The economics of legalizing marijuana

Aug 9, 2012, 12:34 PM | Updated: Aug 10, 2012, 3:30 pm
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The Washington State Office of Financial Management has released its report on the economic impact of Initiative 502 which would legalize and tax marijuana.

According to the report, the state could rake in nearly $2 billion in the next five years if the legalization of marijuana is passed, or it could take in nothing at all. The O.F.M says there are too many variables to pin down a better number. Still, some experts have an understanding of pot economics and can offer educated guesses on the impact.

The first, obvious economic impact of I-502 is the taxes it would place on marijuana once pot is legalized. To figure out just how much money that will bring in, Professor Jonathan Caulkins at Carnegie Melon University says we first have to know the price of pot. He says that will change once it is legal.

“Marijuana is essentially an agricultural crop […] there’s no reason why it should be nearly as expensive as it is except for the prohibition,” Caulkins says.

Caulkins compares the production of legal pot to the growing of crops like apples or tea. There are estimates the price could drop by as much as 50 percent.

The Washington initiative sets up a three-tiered tax system where it would be taxed at 25 percent at the production level, at the distribution level and at the point of sale.

“The price decline would greatly reduce the revenues relative to what you would naively project if you imagined that it was still going to be $10 or $12 a gram,” says Caulkins.

There is also a financial risk that comes along with legalizing marijuana. It could set up a battle with the federal government, which still considers the drug illegal.

“One of the nightmare scenarios for Washington is Congress gets really nasty and says, ‘Ha! No more federal highway dollars for you.’ If they do something like that then the financial loss vastly swamps any of the financial gains,” Caulkins says.

There has also been debate over the amount of money the state would save by not enforcing the prohibition of pot and the amount that would be spent on the enforcement of the new laws legalizing marijuana. Harvard economist Jeffrey Miron says both numbers are relatively small.

“Legalizing marijuana isn’t going to solve any state’s or country’s or city’s budget woes,” says Miron.

Aside from the direct economic impact, Miron says there would likely be secondary effects on our state’s economy. For example, Washington’s 8.3 percent unemployment rate might drop.

“The number of people employed wouldn’t necessarily change very much. It would just be that someone who had been employed as an illegal marijuana grower would now be a legal marijuana grower,” Miron says.

That now legal job could get a few people off unemployment and state aid programs.

So taking it all into consideration, there likely would be a positive economic impact from the legalization of marijuana. Unfortunately, there are too many variables for anyone to guess just how much.

“The claims that legalizing marijuana is somehow a panacea for all the world’s problems, that’s just completely nutty,” says Miron, “Most of what we’ll see different is recognizing explicitly what is already occurring.”

Miron and Caulkins agree the financial argument should not be the main consideration for people deciding whether or not to support legalizing marijuana.

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The economics of legalizing marijuana