Cannabis advocates often gush about the economic benefits of legalizing weed. People are spending the money on cannabis anyway, the argument goes, so why shouldn’t the state make some of that money?
Why not collect taxes from those who profit from selling it? If you legalize cannabis, all of this black market money comes into the legitimate market, offering states an economic boon that it seems illogical to turn down.
But what do the actual numbers say? Are the economic benefits of legalizing cannabis as big as people claim? And can it really make a significant difference to state or national economies?
Continuing our series of the Best Arguments For and Against Legalizing Cannabis, we’re taking an in-depth look at the economics of legalization.
Summary: Do the Economic Benefits Justify Legalizing Cannabis?
Yes…
- Legalization brings in money in the form of direct tax revenue, job creation and investment opportunities. It also frees up police resources.
- State-level legalization brought in $4.2 billion in direct tax revenue in 2023 alone. This is only considering the states where legal sales have already begun.
- Combined with the minimal risks from cannabis, this is more than enough reason to legalize. We could invest the money currently in the hands of black market dealers back into the community.
No…
- Financial benefits aren’t enough to justify legalization of a dangerous and addictive drug. The government selling fentanyl recreationally would generate revenue, but that doesn’t mean they should do it.
- Imperfect systems for legal sales (e.g. with opt-out clauses) can easily still encourage black market sales. This could lose most of the potential revenue.
- If the black market still thrives, all of the problems with it – such as the lack of safety testing and age restrictions – continue.
The Basics: Where Would the Money Come From?
Firstly, it’s important to understand why legalizing cannabis would generate income for a state. There are many such explanations, ranging from the obvious to the more subtle.
- Tax revenue: The simplest and most obvious economic benefit of legalization is collecting tax money. In a black market, there is no tax. The switch to a legal system means that the state takes a portion of every single sale made through the legal system. This directly contributes to the state’s economy. It often provides funds for social programs, public services and helping people struggling with addiction. Many states have special taxes for cannabis sales in addition to ordinary excise and sales taxes.
- Job creation: Creating a cannabis industry in your state (or nationwide) means establishing many businesses. This includes retail outlets to sell the cannabis, growers to produce it, distributors, testing laboratories and much more. All of these need employees, and thus create jobs in local communities. Creating jobs means that the government makes more through income taxes. In turn, residents have more disposable income to further stimulate the economy.
- Investment opportunities: The creation of a new and likely lucrative industry will also attract investors. People from in your state, out of state and even possibly out of the country want to get a piece of the pie. This pumps even more money into the economy. If cannabis was legalized nationally, companies selling cannabis could list themselves on the US stock market and attract even more investors.
- Savings on enforcement: Enforcing laws banning cannabis is not free. An ACLU report from 2013 estimated that states spent over $3.6 billion on enforcing cannabis possession laws back in 2010, before legalization was common around the country. While many of these savings have already been made (with approximately half of states having legalized already), there is still a lot of money being spent on something which arguably offers very little benefit.
How Legal States Have Done So Far
The basic arguments above are more theoretical than based on hard data. But since there are now 24 states with legal recreational cannabis, we don’t need to make this argument based on theoretical benefits. In fact, especially from states like Colorado with mature recreational cannabis markets, we can look at the data collected over the past decade to see how big the benefits are.
The Marijuana Policy Project has collected information about the tax revenue in each legal state. This is not counting things like license fees paid by cannabis businesses and the tax revenue from employees. Overall, it shows just under $4.2 billion in taxes in 2023 alone.
- Colorado is the longest-running recreational cannabis market. From its inception in 2014 through to 2023, the industry paid $2.38 billion in taxes, with around $257 million paid in 2023.
- Washington legalized and started sales at about the same time, and has paid $4.1 billion up until 2023, with 2023 alone bringing in $533 million. It’s worth noting that Washington has one of the highest cannabis tax rates in the country, with a 37% tax at retail plus a 6.5% sales tax.
- Oregon’s cannabis sales began in October 2016. From then until the end of year 2023, the state raised $973.5 million in tax revenue. While the state had a high-point for revenue in 2021, sales from 2023 still brought in $148 million. The figures from the first quarter of 2024 suggest much higher revenues.
- Alaska has a much smaller population than the states covered so far, but also opened sales in October 2016. From then until the end of 2023, the state brought in $156.5 million in cannabis tax revenue. In 2023, the figure was $28.1 million, only slightly down from the peak revenue of $28.9 million in 2021.
- Nevada first started adult use sales in July 2017. Sales brought in just under $1.1 billion in cannabis tax revenue through the end of 2023. For 2023 alone, the state raised $178 million in revenue.
- California started recreational cannabis sales in January 2018. However, it has had issues with gray market sales. This means that revenue is lower than would be expected for the huge population. Still, official sales had brought in over $5.7 billion in revenue by the end of 2023, with just under $1.1 billion of that coming in 2023 alone.
