Marijuana legalization in Missouri will produce $149 million annually in combined savings and revenue for the state according to a new economic analysis co-authored by Harvard Economist Dr. Jeffrey Miron.
Harvard economist, Dr. Jeffrey Miron, co-author of the new study, states that “The savings to Missouri’s state and local governments from marijuana legalization consists of three main components: the reduction in expenditures by police from eliminating marijuana-related arrests; the reduction in spending on prosecution and judicial resources; and the reduction in spending on jails and prisons as well as probation and parole. In addition to these savings, marijuana legalization would allow taxation of commerce in production and sale of marijuana which are currently tax free.”
“This research introduces a fresh perspective into the public debate on marijuana policy. Although dollars and cents should not be the sole motivation for a substantial policy change, this research helps clarify what Missourians presently sacrifice in order to maintain the current system of prohibition and what they stand to gain from reforming this system,” said Abhi Sivasailam, Director of Research for National Cannabis Coalition and co-author of the new study. “Although $159 million will not end all of the state’s budget shortfalls, it is more than enough to protect against cuts to vital state services, including education and public safety.”
National Cannabis Coalition commissioned the paper to support the efforts of Show-Me Cannabis Regulation, the Missouri organization that sponsored a marijuana legalization initiative earlier this year.
“Cannabis prohibition is a costly policy, not only for the tens of thousands of Missourians arrested for possession of marijuana every year, but for our economy as a whole,” said John Payne, Executive Director of Show-Me Cannabis Regulation. “Every dollar we spend attempting to enforce this failed policy is a dollar we cannot spend educating Missouri’s children or keeping our citizens safe from violent crime.”
Upon reviewing the paper, Missouri Representative Rory Ellinger of University City stated, “The criminalization of those who use marijuana not only costs our state a great deal of money, but also inflicts needless suffering on people who experience a lifetime disability in seeking employment and loans and housing. The criminal prohibition of cannabis costs our state far more than just money.”
The full report:
The Budgetary Implications of Legalizing Marijuana in Missouri
Jeffrey A. Miron
Department of Economics, Harvard University and the Cato Institute
Director of Research, American Victory Coalition and National Cannabis Coalition
This report estimates that legalizing marijuana in Missouri would save about $90 million in government expenditure and yield roughly $59 million in tax revenue annually. This assumes that marijuana would be taxed at rates comparable to those on alcohol and tobacco and that all other states and the federal government would also legalize.
This report estimates the reduction in government expenditure and the increase in tax revenue and that would result from legalizing marijuana in Missouri. Legalization would reduce government expenditure by about $90 million annually. Legalization would also generate tax revenue of roughly $59 million annually if marijuana were taxed at rates comparable to those on alcohol and tobacco. These estimates assume that all other states and the federal government also legalize marijuana.
Section II describes the framework that underlies these estimates. Section III estimates state and local expenditure on marijuana prohibition. Section IV estimates the tax revenue from legalized marijuana.
II. Analytic Framework
The budgetary impact of marijuana legalization in a given state depends crucially on marijuana policy in other states and under federal law. We consider only the following policy change: Missouri legalizes marijuana, and all other states and the federal government do likewise.
This policy change is not currently on the table, nor is it likely to occur in the near future. But this hypothetical case is analytically tractable because it circumvents the need for assumptions about cross-border effects or about state versus federal impacts of legalization. More importantly, this hypothetical provides an upper bound on the expenditure savings and revenue increases that might occur from legalization in Missouri.
The estimates here should not be taken as precise. The analysis employs numerous assumptions, some that plausibly bias the estimates downward and some that plausibly bias the estimates upward. The reported estimates are therefore ballpark figures that indicate what order of magnitude policymakers should expect from legalization.
III. Missouri’s State and Local Expenditure for Marijuana Prohibition Enforcement
To estimate the state and local savings in criminal justice resources, this report uses the following procedure. It estimates the percentage of state and local arrests for marijuana violations and multiplies this percentage by the state and local budget for police (subject to one adjustment discussed below). It estimates the percentage of state and local felony convictions for marijuana violations and multiplies this percentage by the state and local budget for prosecutors and judges (subject to one adjustment described below). It estimates the percentage of state and local incarcerations for marijuana violations and multiplies this percentage by the state and local budget for prisons. It then sums these components to estimate the overall reduction in state and local government expenditure. Under plausible assumptions, this procedure yields a reasonable estimate of the cost savings from marijuana legalization.
