How Economics Support Marijuana Legalization

In 2016, more Americans were arrested for marijuana possession than all violent crimes combined. What makes this more surprising is the fact that a number of states, and many other jurisdictions, are either legalizing or decriminalizing marijuana. Nevertheless, possession arrests are increasing (659,700 in 2017, compared to 653,249 in 2016), and these arrests don’t have anything to do with growing marijuana or selling it.

In all, 44% of drug possession arrests in the U.S. are marijuana related and when you add in the arrest for growing and selling pot, fully 49.5% of drug-related arrests trace back to weed.

In an issue that we’ll cover more in a future article, there is also a major justice issue to consider. When it comes to usage rates, a vast majority of studies show similar rates of use in the black population and the white population. However, black people are almost four times more likely to be arrested for marijuana possession, according to the ACLU. I’ll dig deeper into this serious problem in a future article.

What is the human and societal cost of these arrests?

As the move toward legalization seems to be gaining steam (62 percent of Americans are now in favor), it’s critical to consider the economic costs of criminalization and the benefits to legalization.

What Does Criminalization Cost Us?

As you might suspect, the costs are high. States spend about $3.6 billion enforcing marijuana laws annually, according to a 2013 study by the American Civil Liberties Union. If marijuana was removed from the schedule of controlled substances, there would be fewer court cases and reduced incarceration. A 2005 study by a visiting economics professor at Harvard University revealed that marijuana legalization could save $7.7 billion in enforcement costs each year.

Another way to look at the cost of criminalization is to consider the reality of the black market money flowing to drug cartels, and the associated costs to public safety. Here’s what Stephen Downing, the former Deputy Chief of Police of Los Angeles, says, “When we ended the prohibition of alcohol, Al Capone was out of work the next day. Our drug policy is really anti-public safety and pro-cartel, pro-street gang, because it keeps them in business.”

Another cost to consider is the effect that having a criminal record has on individuals, even if it’s “just” for possession. Any criminal record can be easily found by a landlord or potential employer, and make it significantly more difficult to secure housing or a job. A possession conviction also suspends a student’s federal financial aid. A survey conducted in 2017 by Yahoo News and Marist Poll shows that the majority (52%) of Americans over the age of 18 have smoked weed in their lifetime, meaning the majority of Americans have broken federal law.

Clearly, the costs of criminalization are steep. By legalizing recreational marijuana and removing it from the schedule of controlled substances, substantial savings could be achieved across the criminal justice system.

What about Tax Revenue?

Cost savings are one side of the picture, and revenue is on the other. Several states are looking for cannabis taxes to help pay for roads, schools, and other local government functions. The state of Michigan has estimated it will generate $737.9 million in additional tax revenue in the first four years after legalization. According to Forbes, that sum would be sufficient to fund the annual cost of the state’s police force. In 2017 Colorado collected nearly $250 million in cannabis-related taxes and fees; Washington collected almost $320 million.

New Frontier Data, a cannabis analytics firm, released a report in 2017 estimating that the immediate legalization of marijuana at the federal level would lead to $131.8 billion in aggregate federal tax revenue being collected between 2017 and 2025. (Note that those estimates were created before the tax cuts in December 2017.)

Furthermore, a 2016 study showed that there is $2.40 in economic activity for every dollar spent on legal marijuana. Add to that the fact that New Frontier Data estimates federal legalization would create close to 800,000 jobs immediately and 1.1 million jobs by 2025.

All of these taxation numbers should be tempered with the fact that wholesale marijuana prices are dropping quickly in states that have full legalization. Early numbers show that the drop in wholesale prices is even bigger than expected. That may be great news for consumers, but it means some assumptions about future tax collections may be overstated.

Let’s Recap…

Overall, the cost of marijuana remaining illegal to our criminal justice system is staggering. According to FBI crime data, over 600,000 people were arrested for marijuana violations in 2016.

The amount of police time spent on enforcement, the judicial time involved with plea bargains and sentencing, and the costs spent on housing offenders in jails (and then often supervising them upon release) is an incredible financial burden that would be relieved by legalization. Consider that in 2012 more than 46 percent of all drug prosecutions were for marijuana use and possession.

Furthermore, we can’t forget the costs to individuals that result from a marijuana possession conviction-the greater difficulty in securing employment, housing, and federal student financial aid.

One criminal justice cost that won’t go away with legalization: the cost of policing and enforcing DUIs. That cost will likely continue to grow.

Let’s recall the economic benefits of legalization: new jobs, new tax revenues, and money flowing into local communities.

Legalization may bring increased DUI enforcement costs, and there may be additional costs to society related to abuse and rehabilitation. But on balance, the economics appears to strongly favor legalization. It reduces criminal justice costs and increases tax revenue, while cutting out the economic empowerment that flows to cartels and other illegal entities that benefit from criminalization.

Bottom Line for Morality: From a justice perspective alone, legalization has strong benefits. And moving a cash flow stream from the illegal/black market into to mainstream is also a positive.

Bottom Line for Investing: The cost-benefit analysis is one of the strongest (if not the strongest) argument for pot legalization. As we have seen with Canada’s recent national legalization, these forces are likely to continue marching toward federal legalization in the U.S. as well.

Great trading and God bless you,

D.R. Barton, Jr.

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