Economic Impact of Cannabis Legalization in the United States

In April of this year, a poll was conducted by CBS News concerning cannabis legalization at the federal level; results stated that sixty-five percent of Americans favor nationwide legalization of cannabis (De Pinto). For the last century, the United States Federal Government has prohibited the use and possession of cannabis for any purpose, as stated by the Controlled Substances Act of 1970. One of the most controversial and heavily debated questions that can be asked, is if this is, in fact, still the best choice for the United States’ citizens, federal government, and the overall advancement of the country. The second prevalent question posed, asks what this presumably large amount of excise tax dollars could actually be funding for the United States: a question for which the answers are endless. Essentially, this inquires whether or not prohibition continues to be the right thing for the United States’ economy, given the various calculations and the abundance of research that is now available from states who have legalized the use of recreational cannabis. Another important component that should also be considered, regarding the economic influence of cannabis legalization, is the significant amount of employment opportunities that the industry could create. An additional way in which the country would reap benefits from legalization is through the money saved from the reduction in corrections, court costs, and incarcerations. Lastly, the demand for cannabis as it relates to medicinal use: improved cognitive function, lessened side effects for major clinical conditions, reduction in mental health disorder symptoms, and decreased use of conventional pharmaceuticals, are just a few of the impacts cannabis poses for the welfare of our nation (Gruber).

The very first law that was passed in the United States, dealing with cannabis, was put into effect in the year 1619. This bill required that all farmers grow hemp, because cannabis was such a hardy and sustainable crop, in a variety of climates (Livingston). With time came plenty more laws and amendments to laws, ultimately leading to prohibition of cannabis altogether. Since the Controlled Substances Act of 1970 was put into effect, there have been various adjustments made that altered the consequences of possessing marijuana, otherwise called decriminalization. The Obama administration also took part in these transitions, initially, “…by issuing a memo to federal prosecutors, encouraging them to refrain from prosecuting people who distribute medical marijuana in compliance with state laws (Palali).,” Subsequently, individual states acted to legalize obtaining the drug for medicinal purposes, although the regulations for that differed amongst each state, and they still do today. However, significant actions began to occur when the first two states, Colorado and Washington, legalized recreational marijuana use in the year 2012. After this statute ensued, a trend in recreational legalization took place all over the country: The District of Columbia, Alaska, and Oregon all legalized recreational use in the year 2014. Since then, a handful of other states have done the same, though many states have only revised their laws regarding medicinal use and decriminalization of cannabis. In 2018, President Trump signaled his support to pass legislation for allowing state marijuana laws to effectively supersede federal laws (Speights), but no official modifications have taken place. At this time, in total, about thirty-three states have elected to legalize marijuana use to some extent. Despite all of the legislative changes that have taken place on the state level in the last decade across the entire United States, federal amendments relevant to the matter seem to remain completely untouched.

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The situation at hand remains evident, that the states in our country who have legalized marijuana use at a recreational level, have been generating millions of dollars in revenue since legalization, particularly in the form of excise tax and sales tax dollars. According to the Marijuana Policy Group, in the year 2015, only a few years post legalization, the marijuana excise tax revenues in Colorado were the second largest revenue source among excise products sold in the state (Light). Revenues from excise and sales tax in 2015 for marijuana sales specifically, came in at $121,202,211 (Light). From 2014 to 2015, the growth percentage for marijuana was at about ninety-one percent, which is nearly unheard of in tax revenues. The Marijuana Policy Group predicts, however, that this percentage will decrease to around twenty-three percent by the year 2020, as demand shift and demand growth begin to level off and equilibrium is found (Light). In comparison, revenue from excise taxes and sales taxes on alcoholic beverage purchases rendered about $43,027,741 in 2015. Tax revenue for alcoholic beverages are projected to bring in about $47,330,515 in the year 2020 (Light). The source that is dominant in generating revenue for the state of Colorado, as well as for many other states, are cigarettes. Cigarettes are Colorado’s leading revenue source in the excise and sales tax category, having about $60,000 more than marijuana revenue in 2015. However, the Marijuana Policy Group estimates that for the year 2020, marijuana revenue from excise and sales tax will present approximately $149,579,813, while cigarettes should produce about two million dollars less than that (Light). What makes this revenue dynamic plausible, is the way in which the demand shift and the demand growth (increase) are occurring, which is in part due to people continuously shifting from the “black and gray,” markets into the regulated, taxed retail markets (Light). Although the reduced percentage of growth seems drastic for that short of a time span, it is something that was predicted by experts and researchers.

