Economic Benefits of the Legalization and Taxation of Marijuana

I wrote this research paper in January of 2014, just weeks after dispensaries opened for business. This paper shows my understanding and prediction of the effects of legalization and taxation of marijuana. I hope you enjoy!

“Smoke break” has been given a whole new meaning in particular parts of the United States of America over the last couple of decades. Some of its citizens have been given the liberty to not only smoke, but to grow, to sell and to purchase marijuana. What a great thing it is for marijuana users all over the nation! What a step in the right direction. But, what about the people who do not partake in such activities? How do they benefit from this new, some would perceive as, sketchy law, or lack of it? More importantly, what does it do for our community and even for our society as a whole? The benefits are numerous and affect marijuana smokers, and non-smokers; teachers, parents, students, the police force, small business owners, almost everyone.  Through spending less money on enforcement of marijuana laws and lessening the rate of drunk driving, and almost no money on prosecution and housing of marijuana offenders, the government saves billions a year. And by levying a tax on recreational marijuana and collecting profits from medicinal marijuana, the government stands to make billions more annually.  Eventually, this money could be used to help pay down the national deficit extensively.

How much money does the illegal sale of marijuana make annually?

As of now, there are many places to purchase marijuana both legally and illegally all over the United States, but in the early 90’s, marijuana was still illegal everywhere in the United States. It was not until 1996, that California passed the first law, allowing medical use of marijuana. Using the reasoning of an article in the American Journal of Economics and Sociology, an attempt will be made to figure out the amount of potential tax revenue from marijuana. This article talks about calculating the amount of money marijuana brings into the United States yearly. The authors calculate the amount of marijuana that is seized in the U.S. annually and use that number to make an educated guess on how much marijuana actually gets through and is sold annually. Based on this information, the two calculate how many and how much each person uses, and even the difference between a regular user and an irregular user, “each irregular user was assumed to use marijuana six times per year” (Caputo, Ostrom, 1994) is defined. They continue to scrutinize their theory by fussing over the cost to produce marijuana, the cost of street marijuana over a number of years, reminding the reader that, “tax revenue figures are based solely on the recreational use of marijuana” and that, “the estimate excludes the revenue obtainable from the use of hemp as a biomass fuel, clothing and fabric fiber, paper product, protein powder, livestock and pet feed, and vegetable and lubrication oil” (Caputo, Ostrom, 1994), even though some of these things are sold and taxed today. Caputo and Ostrom even used demand and supply side economics while calculating their figures. They also take into account that some people will be growing and others will still purchase marijuana illegally.  Taking all of these factors into account, the authors stated, “retail marijuana sales are estimated to be about 5 to 9 billion dollars in 1991” (Caputo, Ostrom, 1994.)

How much is that worth in 2013?

Although many things have changed since 1991, enough things are the same to be able to get a ball park average of the retail sales of marijuana in today’s money. The amount in 2013 dollars is equal to the Consumer Price Index in 2013 divided by the Consumer Price Index in 1991, all multiplied by the amount derived by Caputo and Ostrom in 1991. The amount in 1991, as stated above is 5-9 billion dollars, the CPI at the beginning of 1991 was 134.6 and at the beginning of 2013, it was 230.280. Therefore, the amount of retail marijuana sales in today’s dollars would be in between 8.55 billion dollars and 15.39 billion dollars a year.  And, according to the authors, most of this would (short a couple of million for the cost of bringing the marijuana to the public) be retained as potential tax takings. Legal marijuana growth will increase the United States’ output possibility, shifting the productions possibility curve outward and will in turn add to value to import, reduce exports and therefore, could again make America, a constant annual net exporter, making a positive profit on overall imports and exports.