- Massachusetts started adult use sales in November 2018. Unlike those covered so far, is still seeing growing revenue year-on-year. The state has raised $920.6 million in tax revenue up to the end of 2023, with $263.5 million of this being for 2023 alone.
- Michigan also opened recreational cannabis sales from November 2018. This raised just under $1.1 billion in revenue up until the end of 2023. Close to half of this came from 2023, where the state raised $473.3 million in tax revenue in that year alone.
While there are many other states – and you can read the full Marijuana Policy Project document for more – this should get the point across pretty clearly. States that legalize cannabis make tons of money from tax revenue alone. This isn’t even considering additional gains from things like licenses and income taxes for people employed in the industry. It is undoubtedly a huge boon for local economies, and would be one for the national economy too.
Counterpoint: Financial Benefits Aren’t Everything, and the Black Market Still Exists
Very few people would doubt that the government would make money if it started selling drugs. Clearly, there is more to the issue of legalization than the financial benefits. If Colorado started also selling fentanyl, they would make even more money, but this isn’t a justification for actually doing it. This is kind of an obvious point but it’s important to spell it out: financial benefits of sales don’t remove ethical considerations about whether we should be doing something.
Moreover, there is the additional issue that in many places, notably California, the black market remains strong even after cannabis is legalized. Leafly’s Opt Out Report from 2022 drew attention to this exact issue. With one of the smallest numbers of stores per 100k residents (at 3, versus 18 in Colorado, for example), 55% of California’s cannabis market was illegal sales in 2022.
This means that for all the talk of financial benefits to states and “taking control of the market,” if it isn’t handled well, you can easily end up with illegal sellers making most of the profit. Not only does this reduce the amount of money the government gains from sales, it also leaves consumers at the mercy of black market sellers in all of the usual ways. Far from taking control, legalization could just provide some legal protection for the same illicit sellers we’ve been trying to deal with the whole time.
Our Take: It Isn’t Perfect, But The Potential Benefits Are Huge
Of course it’s true that a poorly-executed legal system may protect the black market in some ways. But occasionally poor execution doesn’t mean the overall idea is wrong.
Selling cannabis isn’t like selling fentanyl: the risks of use are much smaller and addiction is not such a huge factor to consider. All legalization does is give the benefits of cannabis sales – which are happening anyway, like it or not – over to governments that can use it to do some good in their communities. The potential for benefit is huge, and the potential losses are already happening now on a much larger scale.
References
American Civil Liberties Union. (2013). The War on Marijuana in Black and White. ACLU Foundation. https://assets.aclu.org/live/uploads/publications/1114413-mj-report-rfs-rel1.pdf
About the source:
- Peer reviewed? No, a report from the American Civil Liberties Union (ACLU)
- Methodology: Uses the FBI’s Uniform Crime Reporting Program and Census data to document arrests rates for cannabis possession per 100,000, by race. It also estimates the associated fiscal costs. Covers the period from 2001 to 2010.
- Main results: On average, black people are 3.73 times more likely to be arrested for cannabis possession than white people, despite similar use rates. Estimates an annual financial cost of $3.614 billion to enforce laws against cannabis possession.
- Other notes: This report is quite old, but has the benefit of being compiled when recreational cannabis use hadn’t been legalized by any states. The costs are likely different now due to inflation and changes in the degree of enforcement. However, it clearly establishes that enforcement of cannabis law is expensive and racially biased.
Cannabis Tax Revenue in States that Regulate Cannabis for Adult Use. (n.d.). Marijuana Policy Project. https://www.mpp.org/issues/legalization/cannabis-tax-revenue-states-regulate-cannabis-adult-use/
About the source:
- Peer reviewed? No, a page from the Marijuana Policy Project.
- Methodology: Review the tax revenue generated by legal sales of adult-use cannabis in all states that have legalized it. The data includes state excise taxes and standard sales tax. It doesn’t include tax revenue from medical marijuana, fees paid by cannabis businesses or federal taxes.
- Main results: From 2014 to 2023, these sources generated $19.5 billion in tax revenue, with 2023 alone generating $4.2 billion.
- Other notes: This does not include many sources of state cannabis income, and it doesn’t estimate savings from reduced enforcement.
Barcott, B., & Whitney, B. (2022). ‘Opt-out’ towns are encouraging illegal marijuana sales. Leafly. https://leafly-cms-production.imgix.net/wp-content/uploads/2022/09/21143531/OptOutReport2022.pdf
About the source:
- Peer reviewed? No, a report from Leafly.
- Methodology: Uses public and private sources to determine the percentage of the total market estimation which is captured by legal sales. Data from state regulatory agencies was used to determine the number of legal stores per capita.
- Main results: The number of stores per capita is a key indicator of the success of the legal market, defined based on the proportion of sales taking place legally. States with many municipalities “opting out” of cannabis sales have a bigger issue with illegal sales.
- Other notes: The estimates used for the percentage of legal sales are based on an assumption that past year cannabis use stands at one-third of the population in each state. This may not always be valid.