Taxing cannabis in California

… might bring in $250M/yr. That won’t do much for a $25B deficit, but it’s not a trivial figure.

The California Board of Equalization, whose responsibilities include estimating the revenue impacts of proposed legislation, has “scored” the Ammiano pot-legalization bill, with its $50-per-ounce tax on cannabis, at $1.4 billion per year.

The Board has produced an analysis to back up its recommendation:

According to the report titled Marijuana Production in the United States (2006), an estimated 22.3 million pounds of marijuana was grown in the U.S. in 2006 with a value of $35.8 billion. California was the top producing state; it produced 8.6 million pounds with a value of $13.8 billion. The report also discusses that, although most marijuana is produced for local, in-state use, California is considered an export state in which marijuana is produced for both in-state use and export to other states.

Our literature review indicates that estimated consumption of marijuana in California amounts to one million pounds per year, or 16 million ounces. Based on the estimated 16 million ounces of annual consumption in California and several assumptions (which are summarized in the Qualifying Remarks section), the revenue effect of the bill is an estimated total annual revenue gain of $1.4 billion, as follows: $990 million from the proposed $50 per ounce levy on retail sales of marijuana, $392 million in sales tax revenues.

It would be hard to count how many different ways this is wrong:

1. The Ammiano bill’s tax provisions would take effect only after repeal of the Federal cannabis laws. So current revenue would be zero.

2. The Ammiano bill exempts “marijuana used medicinally with a doctor’s recommendation as specified in Health and Safety Code Section 11362.5, which is known and cited as The Compassionate Use Act of 1996.”

Since almost every dispensary has a tame doc who will write a recommendation for $75-$100 (one of them advertises that if you don’t get a recommendation your visit is free) and since most of the cannabis now sold in California is sold through the dispensaries, the result of this exemption would be to virtually eliminate any actual revenue collection.

3. None of the revenue raised under the bill would be available to help close the State’s General Fund deficit:

Any amounts required to be paid under this part would be deposited into the Drug Abuse Prevention Supplemental Funding Account, which this bill would create in the State’s General Fund. Upon appropriation by the Legislature, the monies in the fund would be used exclusively for drug education, awareness, and rehabilitation programs under the jurisdiction of the Department of Alcohol and Drug Programs.

The Department of Alcohol and Drug Programs would be required to review annually the fee imposed under this part to determine whether a lesser fee would provide sufficient resources to support its drug education, awareness, and rehabilitation programs. Based on this annual review, the Department of Alcohol and Drug Programs would be required to adjust the fee to an amount not to exceed fifty dollars ($50) per ounce of marijuana that is necessary to fund the programs.

4. “The report titled Marijuana Production in the United States (2006)” is by Jon Gettman. Gettman’s Wikipedia entry starts:

Jon B. Gettman is a marijuana reform activist and leader of the Coalition for Rescheduling Cannabis. Gettman has a PhD in public policy and regional economic development from George Mason University and is a longtime contributor to High Times magazine. A former director of the National Organization for the Reform of Marijuana Laws ….

The “report,” published in the extremely prestigious (not!) Bulletin of Cannabis Reform, is based on estimates from the Drug Enforcement Administration. Once again, we see the coincidence between the interests of the drug warriors and the legalizers in hyping the statistics about the illicit drug markets and the illicit drug abuse problem.

The DEA analysis, as cited by Gettman, estimates 22 million pounds of marijuana produced in the U.S. The National Survey on Drug Use and Health estimates that 14.4 million people in the U.S. have used cannabis in the past 30 days. (The total consumption of those who use less frequently must be negligible.) That’s a pound and a half per user per year, or about seven joints per user per day.

So to sum up: The Ammiano bill would raise no revenue at all until Federal cannabis laws are repealed, and damned little thereafter. Even if we assume that the $50/oz. excise, plus sales tax, were available at once, they wouldn’t come to any number resembling $1.4 billion per year.

But now consider a different law: one that imposed a $50/oz. tax on cannabis sold through California’s dispensaries, and forced them to collect sales tax as well (as they already do on other non-prescription remedies). How much could such a bill raise?

I suspect, though I’m not by any means sure, that the dispensaries have largely displaced the old frankly illicit market; why buy from a dealer on the street when you can buy at roughly the same price from a storefront? So I’ll assume that all of the cannabis consumed in California is sold through the dispensaries.

The most recent serious estimate of the total size of the national cannabis market was $10 billion, made by Abt Associates for the Office of National Drug Control Policy back in 2003. (I’m told there’s a later estimate, unreleased because it failed to support whatever nonsense John Walters and his crew were pushing.) California is about one-eighth of the national population, and the West has higher cannabis use than the rest of the U.S., so $10B nationally might mean $1.5B or so for California. (That’s crudely consistent with the report that dispensaries in Oakland, with something just over 1% of the state’s population, did $19M in business last year.)

The dispensaries seem mostly charge prices of $300-$400 per ounce, so a tax of $50/oz. would be between 1/6th and 1/8th of the retail price. Add in another 8% for the state’s share of the sales tax, and the total take might be somewhere between $300M and $350M per year, assuming that all the dispensaries report honestly, that none of the dispensaries are currently collecting sales tax, that none of the market is driven back underground, and either that the dispensaries absorb the tax or that demand is sufficiently inelastic that passing the tax along wouldn’t much decrease consumption. Since all of those assumptions are probably somewhat optimistic, a reasonable guess might be closer to $250M.

That’s chump change given a $100B general fund budget with a $25B deficit; but it’s not a trivial sum. It might seem unjust to collect from patients, but California already collects sales tax on over-the-counter (as opposed to prescription) drugs, and the truly medical share of the dispensary market is relatively small. The proposed system would tax cannabis more heavily, as a proportion of total price, than alcohol is taxed, but I’d fix that by raising alcohol taxes, which ought to be done in any case.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: