Potential tax revenue from a regulated marijuana market: a meaningful revenue source

American Journal of Economics and Sociology, The, Oct, 1994 by Michael R. Caputo, Brian J. Ostrom

Introduction

SINCE THE EARLY 1960s, the use of marijuana by a sizable proportion of the U.S. population is resulting in an issue of increasing national interest. Despite allegations of potential hazardous health effects, and continued efforts by various law enforcement agencies to restrict both its availability and use, current data indicate that the use of the drug has become pervasive. The latest survey data of the Department of Health and Human Services for 1991 indicates that nearly 10 million Americans are regular users; about 20 million are occasional users, and more than one-third of the population age 12 and over have experimented with the drug. The demand for marijuana has created a multi-billion dollar industry, and as of 1992, it is the nation's leading cash crop (Gettman, 1993). Moreover, 1990 was the first year in nearly a decade that the value of marijuana did not exceed that of all other crops grown in California (Johnson, 1992).

The fortunes of marijuana producers and processors have followed a cyclical path over time. The past several decades have witnessed a resurgence in the use of the plant as an intoxicant by millions of people in all strata of society and has led to a reclassification of its legal status and a concomitant reduction in associated penalties, at least up until the mid 1980s, when the "War on Drugs" was initiated. But the 1991 National Drug Control Strategy called for a near doubling of the funds available ($87 million) for the eradication of domestically grown marijuana, and on the legislative side, California and Alaska introduced bills that would stiffen penalties associated with possession.

At the same time, opposition to the current federal drug control strategy has arisen from a broad cross-section of interests. A politically diverse group, including the National Organization for the Reform of Marijuana Laws (NORML), economist Milton Friedman, commentator William F. Buckley, and the Libertarian Party, argue that the rising costs of enforcement, the inability to stem the flow of the drug, the progressive erosion of civil liberties associated with these efforts (especially the Fourth Amendment to the U.S. Constitution), and the inevitable corruption far outweigh benefits from continued prohibition. Quite a large segment of the population continues to believe that the use of any drug solely for the purpose of intoxication is untenable on purely ethical and moral grounds. A February 1990 survey by the Drug Policy Foundation shows that 65% of the population feel this way. Even so, a very real possibility exists that federal law may be further relaxed from its current form of complete prohibition to one of regulation.

One important issue in this debate is addressed here--the potential tax revenues that would flow from a regulated market in marijuana. Clearly, such revenue estimates demand an adequate understanding of the dimensions of the market. Analyzing the size and scope of any black market enterprise presents a number of difficulties in that the participants have a vested interest in obscuring their activities. The market for marijuana is no exception. Interest groups on both sides of the regulation issue are quick to assert estimates of the size of the marijuana market, yet the partisan nature of the debate calls into question the plausibility of the numbers. Developing a credible estimate, however, is a necessary first step in assessing current potential tax revenue. furthermore, such an estimate forms a baseline from which to assess the impact of possible policy prescriptions.

Any movement in marijuana policy toward regulation must investigate and describe a vast array of potential benefits and costs. Such issues as the continuing uncertainty about health and developmental consequences, the social costs of prosecuting otherwise law-abiding citizens, and questions concerning the eventual marketing of the drug (who can buy, what potency, should advertising be allowed, etc.) must all be addressed. These problems lie outside the scope of this paper, so no attempt will be made to deal with these issues.(1)

The next section begins with a critical evaluation of the current estimates of the illicit marijuana market, and continues with the development of an alternative estimate of the size of this market. The section that follows develops an estimate of the potential tax revenue from a regulated market. In the course of the development, elasticities of demand and other policy-relevant economic variables are brought to bear on the discussion. The final section offers some Concluding remarks.

II

Estimated Size of the Illicit Marijuana Industry

A. Variation of Current Estimates

The marijuana industry, similar to most businesses, has three distinct phases: production, distribution, and consumption. A distinguishing feature of this industry is that it exists outside the legal framework. Consequently, measurements of each phase of operation are widely disparate, being limited by incomplete information and uncertainty.