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

B. Potential Tax Revenue

Using the cost estimates from the tobacco industry, the cost of bringing the 1988 5.04-6.45 billion dollar marijuana crop to consumers when legalized would be 3.25 million dollars, leaving 5.04-6.45 billion dollars as the possible tax revenue available to the government. Similarly, the cost of bringing the 1991 5.09-9.09 billion dollar marijuana crop to consumers would be 2.82 million dollars, leaving 5.09-9.09 billion dollars as possible tax revenue. Thus, the total retail value of marijuana is virtually identical to potential tax revenue due to the low cost of production.

The aforementioned tax revenue figures are based solely on the recreational use of marijuana, that is, based solely on the demand for marijuana used for intoxication and relaxation. The estimate excludes the revenue obtainable from the use of hemp as a biomass fuel, clothing and fabric fiber, paper product, protein powder, livestock and pet feed, and vegetable and lubrication oil, among others noted by the Business Alliance for Commerce in Hemp. Given this the estimate of the potential tax revenue from legalized marijuana could be thought as a reasonable lower bound.

C. Consideration of Tax Structure

The optimal structure and implementation of tax policy under a regime of regulation will, of course, depend on the precise form of regulation ultimately adopted by the government.(4) In the absence of a generally accepted regulatory model it is only possible to touch upon some basic parameters of pricing and taxation decisions. Central to a regulated marijuana market is the elimination of the black market cash economy and the concomitant tax avoidance and criminal violence. In setting an optimal tax policy, the government must address the tension of setting the retail price high enough to discourage profligate drug use, but low enough to eliminate profitable sales outside the legal distribution network. A regulatory regime can achieve this end through excise taxation.

Compared to alternative policies and tax structures, excise taxes have a number of desirable properties and have functioned reasonably well in the context of alcohol and tobacco markets. An excise tax can be designed to balance government revenues with efforts to control consumption and minimize the intrusion of black market sources. In addition, a tax on quantity (e.g., so much per gram) is straightforward in design, easy to measure, and therefore relatively inexpensive to collect. Finally, taxes allow individuals to choose their own levels of consumption. No government official is required to decide whether particular individuals or occasions meet a set of standards or requirements.

Of course, the tax component is but one piece of any regulatory regime. As Kleiman (1989) and Goldstein and Kalant (1993) have noted, the designers of a regulated marijuana market must address a range of questions related to the issues of licensing use (e.g., age restrictions), regulating potency, quantity restrictions, and enforcement of government controls.