Legalized marijuana could be tax windfall, but skeptics abound

By JONATHAN J. COOPER, KRISTEN WYATT, Associated Press Published: Sep 19, 2012 at 10:36 AM PDT Last Updated: Sep 20, 2012 at 3:41 PM PDT
Legalized marijuana could be tax windfall, but skeptics abound
DENVER (AP) - A catchy pro-marijuana jingle for Colorado voters considering legalizing the drug goes like this: "Jobs for our people. Money for schools. Who could ask for more?"

It's a bit more complicated than that in the three states — Colorado, Oregon and Washington — that could become the first to legalize marijuana this fall.

The debate over how much tax money recreational marijuana laws could produce is playing an outsize role in the campaigns for and against legalization — and both sides concede they're not really sure what would happen.

At one extreme, pro-pot campaigners say it could prove a windfall for cash-strapped states with new taxes on pot and reduced criminal justice costs.

At the other, state government skeptics warn legalization would lead to costly legal battles and expensive new bureaucracies to regulate marijuana.

In all three states asking voters to decide whether residents can smoke pot, the proponents promise big rewards, though estimates of tax revenue vary widely:

  • Colorado's campaign touts money for school construction. Ads promote the measure with the tag line, "Strict Regulation. Fund Education." State analysts project somewhere between $5 million and $22 million a year. An economist whose study was funded by a pro-pot group projects a $60 million boost by 2017.

  • Washington's campaign promises to devote more than half of marijuana taxes to substance-abuse prevention, research, education and health care. Washington state analysts have produced the most generous estimate of how much tax revenue legal pot could produce, at nearly $2 billion over five years.

  • Oregon's measure, known as the Cannabis Tax Act, would devote 90 percent of recreational marijuana profits to the state's general fund. Oregon's fiscal analysts haven't even guessed at the total revenue, citing the many uncertainties inherent in a new marijuana market. They have projected prison savings between $1.4 million and $2.4 million a year if marijuana use was legal without a doctor's recommendation.

"We all know there's a market for marijuana, but right now the profits are all going to drug cartels or underground," said Brian Vicente, a lawyer working for Colorado's Campaign To Regulate Marijuana Like Alcohol.

But there are numerous questions about the projections, and since no state has legalized marijuana for anything but medical purposes, the actual result is anyone's guess.

Among the problems: No one knows for certain how many people are buying black-market weed. No one knows how demand would change if marijuana were legal. No one knows how much prices would drop, or even what black-market pot smokers are paying now, though economists generally use a national estimate of $225 an ounce based on self-reported prices compiled online.

"It's difficult to size up a market even if it's legal, certainly if it's illegal," said Jeffrey Miron, a Harvard University economist who has studied the national tax implications of the legalization of several drugs.

In Colorado, the $60 million figure comes from Christopher Stiffler, an economist for the nonpartisan Colorado Center on Law & Policy. He looked at the state's potential marijuana market in a study funded by the pro-legalization Drug Policy Alliance. The figure comes from a combination of state and local taxes and projected savings to law enforcement.

Marijuana smokers and dealers, he argued, pay a premium now because the drug is illegal, and if government can find a way to capture that excess, tax collections should rise.

"You can basically take advantage of economies of scale, and the price of marijuana will go down and government can come in and capture the difference," Stiffler said.

The biggest unknown: Would the federal government allow marijuana markets to materialize?

When California voters considered marijuana legalization in 2010, U.S. Attorney General Eric Holder warned that the federal government would not look the other way and allow a state marijuana market in defiance of federal drug law. Holder vowed a month before the election to "vigorously enforce" federal marijuana prohibition. Voters rejected the measure.

Holder hasn't been as vocal this year, but that could change. In early September, nine former heads of the U.S. Drug Enforcement Administration called on Holder to issue similar warnings to Colorado, Oregon and Washington.

That political uncertainty could translate into states spending thousands of dollars to defend the laws, critics say.

"I think it's important that this ballot lay out for the voters how much litigation is going to result from this," said Colorado deputy Attorney General Michael Dougherty, a critic of the legislation.

Legalization proponents counter that some of the 17 medical-marijuana states already collect pot taxes in violation of federal law, which does not condone medical use of the drug. Colorado collects several million dollars a year in pot-related taxes, including sales taxes, licensing fees and fees paid by patients to acquire the drug. Oregon last year doubled the cost of a medical marijuana card to raise money for things like clean water and school health programs.

"Marijuana can be regulated, can be taxed, can be sold. We're doing it now, just currently to sick people," said Vicente, the lawyer working on the Colorado legalization campaign.

Backers concede there are big questions about how marijuana would be taxed and regulated, but they are hoping to sell voters on taking the chance.

"We're like Star Trek. We're heading into a new world," said Art Way of the Drug Policy Alliance, answering tax questions recently posed by law students gathered at the University of Denver to learn about Colorado's initiative.

In the end, voters deciding the marijuana questions won't be making up their minds based on the impact on taxes, said Miron, the Harvard economist.

"It's small potatoes," Miron said of marijuana's tax implications. "I'm as firmly in the pro-legalization camp as anybody in the world, but it's because I think smoking marijuana is not the government's business.

"That is the question — not whether it will produce revenue, but whether these drugs should be legal."

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Cooper reported from Salem, Ore.

Copyright 2012 The Associated Press.