The Budgetary Implications of Marijuana Legalization in Massachusetts

August, 2003

Jeffrey A. Miron
Professor of Economics
Boston University
jmiron@bu.edu
781-856-0086

This report was prepared in response to a request from Change the Climate. Dan Egan provided excellent research assistance.

Download the entire report here (PDF, 77k).

Executive Summary

• Government prohibition of marijuana is the subject of ongoing debate.
• One issue in this debate is the effect of marijuana prohibition on government budgets. Prohibition entails direct enforcement costs, and prohibition prevents taxation of marijuana production and sale.
• This report examines the budgetary implications of legalizing marijuana in Massachusetts.
• The report estimates that legalization would save Massachusetts $120.6 million per year in government expenditure on criminal justice enforcement of prohibition.
• The report also estimates that legalization, if tolerated by federal authorities, would yield tax revenue of at least $16.9 million annually.
• Whether marijuana legalization is a desirable policy depends on many factors other than the budgetary impacts discussed here. But these impacts should be included in a rational debate about marijuana policy.

I. Introduction

Government prohibition of marijuana is the subject of ongoing debate. Advocates of this policy believe prohibition reduces marijuana trafficking and use, thereby discouraging crime, improving productivity and increasing health. Critics of this policy believe prohibition has only modest effects on trafficking and use while contributing to many problems often attributed to marijuana itself.

One issue in this debate is the effect of marijuana prohibition on government budgets. Prohibition entails direct enforcement costs, and prohibition prevents taxation of marijuana production and sale. If marijuana were legal, enforcement costs would be zero and governments could levy taxes on the production and sale of marijuana. Thus, government expenditure would decline and tax revenue would increase. A key question is the magnitude of these budgetary impacts.

This report estimates the expenditure savings and revenue gains that would result from marijuana legalization in Massachusetts. The report is not an overall evaluation of marijuana prohibition; the magnitude of any budgetary impacts does not by itself determine the wisdom of prohibition. But the costs required to enforce prohibition, and the transfers that occur because income generated in the marijuana sector is not taxed, are relevant to rational discussion of this policy.

The policy change analyzed here is more substantial than marijuana decriminalization, under which governments repeal criminal penalties against possession but retain them against trafficking. The budgetary implications of legalization exceed those of decriminalization for three reasons. First, legalization eliminates arrests for trafficking in addition to eliminating arrests for possession. Second, legalization saves prosecutorial, judicial, and incarceration expenses; these are minimal in the case of decriminalization. Third, legalization allows taxation of the marijuana trade, assuming federal policy accommodates this goal.

This report concludes that legalization of marijuana in Massachusetts would produce an annual savings in state and local expenditure of about $120.6 million while generating tax revenue of at least $16.9 million. These estimates necessarily rely on assumptions in cases where appropriate data are not available. But in most instances these assumptions bias the estimated effects downward, so the actual costs savings and revenue gains are plausibly higher than suggested here.

Although this report estimates both the cost savings and the revenue gains from legalization, these components of legalization's budgetary impact need to be interpreted differently. It is possible for a given state to reduce or eliminate enforcement of its own marijuana laws without permission from the federal government. It unlikely, however, that an individual state could tax marijuana unless the federal government also legalized marijuana, since persons producing and selling marijuana would be hesitant to conduct such activity above ground if marijuana were still prohibited under federal law. Thus, the revenue gains are not solely under control of state governments but are nevertheless interesting to consider.

The remainder of the report is organized as follows. Section II addresses the expenditure savings that would occur in Massachusetts as the result of marijuana legalization. Section III analyses the tax revenues that Massachusetts would collect if it legalized marijuana and taxed marijuana similarly to other goods. Section IV concludes.

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