With Budget Going to Pot, California May Tax Marijuana
Policy + Politics

With Budget Going to Pot, California May Tax Marijuana

As California’s budget woes go from bad to worse, some state officials and advocacy groups are seriously thinking of turning to pot for partial relief — by taxing it, not smoking it.

Decriminalizing and taxing marijuana was once considered a political taboo. But the combination of the state’s staggering nearly $20 billion budget deficit and $14 billion-a-year black market for the drug has prompted many state politicians to tune in.

“Our prisons are overflowing and it’s easier now for teenagers to get marijuana than alcohol,” said assemblyman Tom Ammiano, the sponsor of a state marijuana legalization bill. “We simply cannot afford to continue keeping our heads in the sand and pretend that everything is fine.”

“I think it's time for a debate," Gov. Arnold Schwarzenegger said last year. “I think that we ought to study very carefully what other countries are doing that have legalized marijuana and other drugs, what effect it had on those countries, and are they happy with that decision." 

With illegal marijuana now ranking as California’s top cash crop, according to the USDA, some state and local officials have begun speculating over how much could be raked in if the multibillion dollar pot industry were regulated and taxed. The California Board of Equalization projects that the state could raise at least $1.4 billion a year under one proposal in the state legislature that would impose a $50-per-ounce excise tax on commercial marijuana sales.

Another measure that will appear on the November ballot, called Proposition 19, would make it legal for anyone 21 years of age and older to possess up to one ounce of marijuana, and allow county and city government to regulate and tax sales.

Recreational marijuana is illegal in every state except Alaska. Medical marijuana use is legal in only 14 states, including California. Thirty-seven percent of registered California voters say they either have used or currently are using marijuana, according to a recent University of Southern California poll. 

Despite all the excitement, a recent report by the nonpartisan RAND Drug Policy Research Center raised doubt that legalizing and taxing recreational marijuana will put much of a dent in California’s ballooning deficit. The RAND report said it is difficult to predict the revenue-generating potential of any pot legalization measure, particularly Prop 19. Such legislation could generate revenues far below or above the $1.4 billion-a-year estimate. 

Rosalie Liccardo Pacula, a senior economist and co-author of the RAND study, cautioned that by lifting marijuana prohibition, the price of pot prices would fall by 80 to 90 percent. “The going rate for marijuana on the black market right now is between $300 and $450 per ounce, and we estimate legalized prices being about $38 per ounce before taxes,” she said. “With that large of a price drop, consumption will rise — that’s a given.”

But even with a consumption increase, tax revenues would likely to be modest or would steadily decline, Pacula said. First, since tax rates are left up to localities under Prop 19, there could be competition among jurisdictions to lower marijuana tax rates in order to keep more of the revenue within city limits — what the report describes as a “race to the bottom.” 

It’s also possible the federal government might view legalization as a threat to safe driving and penalize the state.  Pacula cited the 1984 federal rule that withheld 10 percent of Federal Highway funding from any state that did not boost its legal drinking age to 21 in order to reduce fatalities. “California gets over $3 billion a year in federal highway funds,” Pacula said. “So if the federal government decided to punish California for adoption of this policy [to legalize marijuana] with a 10 percent penalty, that means $300 million dollars,” Pacula said.

Richard Lee, an activist who is the chief author and promoter of Prop 19, said the measure was tailored to leave it strictly up to cities, counties and towns to decide if they want to regulate and tax recreational marijuana. “We can’t mandate any city, county, or individual, or even the whole state to break federal law. We can only allow them to,” said Lee, who is also the founder and president of Oaksterdam University, a for-profit educational facility which aims to train students to work in the cannabis industry. He teaches politics, history and cannabis cultivation at Oaksterdam, he told The Fiscal Times.

“From a fiscal perspective taxing pot is not a panacea,” said Michael Linden, the Center for American Progress’s associate director for tax and budget policy. “Tax revenue should not be the primary reason why a state decides to change its drug control policies — and let’s not over blow this and think this will solve all of California’s deep budget problems.”

Officials of Oakland, Calif., may beg to disagree. In January, Oakland became the first U.S. city to levy a special tax on medical marijuana clubs. Facing a $42 million budget shortfall, Oakland expects to bring in between $925,000 and $1 million in tax revenue in 2010 from the city’s four medical marijuana collectives, said Oakland tax and revenue administrator David McPherson.  That compares to $23,000 in taxes the city received from the collectives in 2009 — before the ballot measure was implemented. 

Heritage Foundation senior policy analyst Curtis Dubay echoes Linden. “Is heroin next? Is cocaine next? I mean, How many vices can they make legal before they become a sin seeker’s paradise?” he said. “It’s not the way to go about budgeting, and not the way to go about plugging their budget deficit.”