Nowadays there are few touchier subjects than whether to legalize marijuana, especially after voters in Washington state and Colorado last year approved allowing the recreational use of the controlled substance in a users' home.

In both Washington and Colorado a resident may legally purchase or possess up to 1 ounce of cannabis as long as they're 21 years of age or older. However, the proposition to make cannabis legal for recreational use didn't pass in every state, with the measure losing by a small margin in Oregon last year.


Source: PabloEvans, Flickr.

The allure of legalizing marijuana
Let's momentarily take a step back from our own personal views, regardless of what they may be, and look at the hypothetical ramifications of marijuana legalization. I'm not here to take a side one way or another, but merely looking at how legalization could be both positive and negative for the economy.

The primary allure of legalizing cannabis on a state and/or federal basis is inherent in the taxable revenue that could be collected from the sale of the currently controlled substance. According to my Foolish colleague Brian Orelli via data from ArcView Market Research, if cannabis were decriminalized we could be looking at a drug capable of producing $10.2 billion in annual sales within five years. By comparison, the best-selling drug in world, according to my extrapolated calculations earlier this year, is AbbVie's (NYSE:ABBV) anti-inflammatory drug Humira which globally is expected to net $10.1 billion in sales this year. No other marketable drug is within an estimated $1.4 billion in sales relative to Humira globally. Cannabis sales, on the other hand, would nearly match AbbVie's revenue driver in yearly sales.

If you think about this hypothetically in terms of strategies for curbing both federal and state deficits, taxation of this substance could be part of the answer. In early 2012, 42 of the nation's 50 states were running a deficit, according to CNN. Furthermore, most of the other eight were sparsely populated states such as Alaska, Wyoming, Montana, and North Dakota that make up such a small percentage of annual spending , that factoring them into our calculation is almost not worthwhile. 

Colorado, for instance, has a 25% total tax on recreational marijuana sales (15% excise and 10% sales) that should help the state close its budget gap.

Interestingly enough, a CBS News report from 2009 demonstrated that marijuana usage in the U.S. has been on the rise for years. It's also worth noting that 20 U.S. states and Washington, D.C. have legalized the use of marijuana for medical purposes over the past 15 years. That could somewhat explain the rise in cannabis use, but it's certainly just one part of the picture.


The CBS News report stated that the number of polled respondents in 2009 who claimed to use marijuana on a somewhat regular basis increased to 10.8% from 10.2% in the prior year. If this data is consistent throughout the U.S, somewhere in the neighborhood of 20 million-23 million adults are using marijuana somewhat regularly. 

10 states that would benefit the most
According to CBS News' report, here are the 10 states, based on the number of positive respondents, that would benefit the most from the hypothetical legalization of marijuana on a recreational level:


% of Residents Who Smoke Marijuana







New Hampshire






Rhode Island








Source: CBSNews.

With the exception of Alaska, every state on this list was running a budget deficit as of early 2012, according to CNN's figures. Some deficits were enormous, including the $28 billion California shortfall that has supposedly vanished due to steep statewide cost-cuting and increased taxes. Marijuana legalization, however, could help stem those deficits. In Colorado, No. 3 on the above list, the Colorado Center on Law and Policy predicted the state would generate about $60 million in tax revenue annually through 2017. That wouldn't close Colorado's budget gap completely, but it would could help bridge some of the existing shortfall.

Marijuana's numerous stumbling blocks
Before you get too excited about the potential for marijuana to be legalized around the country, consider that there are also a number of huge stumbling blocks that could stand in its way. 

Probably the biggest current drawback is that no matter how many states vote to approve the legalization of marijuana, it's still considered a schedule I drug on the federal level -- illegal in all instances. This leaves marijuana producers and buyers in a bind on the state level with regard to what is and is not legit. Maintaining consistency is another major concern . Because the federal government doesn't allow for the sale of marijuana for recreational purposes, it has no ability to test for THC content (the active ingredient in marijuana) or potency. Furthermore, it's incredibly difficult to regulate the chemical consistency of one marijuana producer to the next.

If the entire country did not legalize at once, leakage onto the black market is another gigantic concern. Washington state, for example, is requiring producers to implement a bar code system from the growth stage through the final shop destination to ensure that none of the cannabis grown is escaping to neighboring states where possession of the drug for nonmedicinal purposes may be considered illegal. 

There are also the potentially negative side effects of cannabis smoking, according to the National Cancer Institute, a division of the National Institutes of Health. According to NCI, rapid heart beat, dizziness, depression, and paranoia can all be linked to cannabis usage. In addition,the NCI notes that "because cannabis smoke contains many of the same substances as tobacco smoke, there are concerns about how cannabis affects the lungs." 

The final tricky topic that's often overlooked is the potential for the Food and Drug Administration to get involved if marijuana were to be legalized on a federal level. At the moment the FDA doesn't regulate illegal substances. However, if marijuana becomes legal, the call for tight regulatory control could come into play. In 2006, The New York Times reported that the FDA had issued a report finding "no sound scientific studies" that support the use of marijuana for medical purposes, so more clinical evidence for efficacy may be necessary.

This is worth watching
Although we don't have all of the answers now, it's worth keeping a close eye on the evolution of state-level recreational marijuana laws in what could be a transformative period in the U.S. All eyes will certainly be focused on Washington and Colorado over the next year to see how well recreational legalization laws perform with regard to revenue generation relative to the potentially negative side effects listed above. If the risk/reward trade-off is beneficial, this could be something other states adopt. If not, Washington and Colorado may likely be the only states to attempt this experiment.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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