustrated in their efforts to get direct revenues from it, according to Hamburg. Schemes proposed in Mendocino included having the county sell permits for $25 a plant and setting up a growers' cooperative that would inspect, certify and market medical herb crops as organically and locally grown. But "anything we came up with along those lines, our lawyers said was impossible."

Miron says potential tax income is "the least important reason to legalize" cannabis when compared with the "horrific" precedents prohibition sets for government power and the damage criminalization does to users. And even at the highest estimates, reefer revenues would not be enough to cover budget deficits the size of California's estimated $15 billion, New York's $6.4 billion, Florida's $1.5 billion, or Massachusetts' $1.3 billion. Still, the combination of reducing expenditures on enforcement and collecting taxes on legal sales could help save the states from having to lay off workers or cut health care payments.

NORML head Allen St. Pierre says that when he was lobbying in Texas last year for a bill that would let local governments decriminalize marijuana possession, one legislator told him that prohibition "is no longer a luxury we can afford." The Austinist, noting that marijuana possession accounts for about 7 percent of arrests in the state at a cost of $2,000 each, called the bill "a money-saving effort more than anything else."

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Steven Wishnia is a New York-based journalist and musician. The author of Exit 25 Utopia and The Cannabis Companion, he has won two New York City Independent Press Association awards for his coverage of housing issues. He is looking for a job.

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