$1bn in tax revenue from marijuana in the USA

When it comes to the legal cannabis debate, money talks

Marijuana is finally becoming legal and available to the average person. At least part of the motivation of legalization came from a political will to appropriate tax revenue that local and stae governments felt they could ‘squeeze’ from the industry.

The legal marijuana market in the state of California with its 39.5 million residents, the world’s sixth-largest economy, is conservatively valued by many experts at several billion dollars annually. This is expected to give the government at least a $1 billion a year in tax revenue coming directly and incrementally to the governments coffers from the sale of weed.

QUICK SUMMARY: There will probably always be a black market for marijuana. The trends visible in the locations where cannabis has been legalized, however, suggest that the majority of sales will be legal, resulting in tax receipts up to $170bn USD in America and contributing to the production of 170,000 jobs, by 2025.

Legal verse Black Market Marijuana and other factors affecting tax receipts from legal marijuana

A ‘black market’ for weed still operates in the US. Legal and illegal cannabis has different prices with the latter currently being cheaper in most locations. This affects government tax receipts. This is not the only factor affecting the price of cannabis.

• Illegal cannabis is relatively cheap in Colorado and California:
  In Colorado when recreational marijuana was legalized in 2014, legal marijuana was significantly lower than what was available from the black market. Marijuana is around $20 per eigths of an ounce on the black market, according to the chairwoman of the California Growers Association. That’s lower than the country average price, which is between $40 to $50 an eighth. The reason is that California grows so much illegal marijuana, there is an oversupply.
• Legal cannabis is more expensive:
  Buying marijuana through a legal outlet is much more expensive than the illegal alternative, in California because of the 35% taxes applied to legal marijuana sales. There are overheads which legal marijuana businesses sustain which illegal operations do not, for example the ‘ exhaustive checks’ that legal weed goes through for purity testing for chemicals and THC levels.
• There is more to the difference between legal and illegal cannabis than just price: 
  Many people are happy to pay the legal price as they are looking for high end products and the variety available from legal outlets that the black-market cannot supply
• The ‘Novelty factor’ of cannabis’ legality:
  When a state first made legal recreational marijuana available there is the novelty aspect of being able to buy legal cannabis. Many people who would otherwise not use cannabis can now try it knowing that they are getting a product that has been thoroughly tested.

Where will these trends end up?

Clearly, if, following legalization, the black market for marijuana continues to operate, little of use will have been achieved – particularly from a tax receipt point of view. Fortunately, trends seem to favour the notion that, medium and long term, legal marijuana will be the cannabis that most people use.

• Over time, competition seems to drive prices down in the legal market:
  In Washington state, prices for legal cannavis were initially high following legalization. With more competition, as more legal cannabis retail outlets became licensed, and opened up, prices dropped to the point they were comparable with the black-market price.
• However, there will likely always be a small black market:
  There will  probably always be a black-market for marijuana. Some people want to make a little on the side selling it (it’s now legal to grow your own in most states which have legalized the product.) Others, perhaps to young to meet the minimum threshold for legal purchase, will also want to get hold of illegal cannavis.

For most people, however, it will be better and safer to shop in the approved and safe markets or retailers where selection, quality and pricing are regulated and product range for the adult use market continues to develop.

Summing up the tax impact of marijuana legalization in the US

New Frontier Data reports that it estimates the American cannabis industry if recreational cannabis use becomes legalized in all areas of America has the potential of generating about $132 billion per year in federal tax revenue by 2025.The same report also suggests that both directly and indirectly, legalization could create 780,000 plus Jobs in the US, too.

What could this mean to Australian tax receipts

The Parliamentary budget office in Australia estimated in 2016 that the legalization of Cannabis could contribute around $300 million to government tax receipts per year, only a tiny fraction of what the US stands to gain.

Since the Australian government spends around $450 billion each year, the legalization of cannabis would contribute less than 0.6% of the total. To some, this will seem like small beans. It’s only around 2% of all income tax paid by individuals in Australia. The argument for legalization will have to be made (for those who wish to see it legalized) on moral, rather than economic grounds.