The Positive Economics of a Marijuana Tax

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As the nation’s governors desperately careen about seeking fresh tax revenue, perhaps it’s time to heed the admonition of our president’s consigliore to "never let a serious crisis go to waste” and call on a constituency that’s begging to be taxed.

Marijuana smokers.

Both prosecuted and persecuted by a culture that prefers to addle itself with the fruit of the vine, marijuana smokers have been paying a stiff tax on their recreational weed for decades. The only difference is that this tax, or risk premium as economists call it, isn’t paid to the government. It’s paid to organized crime.

Where would you rather see your marijuana taxes go? OK, you’re forgiven if you won’t answer that. Where would you rather see your neighbor’s marijuana taxes go?

The well-worn arguments for and against Drug Prohibition have been repeated a thousand times. Suppose we take a break from the culture wars and instead consider the bald economics of legalization?

The National Organization for the Reform of Marijuana Laws (NORML) – remember them? – estimates that legalizing and taxing marijuana could net the state of California alone over a billion dollars a year. That’s a billion fewer dollars that you and I have to fork over to bail them out of their fiscal mess. And although it may seem like every pot smoker in the country lives in California, recent surveys indicate that over 42% of our fellow citizens have tried the stuff. That’s a lot of people, and they live everywhere.

Whether or not you indulge, why would you prefer to see violent Mexican drug lords reap the financial rewards from satisfying a multi-billion dollar market that is never going to go away no matter how many dopey fried egg commercials they show on TV? Wouldn’t you rather see the money fund local schools, police and fire departments? You have to pick one or the other because sure as the sun rises, marijuana money is going to go somewhere.

Ask the folks who run your state lottery what they think about taking over a socially maligned business that used to be run by the mafia. Their employees might be just as shiftless but at least they don’t gun people down in the streets.

There is so much data out there on marijuana consumption that even a Keynesian economist could correctly total up the potential tax revenues and law enforcement savings that legalization would bring. Alcohol tariffs have been a mainstay of American tax policy since the Whiskey rebellion. Yes, this money briefly financed the mob during Prohibition, just as marijuana’s risk premium does today. But somehow Congress managed to extricate itself from that disastrous experiment in social engineering. Have our politicians become that much more incapable since then?

Worried about the impact of legalization on the young? For the sake of argument, imagine that a marijuana tax is set equal to the current risk premium so that the street price remained the same. That would reduce the chance that plummeting prices might induce kids to switch over from alcohol, although why teenage drunks are preferable is an argument someone else is going to have to make.

Is our culture ready for marijuana legalization? Well, we now have our third president that smoked pot. An entire generation of potheads has started collecting Social Security. Even the editorial board of the Wall Street Journal is running regular commentaries attacking the economic imbecility of the War on Drugs.

So, what’s holding back change? A lack of leadership? True, politicians don’t usually lead as often as they jump out in front of the nearest parade. Would it give them cover if a million protestors showed up in Washington DC, one half wearing suits and ties and the other half wearing tie-dyed tee shirts? Picture the banners. “Tax me now!”

The beauty of the Federalist system is that Washington doesn't have to pretend it has a one-size-fits-all solution to complex problems like this. Congress just has to step out of the way and let the states give it a try. If one state wants to legalize and tax marijuana, another wants to decriminalize and treat it like a medical condition, and a third wants to continue consuming precious tax dollars incarcerating non-violent offenders so it can keep the market safe for organized crime, let's see how each fares. Thomas Jefferson would have approved.

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