Missouri’s State and Local Police Budget Due to Marijuana Prohibition
Table A calculates the fraction of total arrests in Missouri due to marijuana prohibition. Line 1 gives the total number of state and local arrests in 2011. Line 2 gives the number of such arrests for marijuana law violations. Line 3 gives the fraction of arrests due to marijuana law violations, defined as Line 2 divided by Line 1. Line 4 gives the percentage of marijuana arrests due to sale or manufacturing violations. Line 5 gives the percentage of overall arrests due to sale/manufacturing violations, defined as Line 3 times Line 4. Line 6 gives the percentage of marijuana law violations due to possession violations. Line 7 gives the percentage of overall arrests due to possession violations, defined as Line 6 times Line 3.
In determining which arrests represent a cost of marijuana prohibition, therefore, it is appropriate to count only those that are “stand-alone,” meaning those in which a marijuana violation rather than some other charge is the reason for the arrest. This issue arises mainly for possession rather than for trafficking. Few hard data exist on the fraction of “stand-alone” possession arrests, but the information in Miron (2002) and Reuter, Hirschfield and Davies (2001) suggests it is between 33% and 85%.6 To err on the conservative side, this report assumes that 50% of possession arrests are due solely to marijuana possession rather than being incidental to some other crime. Thus the resources utilized in making these arrests would be available for other purposes if marijuana possession were legal. Line 8 of Table A therefore shows Line 7 divided by 2; this is the fraction of possession arrests attributed to marijuana prohibition. Line 9 gives Missouri’s total state and local expenditure on police in 2011 (fiscal year), adjusted for non-arrest activities. Line 10 gives police expenditure due to arrests for sales/manufacturing, defined as Line 5 multiplied by Line 9. Line 11 gives police expenditures due to possession, defined as Line 8 multiplied by Line 9. Line 12 gives total police expenditure due to marijuana violations, defined as Line 10 plus Line 11.
State and Local Judicial and Legal Budget Due to Marijuana Prohibition
Table B calculates the judicial and legal budget due to marijuana prohibition in Missouri. Line 1 gives 41.7% of Missouri’s total state and local judicial and legal budget in 2011, which represents the fraction of that budget that is spent on felony and misdemeanor cases. Line 2 gives the percent of felony convictions in state courts due to marijuana law violations.8 Line 3 gives the state and local judicial and legal budget due to marijuana prosecutions, equal to the product of Lines 1 and 2.
The Corrections Budget Due to Marijuana Prohibition
Overall State and Local Expenditure for Enforcement of Marijuana Prohibition
IV. The Tax Revenue from Legalized Marijuana
In addition to reducing government expenditure, marijuana legalization would generate tax revenue from the legal production and sale of marijuana. To estimate this revenue, we employ the following procedure. First, we estimate expenditure on marijuana under prohibition. Second, we estimate the expenditure likely to occur under legalization. Third, we estimate the tax revenue that would result from this expenditure based on assumptions about the kinds of taxes that would apply to legalized marijuana. We carry out all three steps with national data and then allocate a percentage to Missouri based on population.
Expenditure on Marijuana under Current Prohibition
The first step in determining the tax revenue under legalization is to estimate expenditure on marijuana under current prohibition. ONDCP (2001a, Table A, p.3) provides an estimate of this expenditure for 2000. This estimate is controversial and relies on a range of assumptions about the marijuana market; other estimates are 10-30 times larger than the ONDCP estimate.
Table E, line 1, gives the ONDCP estimate for 2000, adjusted for underreporting. Line 2 gives this estimate adjusted for inflation, population growth, and the change in use rates.
Expenditure on Marijuana under Legalization
The second step in estimating the tax revenue from legalization is to determine how expenditure on marijuana would change. A simple framework in which to consider various assumptions is the supply and demand model. To use this model, we must state what effect legalization would have on the demand and supply curves for marijuana.
