Expert Commentary

Marijuana legalization: Tax revenue and changing consumption

2016 study in the American Economic Review estimates how legalizing marijuana nationally would impact tax returns and consumption.

Marijuana plants (Pixabay)

The issue: Since Colorado became the first state to legalize recreational marijuana in 2012, initiatives to bring pot out of the shadows have spread rapidly across the United States. Almost half of states now sanction marijuana for medical purposes – even though it remains illegal under federal law. American public opinion also has shifted toward acceptance. In 1969, according to the Pew Research Center, 84 percent of Americans thought the drug should be illegal; by 2015, that number had fallen to 44 percent.

Legalization raises a number of questions with policy implications. For example, how can it be taxed? In 2015, Colorado raised $135 million in taxes and fees from legal sales. Another important question: Will states that stop arresting people for selling or having marijuana save money on policing and reduce their incarceration rates? Some 620,000 people were arrested for marijuana possession in 2014, according to the FBI; young minority men were disproportionately targeted. Will more children take to smoking weed? As laws relax and the stigma associated with marijuana recedes, people may use more.

An academic study worth reading: “Marijuana on Main Street? Estimating Demand in Markets with Limited Access,” published in American Economic Review, August 2016.

Study summary: Economists Liana Jacobi of the University of Melbourne and Michelle Sovinsky of the University of Mannheim look at how limited access affects usage rates among Australians of different ages. The Australian data is especially useful because it includes statistics on accessibility and prices. Recreational marijuana is currently illegal in Australia, though some states began introducing medical marijuana laws in 2016. As in America, marijuana is the most commonly used illicit drug in Australia.

The authors look at the role accessibility plays in usage and how tax revenues are affected when marijuana is regulated like alcohol and sold to people above the age of 21. They also examine how taxation can curb use among youth. Jacobi and Sovinsky extrapolate their analysis to include the United States, a country with similar cultural behaviors and economies. 


  • The U.S. could raise between $4 billion and $12 billion annually by taxing legal marijuana. These numbers are based on a tax levy of about 25 percent, which is what the state of Colorado charges. This rate could maximize state revenues without incentivizing the black market.
  • When people have more access to marijuana (through legal and illegal means) more people use it.
  • When marijuana is illegal, both access and usage drops as people age. Access is better among the young. Men have better access, and use more, than women. Legalization, therefore, improves access for larger numbers of older people and prompts a larger proportion of older people to begin using.
  • Currently, 17 percent of Australians say they do not use cannabis for fear of legal repercussions; 90 percent of those say that access is not the reason.
  • If marijuana use was legalized and individuals had easy access to the drug, usage rates would rise by approximately 50 percent in the U.S. If that happened, about 19.4 percent of U.S. adults would use marijuana.
  • To prevent teenagers from increasing consumption after marijuana becomes legal for adult use, the price would have to rise fourfold. That is unfeasible because it would encourage a return of the black market. Instead, a tax of 25 percent would stop roughly one-third (34 percent) of potential new teenage users from starting to use marijuana. To stop 40 percent of potential new teenage users, prices would have to almost double. Prices would have to almost triple to cut the number of new teenage users by half.

Other resources:

The number of American cannabis users is rising rapidly. According to an August 2016 Gallup Poll, 13 percent of Americans say they use the drug, up from 7 percent in 2007. Slightly older data from The National Survey on Drug Use and Health, published by the U.S. Department of Health and Human Services, say over 22 million Americans aged 12 or older have used marijuana in the past month. That is 8.4 percent of the population.

The National Institutes of Health (NIH) publishes research on the health impact of cannabis consumption.

Legalization in Colorado has been a closely watched experiment. The state’s Department of Revenue publishes its tax receipts from marijuana sales on a monthly basis.

The American Civil Liberties Union reports that black people are almost four times more likely to be arrested for marijuana possession than whites, even though both groups use the drug at roughly the same rate.

There are a number of advocacy groups working both sides of the legalization debate, including some funded by the cannabis industry. The Marijuana Policy Project lobbies for legalization and regulation. It updates a database of ballot initiatives around the country. Smart Approaches to Marijuana is an anti-legalization lobby group. and High Times magazine are among the news outlets that cover the growing legal marijuana business.

LEAP – Law Enforcement Against Prohibition – is a body of police and other law enforcement officials promoting legalization. It argues that prohibition has failed and distracts police from fulfilling their duties to the public.

Professor Mark Kleiman of New York University has written extensively about criminal justice and marijuana.

Other research:

A 2016 paper in Preventative Medicine analyzes news coverage of recreational marijuana policy and reports that opponents of legalization most often argue about public health concerns, but that stories about opposition rarely mention public health research. Proponents of legalization most often use arguments on reduced criminal justice expenditures and increased tax revenues.

A 2015 study published in Alcoholism: Clinical and Experimental Research explores how marijuana legalization impacts alcohol consumption.

A 2015 study by the RAND BING Center for Health Economics sees an association between medical marijuana and the lower use of addictive opioids as pain medication; it also reports fewer opioid-related deaths. At the same time, the paper finds a correlation between the availability of medical marijuana and higher rates of recreational marijuana use.

There is a growing debate between federalism and states’ rights when it comes to marijuana legalization. The federal government continues to classify cannabis as a Schedule I drug, like heroin and cocaine. That means cultivators, distributors and dispensaries that sell marijuana legally under state laws have severely restricted access to the banking system, which is more often regulated at a federal level. On these restrictions, see the 2015 article “Cooperative Federalism and Marijuana Regulation” published in the UCLA Law Review and the 2014 article “Banks, Marijuana, and Federalism” in Case Western Reserve Law Review.


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