Say What? Marijuana Legalization Would Bring in How Much in Tax Revenue?

Source: Flickr user PabloEvans. 

As hard as this might be to believe, midterm elections are less than three weeks away. There are a lot of crucial issues at stake in the upcoming Congressional elections, but perhaps no hot-button issue is getting more attention than the marijuana legalization movement.

Marijuana gains steam
As Gallup reported one year ago, for the first time in history more respondents in its poll on whether marijuana should be legalized or not responded in the affirmative. Furthermore, in 2012 we also witnessed the first two states, Washington and Colorado, approve marijuana use on a recreational basis. This landmark approval joins the 23 states that have legalized marijuana use for medical purposes or are in the process of implementing their medical marijuana policies.

In the upcoming elections Oregon and Alaska, as well as the District of Columbia will be voting on whether or not to legalize marijuana from a recreational aspect.

Why such a sudden interest in marijuana legalization by individual states and cities? As much as some of our readers would like to believe it's to curry public sentiment I doubt that has little, if anything, to do with what the public wants. Instead, states are looking for ways to make up widening budget deficits, and a unique way to generate instant tax revenue is through the taxation of recreation and medical marijuana sales.

Although certain states have surprisingly delivered budget surpluses, like California, a majority of states, such as New York, North Carolina, and Texas, among a number of others, are facing a budget gap for their upcoming fiscal year. A potential solution is turning toward marijuana adoption and taxing the purchases.

Marijuana legalization would be worth how much to the states?
But, what would marijuana legalization, from a recreational and medical aspect look like across the board? That's a question best posed to NerdWallet which recently tackled this issue utilizing data from the Substance Abuse and Mental Health Services Administration and tax data from the Tax Foundation. Under NerdWallet's assumption of legalization across the board it estimated that states would follow Colorado's lead and collect a 15% excise tax on recreational marijuana sales, as well as add in state and local taxes. Based on NerdWallet's estimate, legalizing marijuana would generate a whopping $3.1 billion in additional tax revenue for states to use.

Source: Flickr user Me and the Sysop.

Unsurprisingly, California, the nation's most populous state, would be the biggest beneficiary of legalizing marijuana according to NerdWallet's estimates. The state would generate $519 million each year, which would be a nice addition to the roughly $3 billion surplus California is expected to end the year with. In addition to California, eight other states would be responsible for generating more than $100 million in annual revenue, including New York with $248 million, Florida with $183 million, and Texas with $166 million, to name a few.

Perhaps the most shocking statistic that I took away from NerdWallet's analysis is that, based on respondents' answers as to whether or not they had smoked marijuana in the past, just 5.05% of the adult population aged 25 and up, or 10.5 million people, had admitted to marijuana use. In other words, just 10.5 million people would generate an estimated $3.1 billion in sales. That in itself is already remarkable, but the possibility of expanded legalization could send this figure considerably higher (since current laws in most states qualify marijuana as an illicit and illegal substance) than the estimated $3.1 billion, which NerdWallet noted in its study. 

There are more motivating factors
There's another potential motivating factor that could cause select states to consider legalization as well: Obamacare. The remaining 14 states that continue to run their own healthcare exchange received federal funds to help construct and maintain their online exchange last year. However, federal funding for maintenance of these sites will all but disappear in the upcoming open enrollment period. For certain states already dealing with budget gaps it means the need to seek additional revenue. For Colorado, legalizing marijuana on a recreational level is one way it's been able to narrow its budget deficit and ensure it has the funds to maintain its online health exchange. Perhaps it's no surprise that four of the five states (including D.C.) that are looking to legalize or are already legal on a recreational basis offer state-run health exchanges.

Source: GW Pharmaceuticals.

Plus, a sweeping legalization could be beneficial for pharmaceutical companies which are basing their research on cannabinoids from the cannabis plant. GW Pharmaceuticals (GWPH +0.00%), for instance, has discovered five dozen cannabinoids which it hopes to use to effect positive biologic changes. The company's lead product, Sativex, is already approved in close to two dozen ex-U.S. countries to treat spasticity associated with multiple sclerosis, and is being tested in three late-stage studies in the U.S. as a treatment for cancer pain. If marijuana were approved on a sweeping basis the assumption I'd make is that physicians and the public would view a marijuana-based prescription as far less taboo, which could ultimately boost sales of these drugs within the U.S.

How realistic is this scenario?
Of course, even those readers who want to see marijuana legalized across the board, as well as potential investors looking to take advantage of this momentum, would be wise to consider a few points beyond NerdWallet's report.

Source: Flickr user Taber Andrew Bain.

First, the potential for marijuana legalization across the board is highly unlikely unless the U.S. federal government changes its stance on marijuana as a schedule 1 drug. To be clear, the federal government has taken a hands-off approach to individual states legalizing marijuana for medical or recreational use, but that isn't to say that it may not get involved down the road if the checks and balances meant to keep the product within state boundaries fails to do so, or if it winds up in the large black market. As Deputy Attorney General James Cole said in an interview with 60 Minutes in 2012 shortly before the passage of Colorado and Washington's recreational marijuana laws, "We're going to take a look at whether or not there are dangers to the community from the sale of marijuana and we're going to go after those dangers." 

Secondly, don't discount that some states simply aren't looking to legalize marijuana, such as Texas. Whether it be political differences or simply the constituency of its residents, not all 50 states will be in the same boat. This makes the idea of sweeping legalization, especially with the federal government not on board, highly unlikely.

Finally, the broader implications for cannabinoid-based drugs can't be overlooked. While cannabinoid-based drugs have shown promise in clinical trials, we've yet to really witness any gain approval in the U.S. Until marijuana becomes far less of a taboo topic it could be difficult to get the FDA or physicians to lighten their view of cannabinoid-based drugs.