If demand does not shift due to legalization, any change in quantity and price must result from changes in supply conditions. Two main effects would operate (Miron 2003a). On the one hand, marijuana suppliers in a legal market would not incur the costs imposed by prohibition, such as the threat of arrest, incarceration, fines, asset seizure, and the like. Other things equal, therefore, costs and prices would be lower under legalization. On the other hand, marijuana suppliers in a legal market would bear the costs of tax and regulatory policies that apply to legal goods but that black market suppliers normally avoid.17 This implies an offset to the cost reductions resulting from legalization. Further, changes in competition and advertising under legalization can potentially yield higher prices than under prohibition.
The best available evidence on the magnitude of legalization’s impact on price comes from comparisons of prices between the U.S. and the Netherlands. Although marijuana is still technically illegal in the Netherlands, the degree of enforcement is substantially below that in the U.S., and the sale of marijuana in coffee shops is officially tolerated. The regime thus approximates de facto legalization. Existing data suggest that retail prices in the Netherlands are roughly 50-100 percent of U.S. prices.1819 We assume that the legalized prices for marijuana would be 50% of the current price. Table E, line 3, shows this assumption.
The effect of any price decline due to legalization depends on the elasticity of demand for marijuana.20 Evidence on this elasticity is limited because appropriate data are not readily available. Existing estimates, however, suggest an elasticity of at least -0.5 and plausibly more than -1.0.2122 Estimates for other drugs, as well as for alcohol and tobacco, generally suggest an elasticity in the range of -0.5 to -1.0. If the demand elasticity equals -1.0, then expenditure will remain constant when price declines. If demand is less elastic, then expenditure will decline.23 We assume an elasticity of -0.5, as shown in Table E, line 4.
Table E, line 5, shows the implications of these assumptions for the amount of marijuana expenditure under legalization, assuming standard income and sales taxation. The estimates in line 5 do not incorporate a sin tax on legalized marijuana.
Tax Revenue from Legalized Marijuana
Legalized marijuana would also generate tax revenue because the income generated would be subject to standard income and sales taxation. The amount of income earned is roughly equal to the amount of expenditure. For most legal goods, tax revenue as a fraction of expenditure is approximately 30%.27 This figure includes the sales taxation of roughly 5% imposed by most state governments as well as personal and corporate income taxation imposed by state and federal governments. This 30% tax share is consistent with the estimates derived above on the relation between prices under prohibition and prices in a legalized market since those prices were based on comparisons that incorporated any costs of legal goods due to standard taxation.
This 30% should be applied to 75% of the legalized, pre-sin-tax expenditure. This is because while the sin tax raises expenditure given that demand is inelastic, the 50% higher price combined with an elasticity of -0.5 leads to a 25% reduction in (tax-exclusive) expenditure. Assuming constant costs therefore means that expenditure should be 75% of pre-sin-tax expenditure. Table E, lines 9 and 10, provide these calculations.
Table E, line 11, adds the revenue from sin taxation and income plus sales taxation to estimate the total tax revenue from a regime in which marijuana is legal but taxed and regulated similarly to alcohol and tobacco. Line 12 shows 1/3 of this revenue, since that is roughly the fraction of state/local tax revenue in total tax revenue. Line 13 presents Missouri’s share of total state tax collections, assuming this revenue is proportional to Missouri’s share of the U.S. population.
Table F summarizes the impact of marijuana legalization on Missouri state and local government budgets. These estimates assume that marijuana would be taxed at rates comparable to those on alcohol and tobacco and that all other states and the federal government would also legalize.
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Table A: Missouri’s State and Local Police Budget Due to Marijuana Prohibition, Millions of 2011 Dollars
|1. Total Arrests||307,240|
|2. Arrests for Marijuana Violations||22,113|
|3. % of Arrests, Marijuana Violations||7.20%|
|4. % of Marijuana Arrests, Sale/Man||8.51%|
|5. % of Total Arrests, Sale/Man||0.61%|
|6. % of Marijuana Arrests , Possession||91.49%|
|7. % of Total Arrests, Possession||6.58%|
|8. 0.5 * % of Arrests, Possession||3.29%|
|9. Total State and Local Police Expenditure||$1,409,46|
|10. Police Expenditure, S/M Violations||$8.60|
|11. Police Expenditure, Possession Violations||$46.37|
|12. Police Expenditure, Marijuana Violations||$54.97|
1. Total arrests and arrests for drug violations:http://www.mshp.dps.mo.gov/MSHPWeb/SAC/data_and_statistics_ucr_query_backup.html
2. Drug violation and sale/manufacturing percentages: http://www.mshp.dps.mo.gov/MSHPWeb/SAC/data_and_statistics_ucr_query_backup.html
3. The data on budgets are from http://www.census.gov/govs/estimate/.
4. Budgets were originally reported for 2008-2009 and were converted to 2011 dollars with http://www.bls.gov/data/inflation_calculator.htm.
