The fiscal windfall of legalizing pot
Democratic gubernatorial challenger Cynthia Nixon proposes full legalization of marijuana; she says it is necessary to rebalance racially skewed scales of criminal justice.
Making recreational use of this drug fully legal is a politically, morally and socially complex matter; as public policy analysts, we do not here wish to weigh in on many of its ramifications.
We focus here on one narrow question: Would it be good for the state budget?
It turns out it may be. We recently conducted analysis of various revenue-raising methods for funding New York infrastructure, a pot tax being one of many possibilities. Our numbers show that there is a lot of money in pot.
Colorado imposes a 2.9% general sales tax, a 10% marijuana sales tax and a 15% excise tax on its legal pot — plus license and application fees. CNNMoney reports that the state has taken in more than $500 million in tax revenue since retail sales began in 2014.
Nationally, one investment analyst now pegs the cannabis market at growing to $75 billion by 2030.
Data for New York are speculative, but our estimates indicate revenue potential in the billions, not millions, of dollars. Using a current street price of $275 an ounce (based on a Pew study on drug usage rates), we assumed two new taxes.
The first tax, which we assumed would be 100% on the wholesale price, would be on distributors and warehouses that received pot from farmers. Assuming a $34-anounce farmer price, which included a $20 farmer profit and $34 in revenue for the wholesalers, an imposition of a $69-an-ounce distribution tax on 39.5 million ounces of yearly production would result in $2.7 billion of annual tax revenue.
The second sales tax would be on consumption. A 100% levy on the estimated taxable price of $138 an ounce (on top of a $138 aftertax wholesale price) would raise $5.4 billion annually.
Together the two taxes would yield more than $8 billion a year.
To put that in perspective, New York State’s four new upstate casinos were expected to generate a reported $600 million a year when fully operational. Taxed at the high rate set by the state, this would yield $265 million a year in tax revenue. (They are currently earning only $359 million in revenue and paying just $70 million a year in taxes.)
The marijuana revenues are scalable, according to desired rate and design. We assumed a very high tax rate, and two separate taxes; but a lower rate, a consumption tax only, or limited legalization might be preferred.
Our baseline estimates of price and consumption under full legalization indicate a potential $10.8 billion industry annually. Even with limits imposed, the revenue potential is still very large.
There is another potential benefit: upstate development. New York could not only tax pot, but produce it as a cash crop with attendant job creation. All production and consumption would be fully licensed and managed, with other production and consumption prohibited.
Given existing federal laws, all marijuana consumed in New York State would have to be grown in the state — which would work out well for local agriculture and industry. All marijuana production would be transported exclusively on New York State roads, rail and waterways, to further avoid any issues with federal law. Our analysis indicates that farmers could recover their initial costs within several years and make reasonable profits thereafter. Several hundred thousand jobs might be created once the industry got going. Administrative setup costs for new government tax collection could be covered by sales of licenses for consumption and production.
This doesn’t settle the question of whether marijuana should be legalized. That must be a matter for robust debate.
Gov. Cuomo and others believe pot is a gateway drug. They worry that the social and other costs associated with legalization would outweigh any benefits from it.
Our research takes no position on this issue; we have no position on legalization ourselves. Our work is solely focused on the fiscal and economic potential of a broad range of funding options.
But if pot legalization of some sort is ultimately embraced in New York, its revenue and economic developments payoffs are likely to be considerable.
Gordon is adjunct associate professor at the Centre for Research and Action in Public Health at the University of Canberra (Australia) and principal investigator of the City University of New York’s Social Policy Simulation Center. Peters is professor of finance at the College of Staten Island.
Taxes could raise billions