Taxation of Retail Marijuana Sales and the Education Front, Colorado

Just a couple of days ago, Colorado citizens voted on a sales tax for the retail sales of marijuana and, according  to Kristen Wyatt, of Business Week writes, “the pot tax question-on an excise and special sales tax that could add more than 25 percent to the sales price of weed-passed by nearly 2-to-1” (2013). She also notes that the only problem an infinitesimal amount of Colorado voters had was about the severity of the new tax rate. This tax can now sum up to 35 percent, which will probably happen in the next few years. Wyatt explains the new tax, what it will be used for and what it means to recreational buyers of the drug. Even though the future cannot be precisely predicted, an estimation was made for the citizens of Colorado. The estimated, “predicted pot taxes would bring in almost $70 million a year. Of that, $27.5 million would go to school construction, as specified in last year’s ballot measure that legalized the drug” (Wyatt, 2013).  However, enough of Colorado voters felt similarly to Robert Kane, VP for a major hemp company. Kane says, “I’ll gladly pay an extra $5 or $10 every time I go to the store to shop in a regulated market and have the money go to my kids’ schools… Let’s do this, get the establishment started, show the world we can do this in a responsible way” (Wyatt, 2013). It is projected that the 25 percent tax will accumulate approximately 70 million dollars in government revenue in the first year. If that was applied to all 50 states (on average, of course, some states would make more, others would make less), then the United States could make approximately 3.5 billion on taxes alone. If 15 percent of this was distributed evenly amongst all of the states for educational purposes, such as higher pay for teachers, better classroom materials for students or even the building of better nutritional programs in public schools, each state would receive 10.5 million per year.

Of course there will be monies left over for the regulation of marijuana use and sales, but projections says that the tax will eventually far outweigh the cost of making marijuana legal. With these extra funds, towns, states and our nation can use this money on roadways, senior citizen services, the local fire department, and scientific and medical research and all for no extra money from the tax payers.

How much can our nation save by legalizing marijuana?

If each state could receive 10.5 million a year for educational assistance from the sales of marijuana, how much can we save by legalizing it? Rob Reuteman breaks this down in his article, The Cost-and-Benefit Arguments around Enforcement (2010).  In his writings, he aims to show that the legalization of marijuana would save tax payers money by no longer needing to arrest, house or prosecute those who are caught possessing marijuana. Jeffrey Miron, who is the director of Undergraduate Studies at Harvard, calculates, “that legalizing marijuana would save 13.7 billion per year in government expenditure on enforcement of prohibition” (Reuteman, 2010). Individual states also spend money on top of what the federal government spends, Texas, for example, spends 2 billion dollars a year on the enforcement of marijuana; a state where marijuana is illegal, but Colorado only spends 145 million, more than ten times less than Texas. Even though not all of the budget for marijuana regulation would go away, it would greatly diminish the need for much of the taxes currently charged.

Externalities and the Legalization of Marijuana

Saving money by legalizing marijuana is a great thing to some, but others are still concerned with the danger of legalizing marijuana. Although, there are many who do not buy or sell marijuana, these people too will see positive externalities as the result of marijuana legalization. The Journal of Law and Economics published an article which talks about the decline in drinking and driving fatalities since marijuana has become legal. The authors of the article try to show that marijuana is used as a substitute to alcohol, for many reasons, and because of this, less people are getting on the roads to drive drunk. To show alcohol and marijuana are substitutes the authors show that when pot is legal, there is a decrease in the price of marijuana and there is a decrease in alcohol sales. The authors also talk about the ability to drive under the influence of alcohol verses the ability to drive under the influence of marijuana. As seen through many billboards and other advertisements, the repercussions of driving under the influence of alcohol can be devastating. On the other hand, driving under the influence of marijuana messes with depth perception, hand-eye coordination and the time it takes to react, but while under the influence of marijuana people also reduce their speed, increase the distance between themselves and the vehicles in front of them as natural ways to compensate for the impairment. They do say, “The negative relationship between legalization and alcohol-related traffic fatalities does not necessarily imply that driving under the influence of marijuana is safer than driving under the influence of alcohol” (Anderson, Hansen, Rees, 2013). Anderson also points out that, “Alcohol is often consumed in restaurants and bars, while many states prohibit the use of medical marijuana in public” (Anderson, Hansen, Rees, 2013). Seriously though, it is also said that pot smokers are lazy, so maybe they just don’t feel like going anywhere! It is much more socially acceptable to drink alcohol than it is to smoke marijuana, so much of the smoking is said to be done in the privacy of one’s home. Because of this, there are less people who are out, on the streets, driving under the influence of either marijuana or alcohol. In fact, the numbers given by Anderson and his team were amazing, showing that, “the legalization of medical marijuana is associated with a 13.2 percent decrease in fatalities in which at least one driver had a positive BAC level” (Anderson, Hansen, Rees, 2013), and these numbers are just in the first year. By decreasing the number of drunk drivers on the road, and therefore decreasing the number of alcohol related accidents, the general driving public experiences safer roads, which leads to lower insurance rates, higher speed limits and many other positive externalities.