Table B: Missouri’s State and Local Judicial and Legal Budget Due to Marijuana Prohibition, Millions of 2011 Dollars
|1. Total Relevant Judicial Budget||$229.62|
|2. % Felony Conv, Marijuana Violations||9.64%|
|3. Judicial Expenditure, Marijuana Violations||$22.14|
1. The data on felony convictions are from Durose and Langan (2007, p.2).
2. The data on budgets are from http://www.census.gov/govs/estimate/.
3. Budgets were originally reported for 2008-2009 and were converted to 2011 dollars with http://www.bls.gov/data/inflation_calculator.htm.
Table C: Missouri’s State and Local Corrections Budget Due to Marijuana Prohibition, Millions of 2011 Dollars
|1. Corrections Operating Budget||$943.34|
|2. % of Prisoners, Marijuana Charges||1.57%|
|3. Corrections Expenditure, Marijuana Violations||$14.81|
1. The data on prisoners are from http://www.albany.edu/sourcebook/pdf/t600012004.pdf.
2. The data on budgets are from http://www.census.gov/govs/estimate/.
3. Budgets were originally reported for 2008-2009 and were converted to 2011 dollars with http://www.bls.gov/data/inflation_calculator.htm.
Table D: Missouri’s Total State and Local Expenditure Attributable to Marijuana Prohibition, Millions of 2011 Dollars
|1. Police Expenditure, Marijuana Violations||$54.97|
|2. Judicial Expenditure, Marijuana Violations||$22.14|
|3. Corrections Expenditure, Marijuana Violations||$14.81|
|4. Gross State and Local Expenditures, Marijuana Prohibition||$91.92|
|5. Net State and Local Expenditures, Marijuana Prohibition||$90.29|
Source: Authors’ Calculations
Table E: Tax Revenues from Marijuana Legalization, Billions of 2011 Dollars
|1. Consumer Expenditure, 2000||13.13|
|2. Consumer Expenditure, 2011*||19.07|
|3. Assumed Percent Decline in Price||50.0%|
|4. Assumed Elasticity||-0.50|
|5. Percent Decline in Expenditure, Legalization||25.00%|
|6. Consumer Expenditure, Legalization||14.30|
|7. Consumer Expenditure, Sin Taxation||17.88|
|8. Revenue From Sin Taxation||5.91|
|9. Consumer Expenditure Subject to Standard Taxation||10.72|
|10. Revenue, Standard Taxation||3.22|
|11. Tax Revenue||9.13|
|12. Total State Tax Collection||3.04|
|13. Missouri’s Total Tax Collection, Population Method (In Millions)||58.65|
*Data on the change in usage rates is only available through 2010. We assume that usage rates in 2011 changed negligibly from those in 2010.
Sources: http://www.abtassociates.com/reports/american_users_spend_2002.pdf; and http://www.census.gov/popest/states/NST-ann-est.html.
Consumer expenditures were originally reported in 2000 dollars and were adjusted for inflation to 2011 dollars with http://www.bls.gov/data/inflation_calculator.htm and for increase in drug usage based on estimates from Monitoring the Future, 2011, http://monitoringthefuture.org/pubs/monographs/mtf-vol2_2010.pdf; Table 418, State and Local Excise Revenue from Alcohol and Tobacco, http://www.census.gov/compendia/statab/cats/state_local_govt_finances_employment.html; Table 457, Federal Excise Tax Revenue from Alcohol and Tobacco, http://www.census.gov/compendia/statab/cats/federal_govt_finances_employment/federal_budget-receipts_outlays_and_debt.html.
