Green Jobs, Green Growth: The Economic Impact of Marijuana Legalization

By TOM HAND – December 2014

Imagine an economic stimulus plan that will increase tax revenue, produce jobs, stimulate tourism, and grow small business. Does that sound like smoke and mirrors? Well, maybe smoke. Marijuana legalization advocates argue that pot can deliver on all of these promises.

Marijuana plants, have been illegal, either through prohibitive taxation or direct prohibition, since 1937. However, on Election Day 2014, Washington, D.C, Alaska, and Oregon followed Colorado and the state of Washington, by legalizing the recreational consumption of marijuana by private citizens. Cannabis remains illegal under federal law, but the Justice Department has not yet enforced the prohibition in states that have legalized recreational use. For the past two years, a majority of Americans have supported the legalization of marijuana. Given the pro-legalization sentiment in the air, how effectively marijuana legalization has helped the Colorado and Washington economies?

Tax Revenue & Regulatory Expenses

In the wake of the Great Recession, the entire American economy suffered. State governments felt some of the most severe effects. The Center on Budget and Policy Priorities states that given these shortfalls, it may take state governments until after 2019 to recover all the lost revenue making it difficult to fund budget items like education. To put it bluntly, the typical solution has been to reduce funding for services and raising prices, tuitions, and fees.

Marijuana legalization and taxation offers an apparent way for states to grow their way out of the crisis. As of earlier this fall, the state of Colorado had made “about $45 million in the [] year-to-date” from taxes and fees related to marijuana. Additionally, Washington state has reported that the tax revenue from marijuana should reach “nearly $43 million . . . [by] the middle of next year.” The possibility of substantial tax revenue has led municipalities throughout Oregon to seek putting their own taxes on marijuana to ensure they get their piece of the pie. We should keep in mind that state budgets are massive. Marijuana taxes represent less than .5% of both states’ budget outlays at this point. Additionally, Washington, D.C’s approach of legalizing only possession and growth, not sale, of marijuana will not result in a similar expansion of the state tax base.   Therefore, the benefits of marijuana taxes to state governments are real but are easy to overstate.

These states will certainly no longer have to spend money to enforce marijuana prohibition laws. While estimates on the costs of prohibition are vague, incarceration costs and enforcement costs are expensive. There are certainly substantial savings involved from not arresting people and jailing them, nonetheless, reliable information in this field on actual savings is hard to come by.

Tourism Revenue

Pot proponents have argued that legalization will bring in tourism revenue, but state officials have sought to distance themselves from this argument. They do not want to give the impression they are seeking to profit by attracting stoners to their state.

Nonetheless, other sources demonstrate that there have been large increases in Colorado and Washington’s tourism. That has a positive impact on the hospitality industries. Certainly, numerous tourist organizations have started providing services to those seeking a legal high, yet these may be tempered currently by restrictive local regulations — such as fines for smoking a joint on a balcony in Denver — that could disproportionately harm tourists unfamiliar with the locale. Additionally, it certainly stands to reason that if more places legalize marijuana, less people will travel for legal marijuana.

On the whole, while tourism in these states is currently being boosted by marijuana legalization, it’s up to Oregon and Alaska to determine what steps they want to take, if any, to make themselves amenable marijuana tourist destinations. Further, Washington, D.C’s approach of legalizing only possession and growth, not sale, will have likely have limited benefits for those travelling from out of town.

Jobs and Small Businesses

Suddenly, this year, in Washington State and Colorado, a new legal industry was born. And marijuana has created new business opportunities. Already, there have been specialized job fairs to help marijuana companies recruit individuals with the skills the marijuana industry requires. Entrepreneurs are creating jobs.

This may not have a huge effect on the economy as a whole. As of September 2014, the unemployment rate is lower in Colorado (by 25%) and Washington (by about 12%) than in the United States as a whole. There is, however, reason to believe this effect could be limited. In the previous years, the unemployment rate in those states was similarly lower than the national average at other points in the Obama administration.

Federal Regulations as a Roadblock

Ironically, while the growth in state tax revenue is one economic benefit of legalizing marijuana, it is the federal tax code that hinders much of the economic growth the marijuana industry could provide. As reported by USA Today, marijuana businesses are taxed without access to deductions and credits that make it possible for many business to earn a profit. An entrepreneur running a marijuana business legal under state law is unable to reduce what he owes the IRS like another taxpayer opening an unrelated business. Certainly, this inequality must drive money out of the marijuana industry. Wouldn’t it drive your money out?

The relevant section provides that all revenues earned from a drug classified under Schedule I or Schedule II of the Controlled Substances Act in contravention of state or federal law is ineligible for any deduction or credit. Schedule I drugs are drugs “with no currently accepted medical use and a high potential for abuse;” Schedule II drugs are drugs “with a high potential for abuse, less abuse potential than Schedule I drugs, with use potentially leading to severe psychological or physical dependence.” Marijuana is classified as a Schedule I drug.

Re-Scheduling Solution

Essentially, the federal government regulates marijuana comparably to heroin even though the President has previously stated it was “not more dangerous than alcohol.” Through either an Act of Congress or the President, marijuana could be rescheduled removing these concerns. Although President Obama has shown willingness to implement Executive Orders on issues like immigration, he has not yet proposed a reclassification of marijuana along these lines. Until the President or Congress takes action, however, the average marijuana business in Alaska, Oregon, Washington, and Colorado will still give up a disproportionate amount of their green. Further, the illegal nature of marijuana on a federal level likewise limits the willingness and ability of medical professionals and industry (through punishing their investors) to explore new uses for marijuana.

Certainly, legislators from Oregon and Alaska should advocate that federal officials reform the tax code so that those involved in these industries have the ability to pursue profitable businesses. Perhaps part of the reason for the limited success of the marijuana industry in stimulating the economy is, in fact, these federal regulations that could be hindering the potential benefits of marijuana. It remains to be seen how much business, investment, and scientific exploration into uses of the cannabis plant could heat up with the removal of these regulations.

The rhetoric of marijuana advocates may be a little overstated. Nonetheless, one thing’s for sure: if we debated marijuana in the same terms we debated other policies — focusing on secondary economic effects — the case for marijuana legalization would be less hazy.