What is the cause of the change of law?

The positive externalities which come from the legalization and taxation of marijuana are a plus, but what caused this change of heart in the American government and its’ people? In the article by Jacob Weiberg, of Newsweek, an answer for this very question is formulated. Weiberg associates the change of the legalization of marijuana with the change in gay marriage laws and even the view on Americans visiting Cubans. Weiberg says, “The chief reason these prohibitions are falling away is the evolving definition of the pursuit of happiness” (2009). He believes two people in a relationship, regardless of their sexual orientation, want to enjoy holy matrimony. The two wish to pursue their lives as one, through the eyes of God and through the eyes of the law. They also want to have the right to file taxes together, get medical insurance together, or just change their last names so they match each other. People want to go to Cuba to have a place to vacation; whether it is a second home, or just a week there every summer. Cuban Americans may want to or need to visit family members, while others  want to do business in Cuba or as the author puts it, “prospect for post-Castro business opportunities” (Weiberg, 2009), all of which follows his reasoning of people wanting so strongly to be happy and enjoy all of the liberties the United States of America has to offer.  People want to have the ability to smoke marijuana as well. People smoke for medicals reasons; like to help with anxiety, reduce opticular pressure due to glaucoma, to soothe a mother in labor, or to help with pain associated with AIDS and cancer patients.

Are our nation’s leaders the front runners for the pursuit of its’ citizens’ happiness?

 Although, now over 50 percent of Americans think marijuana should be legal, our politicians were not as quick to agree. According to Weiberg, politicians are always lagging behind what the American society wants. When speaking of politicians’ and their role in creating the wave of change, Weiberg states, “Why get in front of change when you can follow from a safe distance and end up with the same result?” (2009). It is the people who wanted these things to change. It is the people who have fought to have marijuana legalized. And, it is the people who have created these changes. And, all the people are looking for is their personal happiness. With happiness comes better health, relationships and even better working ability, which boosts our economy. Happiness, although it is not something you can put a dollar amount on, it is something that increases our economy’s ability to increase production.


There are many different ways that the legalization and taxation of marijuana effects our economy positively. Just the thought of 8 to 15 billion dollars more a year on the production of marijuana sounds like justification for legalization and taxation. Some states have given the right to their inhabitants to not just smoke, but to also grow, sell and to purchase marijuana. This has been a great victory for smoker’s nationwide, but does not show the benefits for those who do not participate in any of it. There has been a 13.2 percent decrease in alcohol related fatalities, since marijuana has been legalized in parts of the United States, mostly because research suggests people substitute marijuana for alcohol and choose to stay home, or may even be more cautious behind the wheel than that of someone intoxicated by alcohol. With the taxation of marijuana, schools in Colorado are expected to receive over 20 million dollars next year alone. The money from marijuana taxation can be used in so many different ways, from building a local park to paying down our deficit, which benefits those who are not involved with marijuana in anyway. Also, because our nation will be spending less money on enforcement of marijuana laws, and will greatly reduce spending on prosecution and housing of marijuana offenders, the government stands to save billions a year. Economically though, the biggest benefit is the happiness of United States citizens. With legalization, regulation and taxation, hopefully there will be many big smiles on the streets of America, and not just by the ones who have been toking on some funny green stuff.




Anderson, Hansen & Rees, (2013). Medical Marijuana Laws, Traffic Fatalities, and Alcohol           Consumption. Journal of Law and Economics, 56, 2, 333-369.

Caputo & Ostrom, (1994). Potential Tax Revenue from a Regulated Marijuana Market: A                                                         Meaningful Revenue Source. The American Journal of Economics and Sociology, 53, 4, 475-490.

Reuteman R., (2010). The Cost-and-Benefit Arguments Around Enforcement. NBCUniversal.

Weiberg J., (2009). Gay Marriage & Marijuana: You can stop either. Why that’s good.    Newsweek, 154, 19, ProQuest LLC.

Wyatt K., (2013). Marijuana’s tax potential attracts new allies. Business Week, New York: Bloomberg L.P.


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