Table F: Missouri’s Total Budget Savings Attributable to Marijuana Legalization, Millions of 2011 Dollars
|1. Net State and Local Expenditures, Marijuana Prohibition||$90.29|
|2. Missouri’s Total Tax Collection, Population Method||$58.65|
|3. Total Budget Impact||$148.94|
Source: Authors’ Calculations
1 See, for example, the estimates in Miron (2002) versus those in Miron (2003c).
2 This report addresses only the criminal justice costs of enforcing marijuana prohibition; it does not address changes in prevention, education, or treatment expenses that might accompany legalization. The narrower approach is appropriate because the decision to prohibit marijuana is separate from the decision to subsidize prevention, education and treatment. Marijuana legalization might nevertheless reduce government expenditure for demand-side policies. For example, legalization would likely reduce criminal justice referrals of marijuana offenders to treatment.
3 For example, under current rules regarding parole and probation, a positive urine test for marijuana can send a parolee or probationer to prison, regardless of the original offense. These rules might change under legalization, implying additional reductions in government expenditure.
4 Only 90.4% of paid full-time and part-time police officers have general arrest powers. See the 2003 Sample Survey of Law Enforcement Agencies at http://www.icpsr.umich.edu/cocoon/NACJD/STUDY/04411.xml.
5 To the extent it takes additional resources to process an arrestee on multiple charges rather than on a single charge, prohibition still generates a net utilization of police resources. Likewise, lab tests to determine the content of seized marijuana require additional resources. In some cases, police stops for non-marijuana charges that produce an arrest on marijuana charges might not have done so in the absence of the marijuana charge.
6 Lewis (2004) reports that in 2002 the fraction of stand-alone arrests was 90.5% in Syracuse, New York.
7 See Miron and Waldock (2010), Appendix J, for details.
8 See Miron and Waldock (2010). The calculations there assume that the fraction of felony convictions by drug equals the fraction of sale/manufacturing arrests by drug. Kilmer et al (2010) believe this assumption overstates judicial and legal budget due to marijuana prohibition because marijuana charges are less likely to be prosecuted than other drug charges.
9 See Miron and Waldock (2010), Appendix K, for details.
10 This report excludes the capital outlays portion of the corrections budget since the available data do not indicate the average rate of such expenditures. This biases the estimates downward.
11 Most seized assets are ultimately forfeited.
12 This figure is derived from Miron and Waldock (2010). Our estimate of the total volume of seizures and fines is the implicit total of seizures and fines in Appendix E of that paper, adjusted upwards for inflation to reflect the 2011 price level.
13 Inflation data came from http://www.bls.gov/data/inflation_calculator.htm, and population data from http://www.census.gov/popest/states/NST-ann-est.html.
14 Use rates for marijuana increased slightly between 2000 and 2010, from 27.9% to 28.7%; see Monitoring the Future 2011, pp. 153, http://monitoringthefuture.org/pubs/monographs/mtf-vol2_2010.pdf.
15 To be explicit, we assume no shift in the demand curve. If the supply curve shifts, the quantity demanded will change.
16 Regulation aimed at marijuana use and sale, such as age limits on purchase or licensing and zoning restrictions on sale, might also reduce demand relative to prohibition. Legal sellers face a stronger incentive to obey such regulation than underground sellers, who are already hiding their actions from authorities.
17 The underlying assumption is that the marginal costs of evading tax and regulatory costs is zero for black market suppliers who are already conducting their activities in secret.
18 MacCoun and Reuter (1997) report gram prices of $2.50-$12.50 in the Netherlands and $1.50 – $15.00 in the U.S. They speculate that the surprisingly high prices in the Netherlands might reflect enforcement aimed at large-scale trafficking. Harrison, Backenheimer, and Inciardi (1995) note that ONDCP data on marijuana prices in the U.S. are similar to prices charged in Dutch coffee shops. ONDCP (2001b) reports a price per gram for small-scale purchases of roughly $9 per gram in the second quarter of 2000, while EMCDDA (2002) suggests a price of 2-8 Euros per gram, which is roughly $6 on average. Various web sites that discuss the coffee shops in Amsterdam suggest prices of $5 – $11 per gram in recent years. These comparisons do not adjust for potency or other dimensions of quality.
19 Clements and Daryal (2001) report marijuana prices for Australia that are similar to or higher than those in the United States. Since Australian drug policy is less strict than U.S. policy, this observation is consistent with the view that legalization would not produce a dramatic fall in price.
