In just a little more than two weeks, Oregon, Alaska, and the District of Columbia will become the third through fifth states (and capital in the case of D.C.) of the country to vote on whether to legalize recreational marijuana sales.
While an October 2013 Gallup poll showed that, for the first time in history, more respondents favored marijuana legalization than opposed it, opinions surrounding marijuana's use in a recreational setting remain fluid. In fact, the Oregon Cannabis Tax Act failed to garner enough votes to be approved in 2012, so nothing is a given.
The staggering amount of money spent on drug enforcement
One thing is very clear even if the public's opinion of whether marijuana should be legalized varies state by state: a lot of money is spent by individual states and the federal government in policing marijuana, which is listed as a schedule 1 illicit drug.
Just how much? To answer this question, I turned to a 2010 publication (link opens PDF) from Jeffery Miron, director of undergraduate studies for the Department of Economics at Harvard University, who estimated the effects of drug prohibition on state and federal budgets. While Miron's data reflects the costs associated with cumulative drug enforcement for states and the federal government, which equaled $48.7 billion annually, and also separates out the estimated cost of enforcing prohibitions on each of the major drugs, including marijuana.
Before reading any further, can you guess how much was spent in 2008 on U.S. marijuana enforcement activities?
While I doubt anyone would come up with an exact answer, if you were anywhere in the ballpark of $13.8 billion then you either have an amazing crystal ball or today is your day to buy that lottery ticket.
Miron's breakdown notes that states spent $10.4 billion in 2008 enforcing marijuana regulations, while the federal government spent an additional $3.4 billion (note: these figures are rounded up). By state, Miron's report estimates that California spent close to $1.9 billion on marijuana prohibition, by far the highest amount spent on enforcing marijuana prohibition, and New York spent $1.1 billion. Four additional states spent in excess of $400 million on enforcement: Florida, Texas, Ohio, and Pennsylvania. To add additional color to these estimates, only $3.6 billion more was spent on the fight against heroin and cocaine in 2008 on a state level.
But, have you ever wondered might happen if this money weren't spent on marijuana prohibition and was instead kept by the states and federal government? According to Miron, individual states and the federal government would see reduced expenditures as a result of the cumulative effect of local and federal police departments spending less on enforcing marijuana laws, a reduction in judicial resources since there would be far fewer drug-related offense trials, and a reduction in correctional resources since far fewer people would wind up incarcerated on marijuana charges.
Wait, there's more!
As Miron also points out, legalizing marijuana would not only theoretically free up $13.7 billion in expenditures, but it would allow states and the federal government to collect excise, as well as state and local, taxes on the sale of marijuana, much like Colorado and Washington are doing right now. These taxes could go a long way toward bridging budget gaps, or in the case of Colorado, helping to pay the cost of maintaining its state-run Obamacare health exchange.
Colorado, for instance, has a $66 million annual budget to maintain its health exchange website, per Modern Healthcare, and recently approved a 1.4% fee on premiums paid through the online exchange, as well as a per member fee on residents of the state regardless of whether they purchased their insurance on or off Colorado's health exchange. Marijuana's monthly tax revenue may, in the future, lighten the need for these fees and help pay for Colorado's health exchange maintenance in its entirety.
Based once again on 2008 dollars, Miron estimates that taxing marijuana would generate $2.1 billion annually for the states, including $259 million for California based on the population model. Federal tax revenue generated from the sale of marijuana would result in $4.3 billion, according to the report. Combined, this assumes $6.4 billion in revenue generation and $13.7 billion in cost savings, or roughly a $20 billion swing just from the legalization of marijuana.
Of course, I'd be remiss if I didn't point out that Miron's estimates are, exactly as he states them to be, estimates, and open to interpretation. He notes that the "analysis employs assumptions that plausibly err on the conservative side, but substantial uncertainty remains about the magnitude of the budgetary impacts." Miron is also clear that the analysis is not an evaluating tool to gauge the success or failure of drug prohibition.
One big problem with this assumption
While it's an intriguing analysis that certainly could be conservative given how popular marijuana has become with the public since 2008, per Gallup, Miron's hypothetical figures fail to account for one fatal flaw: Neither the federal government nor select states have any interest in legalizing marijuana on a recreational basis regardless of how the public appears to feel.
The federal government has made it clear that it will allow Washington and Colorado to manage their own recreational marijuana laws, while allowing 23 other states to handle medical marijuana regulation. However, if the barriers that define where marijuana is and is not legal become cloudy, or if legally grown marijuana winds up in the black market or in states where it has not been legalized, you can probably bet on the federal government intervening.
Also, the risk versus benefit profile for marijuana remains mixed. Companies such as GW Pharmaceuticals (NASDAQ:GWPH) keep showing plenty of promise with drugs derived from cannabinoids found in the cannabis plant. GW has Sativex, a drug designed to treat spasticity associated with multiple sclerosis, approved in close to two dozen foreign countries, and it is also researching its potential to treat cancer pain in the U.S.
On the other side of the coin, a report published by the British Lung Foundation in 2012 said marijuana cigarettes have nearly as many cancer-causing products as tobacco products, and that because of the way marijuana is smoked it could stay within the body longer, thus increasing users' chance of developing cancer later in life.
In short, even with marijuana gaining momentum among the public via polls, the likelihood of more sweeping legalization, as well as lower expenditures on prohibition, is probably a pipe dream at best.
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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