The Ace in the Game: Revenue from Legalized Marijuana
13 Pages Posted: 14 Apr 2014 Last revised: 5 May 2014
Date Written: April 26, 2014
After marijuana is legalized, the costs of producing and selling it will collapse. What will happen to prices? A windfall economic gain will be up for grabs. Policymakers might allow that gain to go to consumers (encouraging consumption) or to cannabusinesses (encouraging production). Or, through revenue measures, they might direct the gain elsewhere (say, to society as a whole).
Revenue can be a means, not an end. New revenue for government does not justify legalization of marijuana. New revenue may not cover the costs that legalization creates, and a revenue stream gives government a permanent stake in intoxication. Revenue is only one card in a large deck of drug policy options. But it is the most powerful card.
How to play it? The safest, correctable way to distribute an intoxicant is government monopoly, Uruguay style: Retail-only monopoly can match or beat bootleggers’ wares. But monopoly breeds cronyism and corruption, unless power is spread around and transparent. In the United States, states might need to tweak the monopoly model to keep state control over location and price while assigning sales concessions to businesses.
A riskier, more awkward plan is for governments to tax commercial distribution, Colorado and Washington style. In the inevitable post-legalization price war, bootleggers will act in a New York minute; Legislatures will not. Taxes are easier for bootleggers to beat than monopoly is. And no tax is perfect. Taxing by THC potency is theoretically appealing, but unworkable. A price tax base has several pitfalls. Even a weight base is problematic.
Three other models are possible: auctioning licenses, collective farming, and sales by non-profits.
Since no one really knows how to legalize, flexibility to change course is of the utmost importance.
Keywords: tax, excise, marijuana, alcohol, tobacco
JEL Classification: A13, D40, E61
Suggested Citation: Suggested Citation