The outcomes of sales, growth and consumption are all very different in each state, given that different regulations and laws apply per state individually. For example, California and Maine do not tax marijuana based on price, but instead by weight (Adams). The most concerning problem that has been witnessed in the last twelve months has to do with prices of cannabis plummeting in certain states that have legalized marijuana (Adams). Adams states that, “Some experts predicted this early on, predicting prices to drop by about fifty percent.” Turns out, in Colorado and in Oregon, prices have actually plummeted by about seventy percent (Adams).

“Because states generally set their marijuana tax rates as a percentage of price, their revenue per sale sinks in direct proportion to the fall in marijuana prices,” states a report by Keith Humphreys at the Washington Post (Adams).

Although there are many possible variables that could play into this decreasing-cost issue, the implementation of a price floor has potential to fix the problem. This decreasing-cost is not to be confused with price elasticity of demand, as the cheaper prices are not generating increased sales. Humphreys says a simple and effective way for states to actually retain this revenue is to tax the drug by weight, rather than by price (Adams). This may pose a threat, however, as producers may potentially implement strong potency in their product in order for it to weigh more, bringing in more money. Because of the infancy of the recreational cannabis industry, the business cycle has indeed shown extremes on both ends of the spectrum. In short, it is too early to be certain on one proven, effective approach for states to take on this issue.

The benefits that legalizing cannabis has potential to bring forth for the local, state, and federal economies are seemingly bountiful. The avenues taken to find the equilibrium of the supply and demand, as well as price level, need to be further investigated, perhaps even before nationwide legalization is to occur. That being said, if a federal legalization were to take place, it is expected to create billions of dollars in revenue. A study conducted by analytics company, New Frontier, suggests that legalization on a federal level has the potential to generate $130 billion in aggregate federal tax revenue by the year 2025 (Song). As previously stated, a majority of this revenue would be earned through excise and sales taxes. The second largest component to cultivating these funds, however, are through the creation of jobs that a legalized cannabis industry would call for. The Marijuana Policy Group configured data from the year 2015, the year after legalization passed in the state of Colorado, finding that about eighteen thousand jobs were created as a result of the recreational marijuana industry.

Harvard economist, Jeffrey Miron, researched government expenditures on law enforcement pertaining to marijuana, predicting that our government would save approximately $7.7 billion annually. Miron states that, “about forty-six percent of drug related prosecutions across the country are for marijuana possession (Hall).,” Additionally, the saved-costs that would be retained in response to this legalization would also be supplemented by costs from incarcerations, court costs, and law enforcement. Keeping nonviolent drug offenders in jail and prison should not be what these billions of dollars of funds are used for.

Medicinal cannabis use is by far the most widely accepted and tolerated involvement with the drug within our society today. According to a study done at Harvard Medical School, approximately eighty-five percent of Americans support legalization of medical marijuana. Thirty-three states have legalized medical marijuana, although specific regulations vary per state. There are plenty of undeniable reasons for which this should be legalized at the federal level, beginning with its utilization in the healthcare industry. The number one reason medical marijuana is prescribed today is for pain control. Chronic pain is typically a side effect of various muscle disorders, Parkinson’s disease, fibromyalgia, endometriosis, glaucoma, nausea, ulcers or kidney issues. Medical marijuana is an alternative pain relief for patients that cannot take non-steroidal anti-inflammatories like Advil or Aleve. Lastly, “Medical marijuana is a much healthier, far less addictive alternative to opioids,” states Peter Grinspoon of Harvard Medical School. In addition to the latter, medicinal cannabis use has been proven to decrease opioid consumption by around forty-two percent in all patients (Gruber), which is a very substantial percentage in specific areas of the country that are burdened with the modern opioid crisis. Generally speaking, legalization of cannabis for both medicinal and recreational use is in many circumstances a winning strategy for the government, and a much safer alternative to citizens purchasing marijuana on the black and gray markets.

To conclude, legalization of cannabis at the federal level would be accompanied by hundreds of billions of dollars in total revenue, from multiple different sources. Tax revenue, in the form of sales tax, excise tax, and income tax, would all become extremely significant in funding for the local, state, and federal tiers of our government. The increase in consumer spending within our local regions would not only produce more job opportunities, but it would also help to promote economic growth as a whole. It could be presumed that the opioid epidemic would drastically die off, which in turn would promote community welfare and growth. The suspected few billion dollars spent on law enforcement, incarceration, and court cases would now be utilized to assure the protection and security of all citizens to be equally distributed across the nation. Overall, the economics involved in cannabis legalization is comprised of pros that heavily outweigh the cons.