20 The elasticity of demand is the percentage change in the quantity demanded that results from a one percentage point change in the price. For example, an elasticity of -0.5 means that if price falls by 10%, the quantity demanded increases by 5%. An “elastic” demand curve is one for which the elasticity is large (in absolute value).
21 See Nisbet and Vakil (1972). Their estimates that use survey data imply price elasticities of -0.365 or -0.51 in the log and linear specifications, respectively, while the purchase data imply price elasticities of -1.013 and -1.51. The estimates based on purchase data are plausibly more reliable. Moreover, as they note, these estimates are likely biased downward by standard simultaneous equations bias. Clemens and Daryal (1999) estimate a price elasticity of -0.5 for drugs using Australian data. Estimates of the demand for “similar” goods (e.g., alcohol, cocaine, heroin, or tobacco) suggest similar elasticities.
22 Pacula, Grossman, Chaloupka, O’Malley, Johnston and Farrelly (2000) summarize the literature on the relation between drug use and factors that can affect use, such as legal penalties. They conclude the evidence is mixed but overall indicates a moderate response of consumption to “price.” The papers summarized do not provide measures of the price elasticity. The results reported by Pacula et al. suggest an elasticity of drug participation between 0.0 and -0.5; this understates the total elasticity, which includes any change in consumption conditional on participation. The literature since Nisbet and Vakil is thus consistent with the elasticity estimate presented there.
23 The phrase “if demand is less elastic” can be read as “if demand is less responsive (to price).”
24 Schwer, Riddel and Henderson (2002) estimate the tax revenue from marijuana legalization in Nevada assuming “sin taxation.” Their estimates are not readily comparable to those presented here because they consider the situation in which one state legalizes marijuana while other states and the federal government prohibit marijuana. The same comment applies to Bates (2004), who estimates the tax revenue from marijuana legalization in Alaska. Easton (2004) estimates the tax revenue from marijuana legalization in Canada under the assumption of sin taxation. His estimates are comparable but modestly higher than those presented here, adjusted for the different size of the U.S. and Canadian economies. Caputo and Ostrom (1994) provide estimates for the overall economy that are similar to those obtained here.
25 These assumptions imply an amount of sin taxation as a percent of expenditure that is similar to what currently occurs in the U.S. for alcohol and tobacco. In 2007, federal excise tax receipts from alcohol and tobacco were $8.6 billion and $7.6 billion, respectively (See Table 457 of U.S. Census 2009, http://www.census.gov/compendia/statab/tables/09s0457.pdf), and state and local excise tax receipts from alcohol and tobacco were $5.7 billion and $15.8 billion, respectively (See Appendix Table A of U.S. Census 2007, http://www2.census.gov/govs/estimate/0700ussl_1.txt). This implies total excise taxation on alcohol and tobacco of $14.3 billion and $23.4 billion, respectively. In this same year, consumer expenditure on alcohol and tobacco were $54.9 billion ($457 per consumer unit for 120,171 units) and $33.8 billion ($323 per consumer unit for 120,171 units), respectively (See U.S. Department of Labor 2007, ftp://ftp.bls.gov/pub/special.requests/ce/standard/2007/cusize.txt). These figures imply that excise taxation accounts for roughly 26% (alcohol) and 69% (tobacco) of expenditure.
26These amounts are not necessarily attainable given the characteristics of marijuana production. Small scale, efficient production is possible, so the imposition of a substantial tax might encourage a portion of the market to remain underground. Whether such production is illicit depends on the details of a legalization law. Plausibly, growing small amounts for personal use would not be subject to taxation or regulation, just as growing small amounts of vegetables or herbs is not subject to taxation or regulation. The evidence suggests that the magnitude of such production would be minimal. In particular, alcohol production switched mostly from the black market to the licit market after repeal of Alcohol Prohibition in 1933.
The assumption of a constant demand elasticity in response to a price change of this magnitude is also debatable; more plausibly, the elasticity would increase as the price rose, implying a larger decline in consumption and thus less revenue from excise taxation.
27 In 2001, total government receipts divided by GDP equaled 29.7%. See the 2003 Economic Report of the President on-line, http://www.gpoaccess.gov/usbudget/fy04/pdf/2003_erp.pdf, Tables B-1 and B-92, pp. 276 and 373.
Published with special permission from the National Cannabis Coalition