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

It is optimal to use both supply and demand side figures to estimate the size of the marijuana industry. Supply estimates, however, are problematic at best. While other illicit drugs such as cocaine and heroin are derivatives of plants that grow in reasonably well-specified areas of the world, marijuana is a weed which can be grown almost world-wide. Although much of the marijuana available in the United States is believed to originate outside the country, a relatively large and increasing percentage is being grown domestically. For 1988, the National Narcotics Intelligence Consumers Committee (NNICC) estimated that approximately 25 percent of the total supply was domestically cultivated marijuana. The production patterns tend to change with the rate of enforcement in an unpredictable manner, with domestic growers increasing production when foreign sources are interrupted.

In 1982, the Drug Enforcement Administration (DEA) seized a total of 2,035 metric tons of marijuana. It estimated that the figure represents 10-15 percent of the total traffic in illicit marijuana sales which, assuming a 15 percent seizure rate, implies total 1982 consumption of 13,567 metric tons. This is quite similar to the NNICC estimate of 12,340 to 14,090 metric tons for 1982. The NNICC was created in 1978 to coordinate foreign and domestic collection, analysis, and dissemination of drug related evidence. The seizure figures from the DEA were therefore available to the NNICC as were the demand side estimates.

Reliance on these sources for consumption estimates lead to some peculiar results. To generate a consumption of 13,600 metric tons would entail 38 million people smoking one gram each, 365 days a year. These figures are far higher than any research estimate of the number of regular users. Even higher rates of consumption would hold for the 1988 NNICC estimate of 12,130-16,710 metric tons since the recent survey data of Table 1 indicate a decline in the number of regular users. Moreover, Gettman (1993), Porter (1991) and Reuter (1980) have raised the issue that since the seizure figures are generated by enforcement agencies in pursuit of appropriations and legal authority, they may over-estimate the actual quantity.

B. The Construction of a Conservative Estimate

The demand side is more amenable to analysis. Every two to three years, the National Institute of Drug Abuse sponsors a national household survey of over 7,000 individuals about their current and previous use of illegal drugs. Although these surveys have several limitations, they are viewed as the most complete and reliable source of information on drug use. The potentially largest source of error is that individuals may not tell the truth. The National Institute of Drug Abuse survey technique is designed to minimize this bias. Respondents mark their answers on cards which are sealed and dropped into mailboxes. This method has been shown to reduce the fear of prosecution and tendencies to supply expected answers (i.e., those deemed more socially acceptable).